HMRC Statement of Practice PDF

Statements of Practice
Issued up to 30 January 2012

The Civil Partnership Act (CPA) received Royal Assent on 18/11/2004 and became
effective from 5 December 2005. The Governments commitment is that, for all tax
purposes, same-sex couples who form a civil partnership will be treated the same as
married couples.
As part of this commitment to tax parity, from 5 December 2005 all Extra Statutory
Concessions (ESCs) or Statements of Practice (SoPs) should be taken as extended to
apply equally to civil partners and married couples.
Contents
Introduction
Abbreviations
Part I Index of Statements
A: Statements applicable to individuals (income tax and interest on tax)
B: Statements applicable to individuals and companies (income tax and
corporation tax)
C: Statements applicable to companies, etc. (corporation tax and income tax)
D: Statements relating to tax on capital gains (individuals and companies)
E: Statements relating to inheritance tax (also applicable where the tax
charged is Capital Transfer Tax and Estate Duty)
F: Miscellaneous
G: Statements of administrative practice and procedure
Part II Statements issued before 18 July 1978
Part III Statements issued after 18 July 1978
Introduction
Statements of Practice explain HM Revenue and Customs interpretation of legislation and the
way the Department applies the law in practice. They do not affect a taxpayers right to argue for
a different interpretation, if necessary in an appeal to an independent tribunal.
This guide contains a comprehensive index and the full text of all Statements of Practice issued
up to 30 January 2012 except where they have become obsolete.
The guide is in three parts. Part I is an alphabetical index of the Statements of Practice, grouped
under the following general subject headings.
A.
Statements applicable to individuals (Income Tax and interest on tax)
B.
Statements applicable to individuals and companies (Income Tax and Corporation Tax)
C.
Statements applicable to companies etc. (Corporation Tax and Income Tax)
D.
Statements relating to tax on Capital Gains (individuals and companies)
E.
Statements relating to Inheritance Tax (also applicable where tax charged is Capital
Transfer Tax)
F. Miscellaneou
G.
Statements of administrative practice and procedure.
Statements which are obsolete are shown in bold type and those which have changed (no matter
how small that change is, unless it is purely a formatting change, e.g. font or alignment) since
they were last published are shown with square brackets around the number thus [SP3/94].
Part II gives the full text of Statements issued before 18 July 1978, suitably updated except
where a Statement is obsolete, in which case only the title is given in bold type. They are given a
letter to correspond with the appropriate subject group A to F above e.g. A1, A2, B1, B2 etc.
Part III gives the full text of Statements issued after 18 July 1978 suitably updated except where
a Statement is obsolete, in which case only the title is given in bold type. They are in numbered
annual series having the prefix SP e.g. SP1/78, SP6/81, SP10/92 etc.
Abbreviations
CAA
Capital Allowances Act
CGTA
Capital Gains Tax Act
CTTA
Capital Transfer Tax Act
DLTA
Development Land Tax Act
ESC Extra-Statutory
Concession
FA Finance
Act
F (No 2) A
Finance (No 2) Act
ICTA
Income and Corporation Taxes Act
IHTA
Inheritance Tax Act
ITA
Income Tax Act
ITEPA
Income Tax (Earnings and Pensions) Act
ITMA
Income Tax Management Act
ITTOIA
Income Tax (Trading and Other Income) Act
OTA
Oil Taxation Act
TCGA
Taxation of Chargeable Gains Act
TIOPA Taxation
(International and Other Provisions) Act
TMA
Taxes Management Act
VATA
Value Added Tax Act
References to he, him or his may equally be read as she, her or hers where appropriate.
Part I Index of Statements

A. Statements applicable to individuals (income tax and interest on tax)
Accountancy expenses - Superseded by SP16/91
A28
Airline pilots - Residence - Incidental duties
A10
Approved savings-related share option schemes
SP4/83
Assessing tolerance
A12
Benefits in kind - Scholarship for employee's children
A24
Benefits in kind and VAT
A7
Benefits in kind: Cheap loans: Advances for expenses

Benefits in kind: Section 64 FA 1976
SP7/79
A15
Business by telephone Services for non contact centre customers
SP2/03
Business by telephone - Inland Revenue contact centres
SP3/03
Business by telephone
SP2/98
SP8/98
Business by telephone Customs & Revenue Contact Centres
SP1/05
Business by telephone HMRC Taxes Contact Centres
[SP1/10]
Business Expansion Scheme, Enterprise Investment Scheme, CGT

Reinvestment Relief and Venture Capital Trust Scheme: Loans to
investors Superseded by SP6/98
SP3/94
Capital allowances on machinery and plant: amendment of claim by

an individual trader
A26
Case V Schedule D Losses - Reclassified as ESC B25
A20
Charitable covenants
SP4/90
Close companies: Income tax relief for interest on loans applied in

acquiring an interest in a close company
SP3/78
Correspondence with married women
A23
Covenants in favour of charities: repayment procedure
A5
Deceased persons' estates: Discretionary interests in residue
SP4/93
Deceased persons' estates: Income received during the

administration period
SP7/80
Deeds of covenant
A1
Delay in rendering tax returns: Interest charge and penalties
A14
Delay in rendering tax returns: Interest on overdue tax
SP3/88
Delay in rendering tax returns: Interest on overdue tax (TMA 1970,
SP6/89
Section 88)
Earnings for work done abroad
A17
Employees resident but not ordinarily resident in the UK: General

earnings under Sections 25 and 26 Income Tax (Earnings and
Pensions) Act 2003 superseded by SP1/09
SP5/84
Employees resident but not ordinarily resident in the UK: General

earnings chargeable under Sections 15 and 26 Income Tax (Earnings and
Pensions) Act 2003 (ITEPA) and application of the mixed fund rule
under Sections 809Q onwards of the Income Tax Act 2007 (ITA)
SP1/09
Employment Protection Act 1975: Maternity pay
SP1/78
Employment Income VAT
A6
Enhanced stock dividends received by trustees of interest in possession

trusts
SP4/94
Enterprise Investment Scheme and Venture Capital Trust Scheme:

Location of activity Superseded by SP7/98
SP2/94
Enterprise Investment Scheme. Venture Capital Trusts, Capital Gains

Reinvestment Relief and Business Expansion Scheme: Loans to investors
Supersedes SP3/94
SP6/98
Enterprise Investment Scheme. Venture Capital Trusts, Capital

Gains Tax Reinvestment Relief: Location of activity Supersedes
SP2/94
SP7/98
Exchange rate fluctuations
SP2/02
Exchange rate fluctuations Now SP2/02
SP1/87
Ex-gratia awards made on termination of an office or employment by

retirement or death
SP13/91
Flat rate expenses for manual and certain other employees
SP13/79
SP17/80
Foreign earnings deduction
SP18/91
Goods taken by traders for personal consumption
A32
Incentive awards
SP6/85
Individuals coming to the UK: Ordinary residence
SP3/81
Informal end-of-year adjustments
A11
Investigation settlements: Inclusion of interest clause in letters or

offer - Replaced by leaflet IR73, Inland Revenue Investigations.
How Settlements are Negotiated
SP6/86
Investigation settlements: Retirement annuity relief
SP12/79
Investigation settlements: Retirement annuity relief - Superseded by

SP9/91
SP9/80
Life assurance premium relief: Children's policies
SP4/79
SP11/79
Living expenses abroad - Schedule D Cases I and II
A16
Lorry drivers: Relief for expenditure on meals
SP16/80
Maintenance payments under court orders: Retrospective dating
SP6/81
Maintenance payments: Payment of school fees
SP15/80
Mortgage interest relief: Year of marriage
SP10/80
Non-statutory redundancy payments - Superseded by SP1/94
SP1/81
Notification of chargeability to income tax and capital gains tax for

tax years 1995-96 onwards
SP1/96
Offshore funds
SP2/86
Partnership mergers and demergers
SP9/86
Partnerships - Change in membership
A4
Partnerships and retirement annuity relief
A18
PAYE Settlement Agreements
SP5/96
Payments on account of disability resulting in cessation of employment
SP10/81
Payments to a non-resident from UK discretionary trusts or UK estates

during the administration period: Double Taxation relief
SP3/86
Payments to redundant steel workers
SP2/84
Payments made by employers to employees when in full time attendance

at universities and technical colleges
SP4/86
Pooled cars: Incidental private use
SP2/96
Reimbursement of taxpayers' expenses. Replaced By Code of

Practice 1 Mistakes by published on 17 February 1993
A31
Relief for interest on loan used to buy land for partnership or

company business purposes
SP4/85
Relief for interest payments: Loans applied in acquiring an interest in a

partnership
A33
Relief for interest payments: Loans for improvement or purchase of land:

inherited properties
A34
Reliefs for non-residents: Treatment of wife's income
SP7/85
Residence in the UK: Visits extended because of exceptional

circumstances
SP2/91
Residence in the UK: When ordinary residence is regarded as

commencing where the period to be spent here is less than three
years
SP17/91
Schedule E assessments: Repayment supplement

Section 313 ICTA: Termination payments made in settlement of
employment claims
Settlements: Benefit to settlor's future spouse
Self assessment: Finality and Discovery
A9
SP3/96
A30
SP1/06
Settlements: Part XV, ICTA 1988 (formerly Part XVI, ICTA 1970)
A2
Solicitors deposit interest
A22
Statement clarifying the operation of an existing administrative

practice: Case V Schedule D Losses - Superseded by ESC B25
SP2/80
Stock dividends
A8
Tax treatment of directors' fees received by professional partners Reclassified as ESC A37
A29
Taxation of car telephones provided by employers

Temporary workers engaged through foreign agencies
SP5/88
A21
The interaction of Income Tax and Inheritance Tax on assets put into
settlements
SP1/82
Treatment of certain payments to relocated employees
SP1/85
Venture Capital Trusts: Value of gross assets Superseded by

SP5/98
SP7/95
Venture Capital Trusts: Default terms in loan agreements
SP8/95
Venture Capital Trusts and the Enterprise Investment Scheme:

Value of gross assets Supersedes SP7/95
SP5/98
Venture Capital Trusts, the Enterprise Investment Scheme, the

Corporate Venturing Scheme and Enterprise Management
Incentives - Superseded by SP2/06
SP2/00
Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate

Venturing Scheme and Enterprise Management Incentives - Supersedes
SP2/00
SP2/06
B. Statements applicable to individuals and companies (Income Tax and Corporation Tax)
Accident insurance policies: Chargeable events and gains on policies of
life insurance
SP6/92
Additional redundancy payments
SP11/81
Advance Agreements Unit superseded by SP2/12
[SP2/07]
Application of foreign exchange and financial instruments legislation

to partnerships which include companies
SP9/94
Business expansion scheme: Overseas activities
SP4/87
Business Expansion Scheme: Overseas activities - Superseded by

SP7/86
SP7/83
Capital allowances: Hotels
SP9/87
Capital allowances: Machinery and plant: Short-life assets
SP1/86
Capital allowances: Notification of expenditure on machinery and plant

made outside the normal time limit
SP6/94
Compensation for acquisition of property under compulsory powers
SP8/79
Contributions to retirement benefit schemes on termination of

employment
SP2/81
Discovery assessments
SP8/91
Double taxation relief: Business profits: Unilateral relief
SP7/91
SP3/85
Expenditure on farm drainage
SP5/81
Expenditure on producing films and certain similar assets
SP9/79
Finance lease rental payments
SP3/91
Furnished lettings: Wear and tear allowance - Replaced by ESC B47
A19
Goods sold subject to reservation of title
B6
Industrial buildings allowance: Industrial workshops constructed for

separate letting to small businesses
SP4/80
Inward Investment Support
[SP2/12]
Liability under Chapter II of Part XIII, ICTA 1988, on gains arising

on life and capital redemption policies and life annuities
SP11/80
Non-statutory lump sum redundancy payments
SP1/94
Offshore trusts
SP2/86
Payment of life assurance premiums on which commission is payable

to the policyholder - replaced by SP5/95
SP3/79
Profit-related pay: Use of pool determination formulae
SP7/92
Section 124, ICTA 1988: Interest on quoted eurobonds
SP8/84
Securities dealt in on the Stock Exchange Unlisted Securities Market:

Status and valuation for tax purposes
Small workshops allowance
SP18/80
SP6/80
Stock and work in progress: Changes in accountancy practice

(SSAP9)
B5
Stock and work in progress: Changes in the basis of valuing long

term contract work in progress
B4
Stock relief: completed work in progress of builders
B7
Stock relief: Deferment of recovery charges: Definition of net

indebtedness in Paragraph 1(5), Schedule 7, FA 1980
SP8/80
Stock relief: Recovery charges when level of trading is negligible
SP4/81
Stock relief: treatment of VAT
B2
Stock relief: Withdrawal of claim
B3
Stocks and long-term contracts
SP3/90
Tax treatment of expenditure on films
SP1/98
Tax treatment of expenditure on films and certain similar assets
SP2/83
SP2/85
Tax treatment of expenditure on films and certain similar assetReplaced by SP1/98
SP1/93
Tax treatment of transactions in financial futures and options
SP3/02
SP14/91
Taxation of commission, cashbacks and discounts
SP4/97
Taxation of receipts of insurance and personal pension schemes

commissions Superseded by SP4/97
SP5/95
Treatment of Investment Managers and their overseas Clients
SP1/01
Treatment of investment managers and their overseas clients

Replaced by SP1/01
Treatment of Value Added Tax
SP15/91
B1
C. Statements applicable to companies, etc. (corporation tax and income tax)

Advance Thin Capitalisation Agreements under the APA Legislation
Superseded by SP1/12
Advanced Pricing Agreements (APAs) Superseded by SP2/10
[SP4/07]
[SP1/12
SP3/99
Advance Pricing Agreements (APAs)
SP2/10
Application of local currency rules in Finance Act 2000 to partnerships

which include companies
SP2/01
Application of loan relationships, foreign exchange and financial

instruments legislation to partnerships which include companies
SP4/98
Associated companies for small companies' relief and Corporation Tax

starting rate: Holding companies
SP5/94
Authorised unit trusts, approved investment trusts, and open-ended

investment companies: Monthly savings schemes Superseded by
SP2/99
SP2/97
Building licences granted under the Community Land Act 1975: Stock
relief
SP8/78
Business Expansion Scheme: Overseas activities - Superseded by

SP4/87
SP7/86
Claims to loss relief, capital allowances and group relief outside limit
SP5/01
Claims to loss relief under Section 393(1), ICTA 1988

Close companies: General statement
Close companies: Non-resident participators: Apportionment
Close companies: Paragraph 3(1)(a) Sch 19, ICTA 1988, Reasonable
time
C11
C4
SP2/78
C3
Close company apportionment
SP2/87
Close company apportionment: Member of a trading group
SP8/87
Company residence
SP1/90
Company residence - Superseded by SP1/90
SP6/83
Company taxation: Interest paid in a foreign currency
C9
Corporate Venturing Scheme: applications for advance clearance under

Part X, Schedule 15, FA 2000
SP1/00
Company's purchase of own shares: ICTA 1988
SP2/82
Corporation Tax: A major change in the nature or conduct of a trade
SP10/91
Corporation Tax Self Assessment. Enquiries and chargeable gains

Valuations
SP1/02
Country-risk debts
SP1/83
Definition of Financial Trader for the purposes of S177(1), FA 1994

SP3/95
Definition of Financial Trader for the purposes of paragraph 31 Schedule

Finance act 2002
SP4/02
Demergers: Sections 213-218, ICTA 1988
SP13/80
Double taxation: Dividend income: Tax credit relief
SP12/93
Enterprise Investment Scheme, Venture Capital Trusts, Corporate

Venturing Scheme and Management Incentives and Capital gains Tax
Reinvestment Relief Supersedes SP7/98
General rules as to deductions not allowable: Valuation fees for
compliance with Companies Act 1985, Sch 7 para 1(2)
SP3/00
C10
Group relief: Consortia: S.413(8), ICTA 1988
C6
Group relief: Section 410, ICTA 1988
C7
Group relief: Section 410, ICTA 1988 - Superseded by SP3/93

Group relief: Section 412(1)(c), ICTA 1988
Groups of companies: Arrangements
Income Tax: In the ordinary course of banking business
SP5/80
C2
SP3/93
SP12/91
Income tax: Interest paid in the ordinary course of a banks business
SP4/96
Insurance companies: Transfers of long term business
SP7/93
Interest paid to a bank in the UK on a loan made in foreign currency

Replaced by SP1/95
C5
Interest payable in the United Kingdom
SP1/95
Investment trusts investing in authorised unit trusts Superseded by

SP3/97
SP7/94
Investment trusts investing in authorised unit trusts - Superseded by

SP7/94
SP5/91
Investment trusts investing in authorised unit trusts or open-ended

investment companies
3/97
Long term insurance business: Computations of profit for tax purposes

Lotteries and football pools
Mining companies: Expenditure on planning permission applications
Monthly savings in investment funds Supersedes SP2/97
Non-resident lessors: Section 830, ICTA 1988
Partnerships including companies: Application of loan relationships,
foreign exchange and financial instruments legislation Supersedes
SP9/94
SP4/95
C1
SP4/78
2/99
SP6/84
4/98
Payment of tax credits to non-resident companies
SP2/95
Relief for Underlying Tax
SP3/01
Stamp Duty: Group relief
3/98
Surrender of Advance Corporation Tax
SP7/89
Tax treatment of forward currency transactions by investment trusts Superseded by SP14/91
SP1/88
Tax treatment of transactions in financial futures and options Superseded by SP14/91
SP4/88
Taxation of profits of subsidiaries of UK companies
C8
Tonnage Tax
SP4/00
Trade unions: Provident benefits: Legal and administrative expenses
SP1/84
Trade unions: Provident benefits: Legal expenses paid for members Superseded by SP1/84
SP6/78
Transactions within Section 765A, ICTA 1988: Movements of capital

between residents of EC member states
SP2/92
Transfer pricing, mutual agreement procedure and arbitration
SP1/11
Valuation of oil disposed otherwise than at arm's length: Paragraph 2,

Schedule 3, Oil Taxation Act 1975
SP14/93
D. Statements relating to tax on capital gains (individuals and companies)

Allowable expenditure: Expenses incurred by personal representatives
and corporate trustees see SP2/04
SP8/94
Allowable expenditure: Expenditure incurred by Personal

and corporate trustees
SP2/04
representatives
Asset of negligible value: Time limit for claims - Superseded by ESC

D28
D13
Capital Gains Tax: Exercise of a power of appointment over settled

property
SP7/78
Closure of business followed by sale of assets or liquidation of

company
SP6/79
Company's purchase of own shares: Capital gains treatment of distribution

received by corporate shareholder
SP4/89
Compulsory acquisition of freehold or extension of lease by tenant
SP13/93
Compulsory acquisition of freehold reversion by tenant - Superseded

by SP13/93
SP7/90
Corporation Tax Self Assessment Enquiries and chargeable gains

valuations
SP1/02
Discovery Assessments
SP8/91
Division of a company on a share for share basis
SP5/85
Division of a company on a share for share basis - Superseded by

SP5/85
D14
Double taxation relief: Chargeable gains
SP6/88
Enhanced stock dividends received by trustees of interest in possession

trusts
SP4/94
Exercise of a power of appointment or advance over settled property
SP7/84
Exercise of a power of appointment over settled property - Superseded

by SP7/84
SP9/81
Exemption of companies gains on substantial shareholdings sole or main

benefit test Paragraph 5 Schedule 7AC Taxation of chargeable Gains Act
1992
SP5/02
Family company: Sale of assets in anticipation of liquidation
SP5/79
Finance Act 1965, Section 29(2)

Houses owned by occupants of tied accommodation
D17
D8
Indexation
Initial repairs to property: Section 38(1), TCGA 1992 (CGTA 1979,
Section 32(1))
Losses on irrecoverable loans in the form of qualifying corporate bonds:
Loss on early redemption
Non-resident company: Section 13, TCGA 1992 (Section 15, CGTA 1979)
SP3/82
D24
SP8/90
D23
Non-resident trusts
SP5/92
Offshore funds
SP2/86
Part disposals of land

Partnerships
Partnerships: Assets owned by individuals
Partnerships: Assets owned by partner
D1
D12
D5
D11
Partnerships: Extension of Statement of Practice D12 - See also SP1/89
SP1/79
Partnerships: Further extension of SPD12
SP1/89
Rebasing and indexation: Shares held at 31 March 1982
SP5/89
Rebasing elections - Superseded by SP4/92
SP2/89
Relief for losses on loans to traders: Time limit for claims Superseded by ESC D36
SP3/83
Relief for owner-occupiers

Relief for replacement of business assets: Employees and office holders
Replacement of business assets in groups of companies
Residence exemption: Separated couples
Retirement relief - Change in business during 10 years before disposal
SP14/80
SP5/86
D19
D9
D20
Rollover relief for replacement of business assets: Trades carried on

successively
SP8/81
Self Assessment enquiries and Capital Gains Tax Valuations
SP1/99
Short delay by owner-occupier in taking up residence: Sections 222224, TCGA 1992 (Sections 101-103, CGTA 1979) - Replaced by ESC
D49
D4
Superannuation funds
D2
Time limit for an election for valuation on 6 April 1965 under paragraph
17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979):
Company leaving a group: Section 178, TCGA 1992 (Section 278, ICTA
1970)
D21
Transfer of a business to a company - Superseded by ESC D22
D22
Treatment of VAT
Unquoted shares or securities held on 6 April 1965
Value shifting: Section 30, TCGA 1992 (Section 26, CGTA 1979)
D7
SP14/79
D18
E. Statements relating to Inheritance Tax (also applicable where the tax charged is Capital
Transfer Tax), and Estate Duty
Age of majority
E8
Associated operations
E4
Business property relief: Buy and sell agreements

Charities
Close companies
Close companies - Group transfers
Death benefits under superannuation arrangements
Deduction for reasonable funeral expenses
Employee trusts
Estate Duty: Calculation of duty payable on a chargeable event affecting
heritage objects previously granted conditional exemption
Excluded property
SP12/80
E13
E5
E15
SP10/86
SP7/87
E11
SP11/84
E9
Incidence of tax
E17
Interests in possession
D16
Leases for life
E10
Missives of sale
E16
Orders in matrimonial proceedings
E12
Partial disclaimers of residue
E18
Pools etc syndicates
E14
Power for trustees to allow a beneficiary to occupy a dwelling house
SP10/79
Power to augment income
E6
Powers of advancement
E2
Powers of appointment
E1
Protective trusts
E7
Superannuation schemes
E3
The interaction of Income Tax and Inheritance Tax on assets put into
settlements
SP1/82
Treatment of income of discretionary trusts
SP8/86
F. Miscellaneous
Artificial separation of business activities
F4
Close companies: Apportionment of income and the consequentials

for Capital Gains Tax: Close companies in liquidation - Superseded
by ESCs A36 and D12
F3
Development Land Tax: Double taxation conventions
SP4/84
Development Land Tax: Negotiations on liability
SP2/79
Double Taxation relief: Status of the UKs double taxation conventions

with the former USSR and with newly independent states
SP4/01
Double Taxation relief: Status of the UKs double taxation

conventions with the former Socialist Federal Republic of Yugoslavia
SP3/04
Double Taxation relief: Status of the UK's double taxation conventions

with the former Socialist Federal Republic of Yugoslavia - Supersedes
SP3/04
SP3/07
Double Taxation relief: Status of UK/USSR convention for the

avoidance of double taxation Superseded by SP4/01
SP3/92
Stamp Duty and VAT: Interaction
SP11/91
Stamp Duty and VAT: Interaction - Superseded by SP11/91
SP6/91
Stamp Duty: Convertible loan stock
SP3/84
Stamp Duty: Conveyance in consideration of a debt
SP5/78
Stamp duty: Conveyances and leases of building plots - Superseded

by SP8/93
SP10/87
Stamp duty: Conveyances and transfers of property subject to a debt Section 57, Stamp Act 1891
SP6/90
Stamp Duty Disadvantaged Areas Relief
SP1/03
Stamp Duty Land Tax : Disadvantaged Area Relief
SP1/04
Stamp Duty: New buildings
SP8/93
Stamp Duty: Treatment of securities dealt in on the Stock Exchange

Unlisted Securities Market
SP9/84
The construction industry tax deduction scheme: Carpet fitting

United Kingdom branches of foreign banks - Superseded by Section
67, FA 1982
SP12/81
F2
United Kingdom/Czechoslovakia Double Taxation Convention
SP5/93
United Kingdom/Yugoslavia Double Taxation Convention

SP6/93
VAT Strategy: Input Tax deduction without a valid VAT invoice
SP1/07
G. Statements of administrative practice and procedure

Acceptance of property in lieu of Inheritance Tax, Capital Transfer Tax
and Estate Duty
SP6/87
Accountancy expenses arising out of accounts investigations
SP16/91
Accountants' working papers

Accounts on a cash basis
SP5/90
A27
Allowable expenditure: Expenses incurred by personal

representatives Superseded by SP8/94
SP7/81

and corporate trustees see SP2/04
SP8/94
Allowable expenditure: Expenditure incurred by Personal

representatives and corporate trustees
SP2/04
Barristers - The cash basis
A3
Business tax computations rounded to nearest 1,000
SP15/93
Capital Gains Tax: Rebasing elections
SP4/92
Civil tax penalties and criminal prosecution cases
SP2/88
Company liquidations: Shareholders' CGT

Completion of return forms by attorneys
D3
A13
Corporation Tax Pay and File: Claims to capital allowances and

group relief made outside the normal time limit
SP11/93
Corporation Tax Pay and File: Corporation Tax returns
SP9/93
Corporation Tax Pay and File: Special arrangements for groups of

companies
SP10/93
Directors' and employees' emoluments: Extension of time limits for

relief on transition to receipts basis of assessment
SP1/92
Foreign bank accounts
SP10/84
Furnished lettings: Wear and tear allowance - Replaced by ESC

B47
A19
Guidance notes for migrating companies: Notice and arrangements for

payment of tax
SP2/90
Independent taxation: Mortgage interest relief: Time limit for married

couples' allocation of interest elections
SP8/89
Inheritance Tax: The use of substitute forms
SP2/93
Investigation settlements: Retirement annuities and personal pension

relief
SP9/91
Legal entitlement and administrative practices
SP6/95
Legal entitlement and administrative practices - Superseded by

SP6/95
SP1/80
Limitations of Inland Revenue advice to taxpayers - Replaced by

Inland Revenue Code of Practice No 10 Information and advice
published in May 1995
F1
D1
Partnerships: Circumstances in which late elections will be accepted

Replacement of business assets: Time limit
SP9/92
D6
Repayment of tax to charities on covenanted and other income
SP3/87
Section 707, ICTA 1988: Cancellation of tax advantages from certain

transactions in securities: Procedure for clearance in advance
SP3/80
Separate taxation of wife's earnings: Sections 187-288, ICTA 1988 Extension of time limits
A25
Small companies' rate of Corporation Tax and corporation Tax starting

rate
SP1/91
Tax returns
SP4/91
Tax returns: The use of substitute forms
SP5/87
Termination of life interest in settled property (Sections 71 and 72,

TCGA 1992)
D10
The Electronic Lodgement Service
1/97
Time limit for an election for valuation on 6 April 1965 under paragraph
17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979):
Company leaving a group: Section 178, TCGA 1992 (Section 278,
ICTA 1970)
D21
Unit trust and investment trust monthly savings schemes

superseded by SP2/97
SP3/89
Use of schedules in making personal tax returns
SP5/83
Valuation of assets in respect of which Capital Gains Tax gifts holdover

relief is claimed
SP8/92
Part II. Statements issued before 18 July 1978

The statements are grouped under the following general subject headings:
A.
Statements applicable to individuals (Income Tax and interest on tax)
B.
Statements applicable to individuals and companies (Income Tax and Corporation Tax)
C.
Statements applicable to companies etc. (Corporation Tax and Income Tax)
D.
Statements relating to tax on Capital Gains (individuals and companies)
E.
Statements relating to Inheritance Tax (also applicable where tax charged is Capital
Transfer Tax)
F. Miscellaneou
A. Statements applicable to individuals (Income Tax and interest on tax)

A1.
Deeds of covenant
A guidance booklet about tax repayment claims on deeds of covenant is available from HM
Revenue and Customs - Centre for Non-Residents, St John's House, Merton Road, Bootle,
Merseyside, L69 9BB.
A2.
Settlements: Part XV, ICTA 1988 (Formerly Part XVI ICTA 1970)
A3.
Barristers: The cash basis - Obsolete. See now S48, FA 1998
A4.
Partnerships: Change in membership
A5.
Covenants in favour of charities: Repayment procedure
New repayment procedures were introduced on 1 July 1992. A booklet explaining them is
available from - HM Revenue and Customs Centre for Non-Residents, St John's House, Merton
Road, Bootle, Merseyside L69 9BB
A6.
Employment Income: VAT
The introduction of VAT on 1 April 1973 affected, in some instances, the amount of the
emoluments chargeable to income tax under Schedule E, and the amount to which the PAYE
procedure should be applied. The main circumstances in which this situation will arise are
summarised below, and it is anticipated that all of the relevant information will be available to the
employer in the records which he will maintain for general VAT purposes.
1.
Expenses incurred by employees etc and reimbursed by their employer
The amount to be entered by an employer on his return of expenses payments on Forms P9D and
P11D, or by an employee etc when claiming a deduction for expenses, should include any amount
paid in respect of VAT, which is reimbursed, whether or not the employer may subsequently
recover all or part of that VAT by repayment or set-off.
2.
Benefits etc
Where a director or employee is liable to income tax in respect of payments made to him or on
his behalf by his employer or in respect of expenses incurred by the employer in providing him
with a benefit the liability is on the full amount of the expenditure incurred, inclusive of VAT.
This is so whether or not the employer may subsequently recover all or part of the VAT by
repayment or set-off.
3.
Sums paid for services to certain professional persons
Section 94 (4), VATA 1994 provides that a person who, in the course of carrying on a trade,
profession or vocation, accepts an office, other than a public office, is subject to VAT in respect
of any services supplied by him as the holder of the office.
Where the earnings payable to such a person are subject to tax as employment income, deductible
under PAYE, and also to VAT, the earnings to which PAYE is applied should not include VAT
element of any payment.
A7.
Benefits in kind and VAT
A8.
Stock dividends
There are special rules when share capital is issued to an individual, personal representative or
trustee of an accumulation or discretionary trust in the form of a stock dividend (Sections 249 to
251 ICTA 1988). Such issues are usually made as an alternative to a cash dividend. The recipient
is treated as having received income which has borne an amount of income tax. The amount of
that income is the sum of either the relevant cash dividend or the market value of the share
capital, plus the tax which the income is treated as having borne. For this purpose the amount of
the cash dividend is used unless that amount is substantially greater or substantially less than the
market value of the share capital (Section 251(2)(a)). In interpreting substantially greater or
substantially less, the practice of HM Revenue and Customs is generally to use the market value
of the share capital when that value exceeds the amount of the cash dividend by 15 per cent or
more of the market value of the share capital, or when that value is less than the amount of the
cash dividend by 15 per cent or more of the market value of the share capital. However, HM
Revenue and Customs is normally prepared to use the amount of the cash dividend when the
difference between the market value of the share capital and the cash dividend is no more than
one or two percentage points greater than 15 per cent. In other cases, the amount of the cash
dividend is used.
A9.
Schedule E assessments 1995/96 and earlier: Repayment supplement Obsolete
A10.
Airline pilots: Residence: Incidental duties withdrawn with effect from 6 April
2009
A11.
Informal end of year adjustments
A12.
Assessing tolerance
A13.
Completion of return forms by attorneys
Section 8(2) TMA 1970 requires that every return should include a declaration by the person
making the return to the effect that the return is to the best of his knowledge correct and
complete. For tax years before the introduction of income tax self assessment (1995/6 and
earlier) Section 42(5) of that Act provided for a declaration by the person making the claim.
The Commissioners for Her Majestys Revenue and Customs consider that the obligation to make
declarations under these Sections is within the class of statutory duties which the person making
the return of income, or the claim, cannot delegate. Accordingly, it is the normal practice to insist
that the return of income or claim should be signed by the taxpayer or claimant personally, and
not by his attorney.
However, HM Revenue and Customs- HM Revenue and Customs recognise that there may be
difficulties where, owing to the age or physical infirmity of the taxpayer, he is unable to cope
adequately with the management of his affairs or where for the same reason the taxpayer's general
health might suffer if he were troubled for a personal signature. In such special circumstances the
Revenue will be willing to consider the matter sympathetically and where possible accept the
signature of an attorney who has full knowledge of the taxpayer's affairs.
A14.
Delay in rendering tax returns: Interest charge and penalties
A15.
Benefits in kind: Section 64 FA 1976
A16.
Living expenses abroad: Schedule D Cases I and II
Where an individual who is resident in the UK and assessable under Case I or II of Schedule D in
respect of a trade, profession or vocation (either alone or in partnership) spends time abroad on
business, the costs of living abroad personal to him will not be disallowed under Section 74(1)(a)
or (b) ICTA 1988 if the absence abroad is for the purpose of the trade, profession or vocation.
Private expenditure e.g. on holidays taken in the course of a business trip will not be allowed.
Living expenses are regarded as including the cost of accommodation, food and drink attributable
to the individual, trader or partner. If he is accompanied by his family or other dependants the
costs attributable to them will not be allowed.
A17.
Earnings for work done abroad
A18.
Partnerships and retirement annuity relief
A19.
Furnished lettings: Wear and tear allowance - Replaced by ESC B47
A20.
Case V Schedule D Losses - Re-classified as ESC B25
A21.
Temporary workers engaged through foreign agencies
A22.
Solicitors' deposit interest
A23.
Correspondence with married women
A24.
Benefits in kind: Scholarship for employees' children
A25.
Separate taxation of wife's earnings: Section 287-288, ICTA 1988: Extension of time
limits Obsolete
A26.
Capital allowances on machinery and plant: Amendment of claim by an individual

trader - Rendered Obsolete by the introduction of self-assessment
A27.
Accounts on a cash basis - Obsolete. See now S 42 ff FA98 -
A28.
Accountancy expenses - Superseded by SP16/91
A29.
Tax treatment of directors' fees received by professional partnerships - Reclassified

as ESC A37.
A30.
Settlements: Benefit to settlor's future spouse
A31.
Reimbursement of taxpayers' expenses - Replaced By Code of Practice 1 Mistakes

by HM Revenue and Customs published on 17 February 1993.
A32.
Goods taken by traders for personal consumption
The case of Sharkey v Wernher 1955 36TC 275 establishes the principle that where a trader takes
stock from his business for private use or enjoyment or disposes of stock otherwise by sale in the
normal course of trade, the transfer should be dealt with for taxation purposes as if it were a sale
at market value. Inspectors of Taxes have been authorised to take a reasonably broad view in
applying this principle.
The decision is not considered to apply to:
a.
services rendered to the trader personally or to his household which should be dealt with
in accordance with Section 74(1)(b) ICTA 1988;
b.
the value of meals provided for proprietors of hotels, boarding houses, restaurants etc and
members of their families which should also be dealt with on the basis that Section
74(1)(b) ICTA applies;
c.
expenditure incurred by a trader on the construction of an asset which is to be used as a

fixed asset in the trade.
A33.
Relief for interest payments: Loans applied in acquiring an interest in a partnership

(ICTA 1970, Section 59; FA 1969 Section 21; FA 1974, Schedule I paragraphs 11
and 12; ICTA 1988, Sections 362 and 363).
The commissioners for Her Majestys Revenue and Customs are advised that the above
provisions extend to salaried partners in a professional firm who are allowed independence of
action in handling the affairs of clients and generally so to act that they will be indistinguishable
from general partners in their relations with clients.
A34.
Relief for interest payments: Loans for purchase or improvement of land: Inherited
properties (ICTA 1970, Section 57; FA 1969 Section 19; FA 1972, Section 75 and
Schedule 9; FA 1974, Section 19 and Schedule 1; ICTA 1988, Sections 353 and 354).
Where a property subject to mortgage passes from A to B under a will or on intestacy, then if A
was entitled to tax relief for the mortgage interest B will also be so entitled; and B will also be
entitled (while he remains the owner of the property) to relief for the interest on a fresh loan,
whether secured on the property or not, so far as applied in paying off the inherited mortgage. If,
however, A was not entitled to relief for the mortgage interest (because the mortgage moneys
were not used for a qualifying purpose), B will not be entitled to relief either for that interest or
for interest on a fresh loan raised to pay off the mortgage.
B. Statements applicable to individuals and companies (Income Tax and Corporation Tax)
B1.
Treatment of VAT
A. Income Tax and Corporation Tax

1.
A person carrying on a business who is not a taxable person for VAT.
This broadly covers persons whose output is wholly exempt from VAT and those whose taxable
output (including that which is zero-rated) does not exceed a certain limit each year. (This limit
is increased periodically.)
Such persons will suffer VAT on much of their business expenditure. Where an item of
expenditure is allowable as a deduction in computing income for income tax or corporation tax
purposes, the VAT related to that expenditure will also be allowable. If the expenditure qualifies
for capital allowances, those allowances will be based on the cost inclusive of the related VAT.
2.
A taxable person for VAT whose output is wholly taxable (whether at the standard
rate of VAT or zero-rated)
There is no essential difference for this purpose between taxable and zero-rated output. It is
expected that in general a VAT account will be kept on the lines recommended in the HM
Customs and Excise Notice No. 700 setting VAT on outputs against VAT on inputs and
accounting for (or reclaiming) the difference. In computing income for direct tax purposes in
these circumstances it would be correct to take into account both income and expenditure
exclusive of the related VAT. VAT on inputs is set off whether it relates to capital or revenue
expenditure and it would follow that capital allowances would be determined upon the cost
exclusive of VAT. There are certain categories of VAT on inputs which are non-deductible notably that relating to the cost of motor-cars and entertaining. This VAT will no doubt be
included in the accounts of the business as part of the expenditure to which it relates. So far as
the motor-cars are concerned capital allowances will be computed on the cost inclusive of the
VAT and the entertaining expenditure which is not allowed as a deduction for direct tax purposes
will be the expenditure inclusive of VAT. If a trading debt becomes bad it may well include the
VAT related to the sale. To the extent that this tax has been accounted for to HM Customs &
Excise and cannot be recovered from them, the full amount of the debt including VAT may be
allowed as a trading expense for direct taxation purposes.
Where a trader does not maintain a separate VAT account the adjustments to be made in
computing income and capital allowances for direct taxation purposes would be such as to
achieve the corresponding result.
3.
A partly exempt person.
As explained in HM Customs and Excise Notice No. 706, a taxable person whose output is partly
exempt and partly taxable may set off only part of his VAT on inputs against his VAT on outputs.
In such a case the computation of income for direct tax purposes will follow the general
principles set out in 1 and 2 above. The VAT on inputs which cannot be set off may comprise two
elements:
(a)
that which is non-deductible because it relates to motor-cars or to business entertainment;

and
(b)
that which is referable to the exempt output.
The treatment for direct tax purposes of non-deductible VAT on inputs under (a) will be the same
as for a wholly taxable person, as explained above. VAT on inputs within (b) should be allocated
to the categories of expenditure giving rise to it, and its treatment in computing income for direct
tax purposes will be the same as the treatment of the expenditure to which it relates.
In many cases the extent to which a partly exempt person ultimately bears VAT on goods and
services supplied to him will be determined in accordance with a working arrangement with HM
Customs and Excise (such as the special schemes for retailers set out in Notice No. 727). It
follows that some approximation may be necessary in allocating the VAT ultimately borne to the
various items of expenditure to which it was related. Inspectors of Taxes will be prepared to
consider any reasonable arrangements for allocation which follow the general principles set out
above.
In certain circumstances traders may also decide that the cost of keeping records of some items of
VAT on inputs is excessive in relation to the ultimate set-off to be obtained and will not make any
claim. Where a trader ultimately bears additional VAT in consequence this may be treated as
a part of the relevant expense or capital outlay for direct tax purposes.
B. Capital Gains Tax
If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the
purchaser's VAT account, the cost of the asset for capital gains tax purposes will be the cost
exclusive of VAT. Where no VAT set-off is available, the cost will be inclusive of the VAT
borne. Where an asset is disposed of, any VAT chargeable will be disregarded in computing the
capital gain.
B2.
Stock relief: Treatment of VAT
B3.
Stock relief: Withdrawal of claim
B4.
Stock and work in progress: Changes in the basis of valuing long term contract
work in progress
B5.
Stock and work in progress: Changes in accountancy practice (SSAP9)
B6.
Goods sold subject to reservation of title
Certain traders sell goods on special terms whereby they retain the title to the goods until
payment is made. The accountancy bodies have advised their members that, for accountancy
purposes, if the circumstances indicate that the reservation of title is regarded by the parties as
having no practical relevance except in the event of the insolvency of the buyer, the goods should,
notwithstanding the strict legal position, normally be treated as purchases in the accounts of the
buyer and sales in the accounts of the supplier.
HM Revenue and Customs- HM Revenue and Customs has agreed that for sales subject to
reservation of title the above recommended accountancy treatment will be accepted for tax
purposes provided that both parties to the contract follow it.
The sale of goods subject to reservation of title as described above is to be distinguished from the
supply of goods as consignment stocks e.g. on a sale or return basis. Goods supplied as
consignment stocks are normally to be treated as stock in the hands of the supplier until disposed
of by the consignee.
B7.
Stock relief: Completed work in progress of builders
C. Statements applicable to companies etc. (Corporation Tax and Income Tax)

C1.
Lotteries and football pools
Where a football pool or small lottery is to be run by a supporters club or other society on the
basis that a stated percentage or fraction of the cost of each ticket will be given to a club or body
conducted and established wholly or mainly for one or more of the purposes specified in Section
5(1) of the Lotteries and Amusements Act 1976, HM Revenue and Customs will accept that the
donation element as stated in the cost of each ticket may be excluded in computing for tax
purposes the profits of the trade of promoting the pool or lottery.
A football pools run by a supporters' club had its appeal against tax assessment upheld by the
Special Commissioners. When this question was raised in Parliament on 14 December 1956, Mr
Henry Brooke said:
The football pool in this case was organised on the basis that a specified percentage of the sum
received from each competitor would be paid as a gift to the football club. The Special
Commissioners have held that this donation element formed no part of the receipts to be taken
into account in computing for income tax purposes the profits of the trade of promoting the pool.
This decision will be accepted by the Revenue as governing all cases where a football pool or
small lottery is run by a supporters' club or other society on the basis that a stated percentage or
fraction of the cost of each ticket or chance will be given to a club or body established and
conducted wholly or mainly for one or more of the purposes specified in subsection (1) of Section
1 of the Small Lotteries and Gaming Act 1956.
C2.
Group relief: Section 412(1)(c) ICTA 1988
C3.
Close companies: Paragraph 3(1)(a) Schedule 19 ICTA 1988 reasonable time
C4.
Close companies: General statement
C5.
Interest paid to a bank in the UK on a loan made in foreign currency - Replaced by

SP1/95
C6.
Group relief: Section 403C ICTA 1988
Under Section 403C ICTA 1988 a consortium member's share in a consortium company for any
accounting period is measured by reference to the lowest of the member's percentage interests in
the share capital, profits and assets of the consortium company. Where any of those percentages
has varied the legislation says that the average percentage over the accounting period concerned
should be taken. In determining that average percentage, HM Revenue and Customs practice is
that a weighted average taking into account the length of time involved should be used.
C7.
Group relief: Section 410 ICTA 1988
C8.
Taxation of profits of subsidiaries of UK companies
C9.
Company taxation: Interest paid in foreign currency
C10.
General rules as to deductions not allowable: Valuation fees for compliance with
Companies Act 1985, Schedule 7, Paragraph 1(2)
Costs incurred by companies for the purpose of valuations made to comply with Schedule 7,
Paragraph 1(2) of the Companies Act 1985 are regarded as allowable expenses under Sections
74(1)(a) and 75(1) of ICTA 1988.
C11.
Claims to loss relief under section 393(1) ICTA 1988
D. Statements relating to tax on Capital Gains (individual and companies)

D1.
To save work for taxpayers and their advisers where part of an estate is disposed of (e.g. on the
sale of a field) The Commissioners for Her Majestys Revenue and Customs will accept that the
cost of the part can be calculated on the alternative basis set out in this note instead of under the
general rule which requires the unsold part to be valued in order to apportion the total cost of the
estate. Instructions about the alternative basis have been issued to Inspectors of Taxes who will
be glad to give information about its application to particular cases.
Under the alternative basis the part disposed of will be treated as a separate asset and any fair and
reasonable method of apportioning part of the total cost to it will be accepted - e.g. a reasonable
valuation of that part at the acquisition date. Where the market value at 6 April 1965 or 31 March
1982 is to be taken as the cost, a reasonable valuation of the part at that time will similarly be
accepted.
The cost of the part disposed of will be deducted from the total cost of the estate (or balance of
the total cost) to determine the cost of the remainder of the estate; thus the total of the separate
amounts adopted for the parts will not exceed the total cost. The cost attributed to each part must
also be realistic in itself.
The taxpayer can always require that the general rule should be applied (except in cases already
settled on the alternative basis). If he chooses the general rule it will normally be necessary to
apply this rule to all subsequent disposals out of the estate; but where the general rule has been
applied for a part disposal before the introduction of the alternative basis and it produced a result
broadly the same as under the alternative basis, the alternative basis may be used for subsequent
part disposals out of the estate.
So long as disposals out of an estate acquired before 6 April 1965 are dealt with on the alternative
basis, each part disposal will carry a separate right to elect for acquisition at market value on 6
April 1965. Similarly where part is sold with development value the mandatory valuation at 6
April 1965 will apply only to that part. Even where the part is to be treated as acquired at market
value on 6 April 1965 or 31 March 1982, however, it will still be necessary to agree how much of
the actual cost should be attributed to the part disposed of: first, to ensure that any allowable loss
does not exceed the actual loss, and second, to produce a balance of total cost for subsequent
disposals.
The alternative basis will not apply to part disposals between 6 April 1967 and 22 July 1970
where development value was involved; and in other cases the Commissioners for Her Majestys
Revenue and Customs reserve the right to apply the general rule if they are not satisfied that the
apportionments claimed are fair and reasonable.
Taxpayers who wish to adopt the alternative basis will still be able to claim under existing
statutory provisions that certain small disposals out of an estate should be deducted from cost
instead of being assessed. The disposal proceeds will then be deducted from the total cost (or
balance of total cost) available for subsequent disposals.
D2.
Superannuation funds
D3.
Company liquidations: Shareholders' CGT
1.
During the liquidation of a company the shareholders often receive more than one
distribution. For capital gains tax each distribution, other than the final one, is a part disposal of
his shares by the shareholder, and the residual value of the shares has to be ascertained in order to
attribute a proportion of the cost of the shares to the distribution (unless the Inspector of Taxes
accepts that the distribution is small and can therefore be deducted from cost). It has been
represented to The Commissioners for Her Majestys Revenue and Customs that the making and
formal agreement of these valuations is holding up the agreement of liabilities and that little if
any change in the total tax is involved in the majority of cases.
2.
Where the shares of a company are unquoted at the date of the first or later interim
distribution, therefore, the Commissioners for Her Majestys Revenue and Customs are prepared
to authorise Inspectors of Taxes to accept any valuation by the taxpayer or his agent of the
residual value of the shares at the date of the distribution, if the valuation appears reasonable and
if the liquidation is expected to be completed within two years of the first distribution (and does
not in fact extend much beyond that period). The valuation need not include a discount for
deferment; and if the distributions are complete before the capital gains tax assessment is made,
the Revenue will accept that the residual value of shares in relation to a particular distribution is
equal to the actual amount of the subsequent distributions. In the normal way the Revenue will
not raise the question of capital gains tax on an interim distribution until after 2 years from the
commencement of the liquidation unless the distribution, together with any previous distributions,
exceeds the total cost of the shares.
3.
Where time apportionment (shares acquired before 6 April 1965) applies to a case within
the scope of this practice, the Commissioners for Her Majestys Revenue and Customs are
prepared to calculate the gain on each distribution by applying the time apportionment fraction as
at the date of the first distribution without further adjustment under paragraph 16(8) Schedule 2
TCGA 1992 (paragraph 11(8) Schedule 5 CGTA 1979).
D4.
Short delay by owner occupier in taking up residence: Sections 222-224 TCGA 1992
(Sections 101-103 CGTA 1979) - Replaced by ESC D49
D5.
Partnerships: Assets owned by individuals
D6.
Replacement of business assets: Time limit
Where new town corporations and similar authorities acquire by compulsory purchase land for
development and then immediately grant a previous owner a lease of the land until they are ready
to commence building, the Commissioners for Her Majestys Revenue and Customs will be
prepared to extend the time limit for rollover relief under Sections 152-158 TCGA 1992 to 3
years after the land ceases to be used by the previous owner for his trade, provided that there is a
clear continuing intention that the sale proceeds will be used to acquire qualifying assets;
assurances will be given in appropriate cases subject to the need to raise a protective assessment
if the lease extends beyond the statutory 6 year time limit for making assessments.
This practice may be applied to all cases where the capital gains tax computations have not been
settled at 17 January 1973.
D7.
Treatment of VAT
If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the
purchaser's VAT account, the cost of the asset for CGT will be the cost exclusive of VAT.
Where no VAT set-off is available, the cost will be inclusive of the VAT borne. Where an asset
is disposed of, any VAT chargeable will be disregarded in computing the capital gain.
D8.
Houses owned by occupants of tied accommodation
D9.
Residence exemption: Separated couples
D10.
Termination of an interest in possession in settled property (Sections 71 and 72,

TCGA 1992)
1.
Where an interest in possession in part of settled property terminates and the part can
properly be identified with one or more specific assets, the Commissioners for Her Majestys
Revenue and Customs will accept that the deemed disposals and reacquisitions under Section 71
and 72 Taxation of Chargeable Gains Act 1992 apply to those specific assets, and not to any part
of the other assets comprised in the settled property. Corresponding treatment will apply where,
within a reasonable period (normally three months) immediately following the termination,
specific assets are appropriated by the trustees to give effect to the termination. In either case, the
treatment must be consistent with that adopted for Inheritance Tax purposes.
2.
In particular, Inspectors will be prepared to agree with the trustees lists of assets properly
identifiable with the termination of an interest in possession, and any such agreement will be
regarded as binding on the Revenue and the trustees.
3.
This practice applies on any act or event which terminates an interest in possession
whether voluntarily or involuntarily.
D11.
Partnership: Assets owned by a partner
Provided that the other conditions of Sections 152-158 TCGA 1992 (Sections 115-121 CGTA
1979) are satisfied, relief is available to the owner of assets which are let to a trading or
professional partnership of which he is a member and which are used for the purposes of the
partnership trade or profession.
D12.
Partnerships
This statement of practice was originally issued by The Commissioners for Her Majestys
Revenue and Customs on 17 January 1975 following discussions with the Law Society and the
Allied Accountancy Bodies on the Capital Gains Tax treatment of partnerships. This statement
sets out a number of points of general practice which have been agreed in respect of partnerships
to which TCGA92/S59 applies.
The enactment of the Limited Liability Partnership Act 2000, has created, from April 2001, the
concept of limited liability partnerships (as bodies corporate) in UK law. In conjunction with this,
new Capital Gains Tax provisions dealing with such partnerships have been introduced through
TCGA92/S59A. TCGA92/S59A (1) mirrors TCGA92/S59 in treating any dealings in chargeable
assets by a limited liability partnership as dealings by the individual members, as partners, for
Capital Gains Tax purposes. Each member of a limited liability partnership to which S59A (1)
applies has therefore to be regarded, like a partner in any other (non-corporate) partnership, as
owning a fractional share of each of the partnership assets and not an interest in the partnership
itself.
This statement of practice has therefore been extended to limited liability partnerships which
meet the requirements of TCGA92/S59A (1), such that capital gains of a partnership fall to be
charged on its members as partners. Accordingly, in the text of the statement of practice, all
references to a partnership or firm include reference to limited liability partnerships to which
TCGA92/S59A (1) applies, and all references to partner include reference to a member of a
limited liability partnership to which TCGA92/S59A (1) applies.
For the avoidance of doubt, this statement of practice does not apply to the members of a limited
liability partnership which ceases to be fiscally transparent by reason of its not being, or its no
longer being, within TCGA92/S59A (1).
1. VALUATION OF A PARTNERS SHARE IN A PARTNERSHIP ASSET

Where it is necessary to ascertain the market value of a partner's share in a partnership asset for
Capital Gains Tax purposes, it will be taken as a fraction of the value of the total partnership
interest in the asset without any discount for the size of his share. If, for example, a partnership
owned all the issued shares in a company, the value of the interest in that holding of a partner
with a one-tenth share would be one-tenth of the value of the partnership's 100 per cent holding.
2. DISPOSALS OF ASSETS BY A PARTNERSHIP
Where an asset is disposed of by a partnership to an outside party each of the partners will be
treated as disposing of his fractional share of the asset. In computing gains or losses the proceeds
of disposal will be allocated between the partners in the ratio of their share in asset surpluses at
the time of disposal. Where this is not specifically laid down the allocation will follow the actual
destination of the surplus as shown in the partnership accounts; regard will of course have to be
paid to any agreement outside the accounts. If the surplus is not allocated among the partners but,
for example, put to a common reserve, regard will be had to the ordinary profit sharing ratio in
the absence of a specified asset-surplus-sharing ratio. Expenditure on the acquisition of assets by
a partnership will be allocated between the partners in the same way at the time of the acquisition.
This allocation may require adjustment, however, if there is a subsequent change in the
partnership sharing ratios (see paragraph 4).
3. PARTNERSHIP ASSETS DIVIDED IN KIND AMONG THE PARTNERS
Where a partnership distributes an asset in kind to one or more of the partners, for example on
dissolution, a partner who receives the asset will not be regarded as disposing of his fractional
share in it. A computation will first be necessary of the gains which would be chargeable on the
individual partners if the asset has been disposed of at its current market value. Where this results
in a gain being attributed to a partner not receiving the asset the gain will be charged at the time
of the distribution of the asset. Where, however, the gain is allocated to a partner receiving the
asset concerned there will be no charge on distribution. Instead, his Capital Gains Tax cost to be
carried forward will be the market value of the asset at the date of distribution as reduced by the
amount of his gain. The same principles will be applied where the computation results in a loss.
4. CHANGES IN PARTNERSHIP SHARING RATIOS
An occasion of charge also arises when there is a change in partnership sharing ratios including
changes arising from a partner joining or leaving the partnership. In these circumstances a
partner who reduces or gives up his share in asset surpluses will be treated as disposing of part of
the whole of his share in each of the partnership assets and a partner who increases his share will
be treated as making a similar acquisition. Subject to the qualifications mentioned at 6 and 7
below the disposal consideration will be a fraction (equal to the fractional share changing hands)
of the current balance sheet value of each chargeable asset provided there is no direct payment of
consideration outside the partnership. Where no adjustment is made through the partnership
accounts (for example, by revaluation of the assets coupled with a corresponding increase or
decrease in the partner's current or capital account at some date between the partner's acquisition
and the reduction in his share) the disposal is treated as made for a consideration equal to his
Capital Gains Tax cost and thus there will be neither a chargeable gain nor an allowable loss at
that point. A partner whose share reduces will carry forward a smaller proportion of cost to set
against a subsequent disposal of the asset and a partner whose share increases will carry forward a
larger proportion of cost.
The general rules in TCGA92/S42 for apportioning the total acquisition cost on a part-disposal of
an asset will not be applied in the case of a partner reducing his asset-surplus share. Instead, the
cost of the part disposed of will be calculated on a fractional basis.
5. ADJUSTMENT THROUGH THE ACCOUNTS

Where a partnership asset is revalued a partner will be credited in his current or capital account
with a sum equal to his fractional share of the increase in value. An upward revaluation of
chargeable assets is not itself an occasion of charge. If, however, there were to be a subsequent
reduction in the partner's asset-surplus share, the effect would be to reduce his potential liability
to Capital Gains Tax on the eventual disposal of the assets without an equivalent reduction of the
credit he has received in the accounts. Consequently at the time of the reduction in sharing ratio
he will be regarded as disposing of the fractional share of the partnership asset represented by the
difference between his old and his new share for a consideration equal to that fraction of the
increased value at the revaluation. The partner whose share correspondingly increases will have
his acquisition cost to be carried forward for the asset increased by the same amount. The same
principles will be applied in the case of a downward revaluation.
6. PAYMENTS OUTSIDE THE ACCOUNTS
Where on a change of partnership sharing ratios payments are made directly between two or more
partners outside the framework of the partnership accounts, the payments represent consideration
for the disposal of the whole or part of a partner's share in partnership assets in addition to any
consideration calculated on the basis described in 4 and 5 above. Often such payments will be for
goodwill not included in the balance sheet. In such cases the partner receiving the payment will
have no Capital Gains Tax cost to set against it unless he made a similar payment for his share in
the asset (for example, on entering the partnership) or elects to have the market value at 6 April
1965 treated as his acquisition cost. The partner making the payment will only be allowed to
deduct the amount in computing gains or losses on a subsequent disposal of his share in the asset.
He will be able to claim a loss when he finally leaves the partnership or when his share is reduced
provided that he then receives either no consideration or a lesser consideration for his share of the
asset. Where the payment clearly constitutes payment for a share in assets included in the
partnership accounts, the partner receiving it will be able to deduct the amount of the partnership
acquisition cost represented by the fraction he is disposing of. Special treatment, as outlined in 7
below, may be necessary for transfers between persons not at arm's length.
7. TRANSFERS BETWEEN PERSONS NOT AT ARMS LENGTH
Where no payment is made either through or outside the accounts in connection with a change in
partnership sharing ratio, a Capital Gains Tax charge will only arise if the transaction is otherwise
than by way of a bargain made at arm's length and falls therefore within TCGA92/S17 extended
by TCGA 92/S18 for transactions between connected persons. Under TCGA92/S286 (4)
transfers of partnership assets between partners are not regarded as transactions between
connected persons if they are pursuant to genuine commercial arrangements. This treatment will
also be given to transactions between an incoming partner and the existing partners.
Where the partners (including incoming partners) are connected other than by partnership (for
example, father and son) or are otherwise not at arm's length (for example, uncle and nephew) the
transfer of a share in the partnership assets may fall to be treated as having been made at market
value. Market value will not be substituted, however, if nothing would have been paid had the
parties been at arm's length. Similarly if consideration of less than market value passes between
partners connected other than by partnership or otherwise not at arm's length, the transfer will
only be regarded as having been made for full market value if the consideration actually paid was
less than that which would have been paid by parties at arm's length. Where a transfer has to be
treated as if it had taken place for market value, the deemed disposal will fall to be treated in the
same way as payments outside the accounts.
8. ANNUITIES PROVIDED BY PARTNERSHIPS

A lump sum which is paid to a partner on leaving the partnership or on a reduction of his share in
the partnership represents consideration for the disposal by the partner concerned of the whole or
part of his share in the partnership assets and will be subject to the rules in 6 above. The same
treatment will apply when a partnership buys a purchased life annuity for a partner, the measure
of the consideration being the actual costs of the annuity.
Where a partnership makes annual payments to a retired partner (whether under covenant or not)
the capitalised value of the annuity will only be treated as consideration for the disposal of his
share in the partnership assets under TCGA92/S37 (3), if it is more than can be regarded as a
reasonable recognition of the past contribution of work and effort by the partner to the
partnership. Provided that the former partner had been in the partnership for at least ten years an
annuity will be regarded as reasonable for this purpose if it is no more than two-thirds of his
average share of the profits in the best three of the last seven years in which he was required to
devote substantially the whole of this time to acting as a partner. In arriving at a partner's share of
the profits regard will be had to the partnership profits assessed before deduction of any capital
allowances or charges. The ten year period will include any period during which the partner was a
member of another firm whose business has been merged with that of the present firm. For lesser
periods the following fractions will be used instead of two-thirds:
Complete years in partnership
15
6
7
8
9
Fraction
16/60
24/60
32/60
1/60 for each year

8/60
Where the capitalised value of an annuity is treated as consideration received by the retired
partner, it will also be regarded as allowable expenditure by the remaining partners on the
acquisition of their fractional shares in partnership assets from him.
9. MERGERS
Where the members of two or more existing partnerships come together to form a new one, the
Capital Gains Tax treatment will follow the same lines as that for changes in partnership sharing
ratios. If gains arise for reasons similar to those covered in 5 and 6 above, it may be possible for
roll-over relief under TCGA92/S152 to S158 to be claimed by any partner continuing in the
partnership insofar as he disposes of part of his share in the assets of the old firm and acquires a
share in other assets put into the merged firm. Where, however, in such cases the consideration
given for the shares in chargeable assets acquired is less than the consideration for those disposed
of, relief will be restricted under TCGA92/S153.
10. SHARES ACQUIRED IN STAGES
Where a share in a partnership is acquired in stages wholly after 5 April 1965, the acquisition
costs of the various chargeable assets will be calculated by pooling the expenditure relating to
each asset. Where a share built up in stages was acquired wholly or partly before 6 April 1965
the rules in TCGA92/SCH2/PARA18, will normally be followed to identify the acquisition cost
of the share in each asset which is disposed of on the occasion of a reduction in the partnership's
share; that is, the disposal will normally be identified with shares acquired on a first in, first out
basis. Special consideration will be given, however, to any case in which this rule appears to
produce an unreasonable result when applied to temporary changes in the shares in a partnership,
for example those occurring when a partner's departure and a new partner's arrival are out of step
by a few months.
11. ELECTIONS UNDER TCGA92/SCH2/PARA4
Where the assets disposed of are quoted securities eligible for a pooling election under paragraph
4 of TCGA92/SCH2, partners will be allowed to make separate elections in respect of shares or
fixed interest securities held by the partnership as distinct from shares and securities which they
hold on a personal basis. Each partner will have a separate right of election for his proportion of
the partnership securities and the time limit for the purposes of Schedule 2 will run from the
earlier of
a)
the first relevant disposal of shares or securities by the partnership
and
b)
the first reduction of the particular partner's share in the partnership assets after 19 March
1968.
12. PARTNERSHIP GOODWILL AND TAPER RELIEF

This paragraph applies where the value of goodwill which a partnership generates in the conduct
of its business is not recognised in its balance sheet and where, as a matter of consistent practice,
no value is placed on that goodwill in dealings between the partners. In such circumstances, the
partnership goodwill will not be regarded as a fungible asset (and, therefore, will not be within
the definition of securities in section TCGA92/S104 (3) for the purpose of Capital Gains Tax
taper relief under TCGA92/S2A. Accordingly, on a disposal for actual consideration of any
particular partners interest in the goodwill of such a partnership, that interest will be treated as
the same asset (or, in the case of a part disposal, a part of the same asset) as was originally
acquired by that partner when first becoming entitled to a share in the goodwill of that
partnership.
The treatment described in the preceding paragraph will also be applied to goodwill acquired for
consideration by a partnership but which is not, at any time, recognised in the partnership balance
sheet at a value exceeding its cost of acquisition nor otherwise taken into account in dealings
between partners. However, such purchased goodwill will continue to be treated for the purpose
of computing capital gains tax taper relief as assets separate from the partnerships self-generated
goodwill. On a disposal or part disposal for actual consideration of an interest in such purchased
goodwill by any particular partner, that interest shall be treated for taper relief purposes as
acquired either on the date of purchase by the partnership or on the date on which the disposing
partner first became entitled to a share in that goodwill, whichever is the later.
D13.
Asset of negligible value: Time limit for claims - Superseded by ESC D28
D14.
Division of a company on a share for share basis - Superseded by SP5/85
D15.
Accommodation let by owner-occupier - Superseded by SP14/80
D16.
Interests in possession
D17.
Finance Act 1965 Section 29(2)
D18.
Value shifting: Section 30 TCGA 1992 (Section 26 CGTA 1979)
The Revenue Law Committee of the Law Society raised with the Commissioners for Her
Majestys Revenue and Customs a problem arising out of the widely drawn provisions of Section
30, which problem was causing concern among those dealing with agricultural properties.
The Committee pointed out that there are instances where a farmer who owns the land he farms
may decide to retire and may wish to hand over the farming business, possibly to his son, while
raising capital for himself. He therefore enters into two transactions:
(a)
lease of the farm at a rack-rent to his son on normal agricultural terms; and
(b)
sale of the freehold, subject to the lease to the son, to an outside investor, often an
institutional buyer.
The market price paid by the institutions is for the tenanted value of the property and this is the
value on which the retiring farmer pays capital gains tax. He will undoubtedly have reduced the
value of his asset by the grant of the tenancy and as a result paid capital gains tax on a tenanted
rather than vacant possession value basis.
The Commissioners for Her Majestys Revenue and Customs have now confirmed that in the
precise circumstances mentioned above they would take the view that Section 30 cannot and
should not apply and accordingly that they do not regard that section as giving rise to an
increased charge to capital gains tax when a farmer enters into the two transactions mentioned.
D19.
Replacement of business assets in groups of companies
To obtain the benefit of Section 175 TCGA 1992, the company making the gain during the
replacement of business assets by a group of companies must be a member of a group and the
company carrying out the complementary transaction must be a member of the same group, as
defined by Section 170(2) TCGA 1992, when the transaction is carried out.
The Consultative Committee of Accountancy Bodies raised with HM Revenue and Customs the
problem of defining the membership of a group of companies for the purpose of replacement of
business assets bearing in mind that the replacement acquisition may take place at any time
within a period beginning twelve months before and ending three years after the disposal (or such
longer period as the Commissioners for Her Majestys Revenue and Customs may be notice in
writing allow).
The Revenue take the view that to obtain the benefit of s175 the company making the gain or the
qualifying replacement must be a member of a group and the company carrying out the
complementary transaction must be a member of the same group when that transaction is carried
out. The concept of same group is as defined in Section 170(10) TCGA 1992.
Thus, if company A makes a gain at a time when it is a member of the X group of companies then
that gain may only be rolled over against an acquisition by company B if at the time of that
acquisition company B is a member of the X group.
Therefore, company B need not have been a member of the group at the time that company A
made the disposal but must be a member of the group by the time that company B makes its
acquisition. Similarly, company A must be a member of the group at the time that it makes its
disposal but need not be a member of the group at the time that company B makes the
corresponding acquisition.
D20.
Retirement relief: Change in business during 10 years before disposal
D21.
Time limit for an election for valuation on 6 April 1965 under Paragraph 17,
Schedule 2, TCGA 1992 (Paragraph 12 Schedule 5 CGTA 1979): Company leaving a
group: Sections 178 and 179 TCGA 1992 (Section 278 ICTA 1970)
The time limit for the making of an election for valuation on 6 April 1965 under Paragraph 17
Schedule 2 TCGA 1992 is two years from the end of the year of assessment or accounting period
within which the disposal took place, or such further time as The Commissioners for Her
Majestys Revenue and Customs may allow. The Commissioners for Her Majestys Revenue and
Customs will exercise their discretion under paragraph 17(3) to extend the time limit as
appropriate where a company ceases to be a member of a group of companies and as a result a
chargeable asset acquired from another member of the group within the past six years is deemed
to have been disposed of (and reacquired) immediately after the acquisition (Sections 178 and
179 TCGA 1992).
D22.
Transfer of business to a company - Superseded by ESC D22
D23.
Non-resident company: Section 13, TCGA 1992
Where a United Kingdom participator in a non-resident company which would be a close

company if resident in the United Kingdom is chargeable to capital gains tax on a proportion of a
capital gain accruing to that company, tax credit relief may be given against United Kingdom
capital gains tax for the appropriate proportion of any overseas tax payable by the company in the
country where it is resident in respect of its gain under Section 277 TCGA 1992; alternatively,
under Section 278 TCGA 1992, the appropriate proportion of the overseas tax may be deductible
in computing the participator's gains to the extent that the overseas tax has not qualified for relief
under Section 277 TCGA 1992.
D24.
Initial repairs to property: Section 38(1), TCGA 1992
Expenditure on initial repairs to a property (including expenditure on decorations), undertaken in

order to put it into a fit state for letting and not allowable for the purposes of Schedule A, is
regarded as allowable expenditure for capital gains tax purposes under Section 38(1) TCGA
1992.
E. Statements relating to Inheritance Tax (also applicable where tax charged is Capital
Transfer Tax) and Estate Duty
El.
Powers of appointment
1.
It is not necessary for the interests of individual beneficiaries to be defined. They can for
instance be subject to powers of appointment. In any particular case the exemption will depend
on the precise terms of the trust and power concerned, and on the facts to which they apply. In
general, however, the official view is that the conditions do not restrict the application of Section
71 IHTA 1984 to settlements where the interests of individual beneficiaries are defined and
indefeasible.
2.
The requirement of Section 71(1)(a) IHTA 1984 is that one or more persons will, on or
before attaining a specified age not exceeding twenty five, become beneficially entitled to, or to
an interest in possession in, the settled property or part of it. It is considered that settled property
would meet this condition if at the relevant time it must vest for an interest in possession in some
member of an existing class of potential beneficiaries on or before that member attains 25. The
existence of a special power of appointment would not of itself exclude Section 71 if neither the
exercise nor the release of the power could break the condition. To achieve this effect might,
however, require careful drafting.
3.
The inclusion of issue as possible objects of a special power of appointment would
exclude a settlement from the benefit of Section 71 if the power would allow the trustees to
prevent any interest in possession in the settled property from commencing before the beneficiary
concerned attained the age specified. It would depend on the precise words of the settlement and
the facts to which they had to be applied whether a particular settlement satisfied the conditions
of Section 71(1). In many cases the rules against perpetuity and accumulations would operate to
prevent an effective appointment outside those conditions. However the application of Section 71
is not a matter for a once-for-all decision. It is a question that needs to be kept in mind at all
times when there is settled property in which no interest in possession subsists.
4.
Also, a trust which otherwise satisfies the requirement of Section 71(1)(a) would not be
disqualified by the existence of a power to vary or determine the respective shares of members of
the class (even to the extent of excluding some members altogether) provided the power is
exercisable only in favour of a person under 25 who is a member of the class.
Annex To SPE1
Practical illustrations of Section 71 IHTA 1984. The examples set out below are based on a
settlement for the children of X contingently on attaining 25, the trustees being required to
accumulate the income so far as it is not applied for the maintenance of X's children.
Example A
The settlement was made on X's marriage and he has as yet no children.
Section 71 IHTA 1984 will not apply until a child is born and that event will give rise to
a charge for tax under Section 65 IHTA 1984.
Example B
The trustees have power to apply income for the benefit of X's unmarried sister.
Section 71 IHTA 1984 does not apply because the conditions of subsection
(1)(b) are not met.
Example C
X has power to appoint the capital not only among his children but also among his remoter issue.
Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favour
of persons who would thereby acquire interests in possession on or before attaining age
25). A release of the disqualifying power would give rise to a charge for tax under
Section 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65
IHTA 1984.
Example D
The trustees have an overriding power of appointment in favour of other persons.
Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favour
of persons who would thereby acquire interests in possession on or before attaining age
25). A release of the disqualifying power would give rise to a charge for tax under
Section 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65
IHTA 1984.
Example E
The settled property has been revocably appointed to one of the children contingently on his
attaining 25 and the appointment is now made irrevocable.
If the power to revoke prevents Section 71 IHTA 1984 from applying (as it would for
example, if the property thereby became subject to a power of appointment as at C or D
above), tax will be chargeable under Section 65 IHTA 1984 when the appointment is
made irrevocable.
Example F
The trust to accumulate income is expressed to be during the life of the settlor.
As the settlor may live beyond the 25th birthday of any of his children, the trust does not
satisfy the condition in subsection (1)(a) and Section 71 IHTA 1984 does not apply.
E2.
Powers of advancement
E3.
Superannuation schemes
1.
This Statement clarifies the inheritance tax liability of benefits payable under pension
schemes.
2.
No liability to inheritance tax arises in respect of benefits payable on a person's death
under a normal pension scheme except in the circumstances explained immediately below. Nor
does a charge to inheritance tax arise on payments made by the trustees of a superannuation
scheme within Section 151 IHTA 1984 in direct exercise of discretion to pay a lump sum death
benefit to any one or more of a member's dependants. It is not considered that pending the
exercise of the discretion the benefit should normally be regarded as relevant property comprised
in a settlement so as to bring it within the scope of IHTA 1984 Part III. The protection of Section
151 IHTA 1984 would not of course extend further if the trustees themselves then settled the
property so paid.
3.
Benefits are liable to inheritance tax if:
(a)
they form part of the freely disposable property passing under the will or intestacy of a
deceased person. This applies only if the executors or administrators have a legally
enforceable claim to the benefits: if they were payable to them only at the discretion of
the trustees of the pension fund or some similar persons they are not liable to inheritance
tax);
or
(b)
the deceased had the power, immediately before the death, to nominate or appoint the
benefits to any person including his dependants.
4.
In these cases the benefits should be included in the personal representatives account
(schedule of the deceaseds assets) which has to be completed when applying for a grant of
probate or letters of administration. The inheritance tax (if any) which is assessed on the personal
representatives account has to be paid before the grant can be obtained.
5.
On some events other than the death of a member information should be given to the
appropriate office of IR Capital Taxes. They are:
(i)
the payment of contributions to a scheme which has not been approved for income tax
purposes;
(ii)
the making of an irrevocable nomination or the disposal of a benefit by a member in his

or her lifetime (otherwise than in favour of a spouse) which reduces the value of his or
her estate (e.g. the surrender of part of the pension or lump sum benefit in exchange for a
pension for the life of another);
(iii)
the decision by a member to postpone the realisation of any of his or her retirement
benefits.
6.
If inheritance tax proves to be payable the IR Capital Taxes will communicate with the
persons liable to pay the tax.
7. See
also:
Statement of Practice 10/86; and

Tax Bulletin No. 2 of February 1992; the article INHERITANCE TAX - Retirement Benefits
Under Private Pension Contracts: Section 3(3) Inheritance Tax Act 1984.
E4.
Associated operations
Life assurance policies and annuities are regarded as not being affected by the associated
operations rule if, first, the policy was issued on full medical evidence of the assureds health and,
second, it would have been issued on the same terms if the annuity had not been bought.
E5.
Close companies
The Commissioners for Her Majestys Revenue and Customs consider that the general intention
of Section 101 IHTA 1984 is to treat the participators as beneficial owners for all the purposes of
that Act. Consequently, the conditions of Sections 52(2) and 53(2) IHTA 1984 are regarded as
satisfied where it is the company that in fact becomes entitled to the property or disposes of the
interest.
E6.
Power to augment income
This statement sets out the effect for inheritance tax of the exercise by trustees of a power to
augment a beneficiarys income out of capital.
In the normal case, where the beneficiary concerned is life tenant of the settled property this will
have no immediate consequences for inheritance tax. The life tenant already has an interest in
possession and under the provisions of Section 49(1) IHTA 1984 is treated as beneficially entitled
to the property. The enlargement of that interest to an absolute interest does not change this
position (Section 53(2) IHTA 1984) and it is not affected by the relationship of the beneficiary to
the testator.
In the exceptional case, where the beneficiary is not the life tenant, or in which there is no
subsisting interest in possession, the exercise of the power would give rise to a charge for tax
under Section 52(1) IHTA 1984, although on or after 17 March 1987 this may be a potentially
exempt transfer, or a charge under Section 65(1)(a) IHTA 1984. But if the life tenant is the
surviving spouse of a testator who died before November 13 1974, exemption might be available
under paragraph 2 Schedule 6 IHTA 1984.
The exercise of the power would be regarded as distributing the settled property rather than as
reducing its value, so that Sections 52(3) and 65(1)(b) IHTA 1984 would not be in point.
E7.
Protective trusts
In the Commissioners for Her Majestys Revenue and Customs view, the reference to trusts to
the like effect as those specified in Section 33(1) of the Trustee Act 1925 - contained in Sections
73 and 88 IHTA 1984 - is a reference to trusts which are not materially different in their tax
consequences.
The Commissioners for Her Majestys Revenue and Customs would not wish to distinguish a
trust by reason of a minor variation or additional administrative duties or powers. The extension
of the list of potential beneficiaries to, for example, brothers and sisters is not regarded as a minor
variation.
E8.
Age of majority - Obsolete. See now Begg-McBrearty (Inspector of Taxes) v Stilwell

[1996] STC 413
E9.
Excluded property
Property is regarded, for the purposes of Section 48(3) IHTA 1984, as becoming comprised in a
settlement when it, or other property which it represents, is introduced by the settlor.
E10.
Leases for life
E11.
Employee trusts
This statement clarifies the application of Section 13(1) IHTA 1984, where employees of a
subsidiary company are included in the trust.
The Commissioners for Her Majestys Revenue and Customs regard Section 13 (1) IHTA 1984 as
requiring that where the trust is to benefit employees of a subsidiary of the company making the
provision, those eligible to benefit must include all or most of the employees and officers of the
subsidiary and the employees and officers of the holding company taken as a single class. So it
would be possible to exclude all of the officers and employees of the holding company without
losing the exemption if they comprised only a minority of the combined class. But the exemption
would not be available for a contribution to a fund for the sole benefit of the employees of a small
subsidiary. This is because it would otherwise have been easy to create such a situation
artificially in order to benefit a favoured group of a companys officeholders or employees. But
even where the participators outnumber the other employees the exemption is not irretrievably
lost. The requirement to exclude participators and those connected with them from benefit is
modified by Section 13(3) IHTA 1984. This limits the meaning of a participator for this
purpose to those having a substantial stake in the assets being transferred and makes an exception
in favour of income benefits. So even where most of the employees are also major participators
or their relatives, an exempt transfer could be made if the trust provided only for income benefits
and for the eventual disposal of the capital away from the participators and their families.
This restriction does not affect the exemptions offered by Section 86 IHTA 1984 from tax
charges during the continuance of a trust for employees which meets the conditions of that
section.
E12.
Orders in matrimonial proceedings
E13.
Charities
1.
Sections 23 and 24 IHTA 1984 exempt from inheritance tax certain gifts to charities and
political parties to the extent that the value transferred is attributable to property given to a charity
etc. Section 25 IHTA 1984 exempts certain gifts for national purposes and for the public benefit.
2.
Where the value transferred (i.e. the loss to transferors estate as a result of the
disposition) exceeds the value of the gift in the hands of a charity, etc. the Commissioners for Her
Majestys Revenue and Customs take the view that the exemption extends to the whole value
transferred.
E14.
Pools etc. syndicates
No liability to inheritance tax arises on winnings by a football pool, National Lottery or similar
syndicate provided that the winnings are paid out in accordance with the terms of an agreement
drawn up before the win.
Where for example football winnings are paid out, in accordance with a pre-existing enforceable
arrangement, among the members of a syndicate in proportion to the share of the stake money
each has provided, each member of the syndicate receives what already belongs to him or her.
There is therefore no gift or chargeable transfer by the person who, on behalf of the members,
receives the winnings from the pools promoter.
Members of a pool syndicate may think it wise to record in a written, signed and dated statement,
the existence and terms of the agreement between them. But HM Revenue and Customs cannot
advise on the wording or legal effect of such a statement, nor do they wish copies of such
statements to be sent to them for approval or registration. Where following a pools win the terms
of an agreement are varied or part of the winnings are distributed to persons who are not members
of the syndicate, an IHT liability may be incurred. The same principles apply to premium bonds
syndicates and other similar arrangements.
E15.
Close companies: Group transfers
This statement clarifies the position concerning dividend payments and transfers of assets from a
subsidiary company to a parent or sister company as appropriate.
Whether or not a disposition is a transfer of value for capital transfer tax or inheritance tax
purposes has to be determined by reference to Section 3(1), (2) IHTA 1984, and Section 10
provides that a disposition is not a transfer of value if it was not intended to confer any gratuitous
benefit on any person, subject to the other provisions of that subsection.
In the Commissioners for Her Majestys Revenue and Customs view, the effect is that a
dividend paid by a subsidiary company to its parent is not a transfer of value and so Section 94
IHTA 1984 does not start to operate in relation to such dividends. Nor do the Commissioners
for Her Majestys Revenue and Customs feel that they can justifiably treat a transfer of assets
between a wholly-owned subsidiary and its parent or between two wholly-owned subsidiaries as a
transfer of value.
E16.
E17.
E18.
Missives of sale
Incidence of tax
Partial disclaimers of residue
Under Scots law there are certain circumstances in which a residuary legatee can make a partial
disclaimer. Where this is possible the Commissioners for Her Majestys Revenue and Customs
accepts that the provisions of Section 142 IHTA 1984, which deal with disclaimers, apply.
F. Miscellaneous
Fl.
Limitations of Inland Revenue advice to taxpayers - Superseded by Inland Revenue

Code of Practice No 10 Information and advice published in May 1995.
F2.
United Kingdom branches of foreign banks - Superseded by Section 67 FA 1982.
F3.
Close companies: apportionment of income and the consequentials for Capital Gains
Tax: Close companies in liquidation - Superseded by ESCs A36 and D12.
F4.
Artificial separation of business activities
Part III. Statements issued after 18 July 1978

SP1/78
Employment Protection Act 1975: Maternity pay
SP2/78
Close companies: Non-resident participators: Apportionment
SP3/78
Close companies: Income tax relief for interest on loans applied in acquiring an
interest in a close company
1.
Section 360 ICTA 1988 provides, subject to certain conditions, for relief from income tax
in respect of interest on a loan applied in acquiring any part of the ordinary share capital of a
close company or in lending on for use in the business of that or an associated close company.
2.
In paragraph 41 of HM Revenue and Customs booklet entitled Tax Treatment of
Interest Paid issued in 1974, it is stated that:
The company must have been a close company for tax purposes throughout the period
beginning immediately after the application of the money and ending with the payment of interest
giving rise to the claim for relief.
The Commissioners for Her Majestys Revenue and Customs have now agreed that the statutory
provisions may be interpreted as not requiring the company to be close at the time of paying the
interest.
3.
In future, therefore, Section 360 ICTA 1988 will in effect be construed by HM Revenue
and Customs as applying in relation to a company which has ceased to be close after the
application of the loan proceeds as they apply in relation to companies which have remained
close throughout, provided that the other conditions for relief are satisfied. Claims which have
been determined by an agreement taking effect as the determination of an appeal cannot be
reopened for the year or years to which the claim related, but subject to this, claims made on the
new basis within the statutory time limit will be admitted for all years.
SP4/78
Mining companies: Expenditure on planning permission applications
SP5/78
Stamp Duty: Conveyance in consideration of a debt
SP6/78
Trade unions: Provident benefits: Legal expenses paid for members - Superseded
by SP1/84
SP7/78
Capital Gains Tax: Exercise of a power of appointment over settled property
SP8/78
Building licences granted under the Community Land Act 1975: Stock relief
SP1/79
Partnerships: Extension of Statement of Practice D12
Paragraph 8 of SP/D12 explains the circumstances in which the capitalized value of an annuity
paid by a partnership to a retired partner will not be treated as consideration for the disposal of his
share in the partnership assets. The Commissioners for Her Majestys Revenue and Customs
have now agreed that this practice will be extended to certain cases in which a lump sum is paid
in addition to an annuity. Where the aggregate of the annuity and one-ninth of the lump sum does
not exceed the appropriate fraction (as indicated in the Statement) of the retired partner's average
share of the profits, the capitalized value of the annuity will not be treated as consideration in the
hands of the retired partner. The lump sum, however, will continue to be so treated.
This extension of the practice will be applied to all cases in which the liability has not been
finally determined at the date of this Notice.
See also SP1/89.
SP2/79
Development Land Tax: Negotiations on liability
SP3/79
Payment of life assurance premiums on which commission is payable to the

policyholder - Replaced by SP5/95
SP4/79
The Commissioners for Her Majestys Revenue and Customs have considered the question of
premium relief as it relates to policies effected on the lives of children in the light of the new
scheme for premium relief by deduction commencing on 6 April 1979.
Relief under Section 266 ICTA 1988 (formerly Section 19 ICTA 1970) is at present confined to
premiums on an insurance or contract ... made by (the claimant) and as from 6 April 1979, the
individual. Where a child is of tender years the Commissioners for Her Majestys Revenue and
Customs consider that he cannot reasonably be regarded as having made the insurance or
contract since he would have insufficient knowledge or understanding of what he was doing.
Accordingly the Commissioners for Her Majestys Revenue and Customs have decided that no
relief is due in respect of premiums on a policy taken out by a child of tender years. For this
purpose they regard tender years as including a child of less than 12 years of age.
In applying this ruling the Commissioners for Her Majestys Revenue and Customs have agreed
that:
1.
Relief will be allowed by deduction on children's policies which satisfy all the other
requirements for relief and which are issued by a company within UK jurisdiction before 1 March
1979.
2.
New policies taken out on or after 1 March 1979 by a child of tender years on his own
life, will not be allowed relief whether or not the premiums are paid out of the child's own
income.
3.
Where relief is refused in respect of a policy taken out on or after 1 March 1979 by a
child of tender years, it may be granted when the child reaches the age of 12 years if the
insurance or contract was made before 1 September 1979.
SP5/79
Family company: Sale of assets in anticipation of liquidation
SP6/79
Closure of business followed by sale of assets or liquidation of company
SP7/79
Benefits in kind: Cheap loans: Advances for expenses - This Statement of

Practice (SP) has been enacted in section 179 of the Income Tax (Earnings
Pensions) act 2003. This SP applies up to and including tax year 2002-03. After
this date S179 ITEPA applies
SP8/79
Compensation for acquisition of property under compulsory powers
1.
HM Revenue and Customs practice - announced in a statement on 13 December 1972 has been that any element of compensation for temporary loss of profits, which is present in the
compensation or price payable by an authority possessing compulsory powers for the acquisition
of property used for the purposes of a trade or profession, is included as part of the consideration
for the resulting disposal for the purposes of capital gains.
2.
The Commissioners for Her Majestys Revenue and Customs have reconsidered this
practice in the light of the decision of the Court of Appeal in the recent case of the City of
Stoke on Trent v Wood Mitchell & Co Ltd (a Lands Tribunal case). In accordance with this
decision any element of compensation received for temporary loss of profits in the circumstances
described above falls to be included as a receipt taxable under Case I or II of Schedule D.
Compensation for losses on trading stock and to reimburse revenue expenditure, such as removal
expenses and interest, will be treated in the same way for tax purposes.
3.
The practice described in paragraph 2 will also apply in compensation cases where no
interest is acquired (e.g. compensation due to damage, injury or exploitation of land, or to the
exercise of planning control).
4.
The new practice will apply to all cases in which the liability had not been finally
determined at the date of the Court of Appeal's judgement (28 July 1978).
SP9/79
Expenditure on producing films and certain similar assets
SP10/79
Power for trustees to allow a beneficiary to occupy a dwelling house
Many wills and settlements contain a clause empowering the trustees to permit a beneficiary to
occupy a dwelling house which forms part of trust property on such terms as they think fit. The
Commissioners for Her Majestys Revenue and Customs do not regard the existence of such a
power as excluding any interest in possession in the property.
When there is no interest in possession in the property in question the Commissioners for Her
Majestys Revenue and Customs do not regard the exercise of the power as creating one if the
effect is merely to allow non-exclusive occupation or to create a contractual tenancy for full
consideration. The Commissioners for Her Majestys Revenue and Customs also take the view
that no interest in possession arises on the creation of a lease for a term or a periodic tenancy for
less than full consideration, though this will normally give rise to a charge for tax under Section
65 (1)(b) IHTA 1984. On the other hand, if the power is drawn in terms wide enough to cover the
creation of an exclusive or joint residence, albeit revocable, for a definite or indefinite period, and
is exercised with the intention of providing a particular beneficiary with a permanent home, the
Revenue will normally regard the exercise of the power as creating an interest in possession. And
if the trustees in exercise of their powers grant a lease for life for less than full consideration, this
will be regarded as creating an interest in possession in view of Sections 43(3) and 50(6) IHTA
1984.
A similar view will be taken where the power is exercised over property in which another
beneficiary had an interest in possession up to the time of the exercise.
SP11/79
The Commissioners for Her Majestys Revenue and Customs have given further consideration to
the question of premium relief as it applies to policies effected on the lives of children. They
remain of the opinion that (as specified in the Statement of Practice SP4/79 issued on 28 February
1979) no relief is in strictness due on premiums on a policy taken out by a child of tender years
(i.e. a child under age 12), but they are prepared to relax somewhat the terms of that Statement.
1.
In view of the special problems of industrial branch business the Commissioners for Her
Majestys Revenue and Customs will not contest life assurance premium relief on premiums on
all industrial branch juvenile policies and similar policies issued by registered Friendly Societies
as part of their tax exempt business, subject in each case to the limit in paragraph 2(3),
Schedule 14, ICTA 1988 (formerly paragraph 11(3), Schedule 4, FA 1976).
2.
Where an ordinary branch policy other than a Friendly Society policy referred to above is
taken out on the life of a child and is assigned to him or he possesses or acquires the whole
interest in the policy, relief on premiums paid by the child may be allowed (provided that the
other conditions are satisfied)
a.
where the policy was taken out after the child had attained age 12;
b.
where the policy was taken out prior to 1 March 1979 and before the child attained
age 12;
c.
where the policy was taken out on or after 1 March 1979 before the child attained age 12
and he has attained that age.
SP12/79
Investigation settlements: Retirement annuity relief
SP13/79
SP14/79
Unquoted shares or securities held on 6 April 1965
1.
This Statement concerns the application of paragraph 19, Schedule 2 TCGA 1992
(paragraph 14, Schedule 5, CGTA 1979) to unquoted shares and securities held on 6 April 1965.
Where there has been a reorganisation of a company's share capital before 6 April 1965,
paragraph 19(1) deems the shares to have been sold and re-acquired at market value on 6 April
1965. Where a reorganisation takes place on or after 6 April 1965, and all or part of the new
holding of shares is disposed of without an election for valuation as at 6 April 1965 being made,
paragraph 19(2) requires the new shares to be valued as at the date of the reorganisation: time
apportionment is applied to the gain or loss up to that date and on a disposal this is brought into
account as well as the subsequent gain or loss.
2.
For the purposes of paragraphs 19(1) and 19(2) reorganisation of share capital includes
not only reorganisation of one company's share capital within Section 126 or Section 132 TCGA
1992 (Section 77 or Section 82 CGTA 1979), but also certain takeovers, reconstructions and
amalgamations involving more than one company within Section 135 TCGA 1992 (Section 85
CGTA 1979) or Section 136 TCGA 1992 (Section 86 CGTA 1979).
3.
Paragraph 19(3) however, prevents the application of paragraphs 19(1), or 19(2) where
the new holding differs only from the original shares in being a different number, whether greater
or less, of shares of the same class as the original shares. HM Revenue and Customs practice has
been to treat paragraph 19(3) as capable of covering reorganisations involving more than one
company; for example, the exchange of shares of a certain class in one company for shares of the
same class in another company.
4.
The Commissioners for Her Majestys Revenue and Customs have reconsidered this
practice in the light of the case of CIR v Dr G W Beveridge. In accordance with opinions
expressed in the Court of Session paragraph 19(3) is no longer considered to apply where the
shares comprised in the new holding are shares in a different company from the old shares.
5.
This interpretation will be applied to all cases in which the liability had not been finally
determined at the date of the Court of Sessions' judgement (19 July 1979).
SP1/80
Legal entitlement and administrative practices - Superseded by SP6/95
SP2/80
Statement clarifying the operation of an existing administrative practice: Case V

Schedule D Losses - Superseded by ESC B25
SP3/80
Section 707 ICTA 1988: Cancellation of tax advantages from certain transactions
in securities: Procedure for clearance in advance
Section 703, ICTA 1988 and the succeeding sections (which provide for the cancellation of tax
advantages from certain transactions in securities) contain safeguards against counteraction being
taken unwarrantably in respect of transactions which a taxpayer has carried out. In addition,
Section 707 provides a procedure for the taxpayer to be told in advance whether The
Commissioners for Her Majestys Revenue and Customs are satisfied that proposed transactions
as described to them, if carried out, would not invoke counteraction.
Reasons for refusing clearance
1.
Where the Commissioners for Her Majestys Revenue and Customs cannot give
clearance under Section 707 they are not statutorily required to say why and at one time their
practice was to decline to do so. With a view to removing misunderstanding in particular about
the scope of Section 703 in relation to transactions with a commercial element, they later
modified that practice.
Where the applicant has given full reasons for his transactions and clearance has to be refused,
the Commissioners for Her Majestys Revenue and Customs indicate, where possible, their main
grounds for doing so. In appropriate cases where they do not think it right to give reasons the
Commissioners for Her Majestys Revenue and Customs will invite the principals themselves as
well as their advisers to an interview so that the Commissioners for Her Majestys Revenue and
Customs can be certain they have fully appreciated the position.
Significance of refusing clearance
2.
The rules of the clearance procedure require the Commissioners for Her Majestys
Revenue and Customs to say whether in their view Section 703 would not apply. They are not
required to say whether in their view the Section definitely would apply. It may not always be
practicable to do so in advance of the transaction's actually being carried out, e.g. where the
motive for it is a relevant factor. Nonetheless, it is not the practice of the Commissioners for Her
Majestys Revenue and Customs to withhold consent under Section 707 unless they would, on the
information available to them, expect to take counteraction under Section 703. The then
Financial Secretary to the Treasury stated this practice in the 1966 Finance Bill debates in the
following words: The Revenue's approach is that it will not refuse a [Section 707] clearance unless, having
considered the transaction fully and all the circumstances of it, it would itself take action under
the Section if the transaction were completed.
SP4/80
Industrial buildings allowance: Industrial workshops constructed for separate

letting to small businesses
Under the industrial buildings allowance rules (Part 1 CAA 1990) a building only qualifies for
relief if it is in use as an industrial building or structure as defined in Section 18. Where a
number of small workshops which are to be industrial buildings are constructed for separate
letting to small businesses, it is thus necessary for the owner of the relevant interest to establish in
each case that the tenant is carrying on a qualifying trade. He must also establish, in each case,
how much, if any, of the building is used for non-qualifying purposes, such as for offices. These
requirements can be burdensome, particularly where tenants change frequently, and further
information on these points has to be obtained to establish that each workshop continues to be
used in full as an industrial building.
HM Revenue and Customs have decided that, in future, they will normally be prepared to deal
with industrial buildings allowance claims for estates consisting of small industrial workshops on
a global instead of individual basis. Where, therefore, individual workshops units of
2,500 square feet or less intended for separate letting as industrial buildings to small businesses
are constructed as an estate, the Inspector will normally be satisfied with a general description of
the uses to which the units will be put and, unless the circumstances suggest the need for further
enquiry, will not ask for particulars of the trades carried on by individual tenants or details of the
uses to which these premises are put. For the purpose of writing down allowances, the whole of
any estate built at one time (or part of an estate where it is constructed in phases) will be regarded
as having been brought into use when the first workshop begins to be used.
A sale of the relevant interest in the estate would also be dealt with on a global basis so far as
possible, but when only part of the estate is sold, separate computations would normally be
necessary to establish the balancing adjustments and the successor's allowances.
This practice is intended to simplify the administration of the industrial buildings allowance rules
as they apply to most industrial workshop estates built for letting as separate units to small
businesses. It will not apply where, exceptionally, several units in one estate are let to the same
tenant or connected tenants; where the estate is to a significant extent used for trades which do
not attract industrial buildings allowance; and in any other circumstances where the relief
available would be significantly lower on a strict application of the industrial building allowances
rules.
SP5/80
Group relief: Section 410 ICTA 1988 - Superseded by SP3/93
SP6/80
Small workshops allowance
SP7/80
Deceased persons' estates: Income received during the administration period
SP8/80
Stock relief: Deferment of recovery charges: Definition of net indebtedness in

Paragraph 1(5), Schedule 7, FA 1980
SP9/80
Investigation settlements: Retirement annuity relief -Superseded by SP9/91
SP10/80
Mortgage interest relief: Year of marriage
SP11/80
Liability under Chapter II of Part XIII, ICTA 1988, on gains arising on life and
capital redemption policies and life annuities
1.
On the occurrence of a chargeable event in connection with a policy of life assurance, a
contract for life annuity, or a capital redemption policy, the appropriate person may be liable to
pay tax in respect of any gain treated as arising on that event.
2.
The Commissioners for Her Majestys Revenue and Customs have recently considered
the liability on a chargeable event of persons not resident in the United Kingdom. Although the
matter is not free from doubt, they have concluded that in future a charge to tax should not be
made on non-resident persons if the proceeds of the policy or contract are not payable in the
United Kingdom and: a.
the policy or contract was made outside the United Kingdom by an overseas branch of an
insurance company resident in the United Kingdom; or
b.
the policy or contract was made outside the United Kingdom by an insurance company
not resident in the United Kingdom.
SP12/80
Business property relief: Buy and sell agreements
The Commissioners for Her Majestys Revenue and Customs understand that it is sometimes the
practice for partners or shareholder directors of companies to enter into an agreement (known as a
Buy and Sell Agreement) whereby in the event of the death before retirement of one of them,
the deceaseds personal representatives are obliged to sell and the survivors are obliged to
purchase the deceaseds business interests or shares, funds for the purchase being frequently
provided by means of appropriate life assurance policies.
In the Commissioners for Her Majestys Revenue and Customs view such an agreement,
requiring as it does a sale and purchase and not merely conferring an option to sell or buy, is a
binding contract for sale within Section 113 IHTA 1984. As a result the inheritance tax business
property relief will not be due on the business interest or shares. (Section 113 IHTA 1984
provides that where any property would be relevant business property for the purpose of business
property relief in relation to a transfer of value but a binding contract for its sale has been entered
into at the time of the transfer, it is not relevant business property in relation to that transfer.)
SP13/80
Demergers: Sections 213-8 ICTA 1988
Sections 213-8, ICTA 1988 contain certain tax reliefs where trading activities carried on by a
single company or group are divided so as to be carried on by two or more companies not
belonging to the same group or by two or more independent groups.
This Statement of Practice explains how HM Revenue and Customs will apply certain of the
provisions in practice and does not affect the right of appeal on points affecting liability to tax.
The references are to ICTA 1988.
exempt distribution
This expression, wherever it appears in Sections 213-8, refers only to what would otherwise have
been a distribution for the purposes of the Corporation Tax Acts. It does not, for example, apply
to a distribution in a winding up.
213(3)(b)(i)
To satisfy S 213 (3)(b)(i), a trade (or trades) must be transferred. The Revenue will regard this as
satisfied where what is received by the transferee company is a trade. What passes from one
company to another will be a parcel of assets comprising what is needed for the carrying on of
that trade. The same trade may previously have been carried on as such by the distributing
company; but this is not essential. What is transferred may have been part only of a trade carried
on by that company, for example, the retail end of a combined manufacturing/retailing trade. Or
again the assets being transferred may be being brought together for the first time from one or
more trades carried on by the distributing company or in the group of which it is a member; assets
may even be included which were not previously used in a trade or held by a trading company,
e.g. property may have been held in a property investment company. What matters is that there
should be a division of trading activities and that assets transferred should be transferred to be
used in a trade by the transferee company and should be so used. Relief will not be denied solely
because some minor asset linked with a trading asset, for example a flat above a shop, is also
transferred.
S213 (6)(a), 8(b) and 8(d) Ordinary shares
Relief under S213 (2) is given to a distribution to ordinary shareholders only insofar as it is of
shares forming part of ordinary share capital (as defined in Section 832) which are transferred or
issued. Relief on that distribution will not be denied solely because concurrently there is a
transfer or issue, of a kind that does not qualify for relief, of other shares or securities to ordinary
shareholders or of shares or securities of any description to preference shareholders (and whether
or not that other transfer or issue involves a taxable distribution). Similarly, the words
substantially the whole will be regarded as satisfied even where the shareholders give some
consideration. However, these other circumstances will be taken into account in judging whether
all the conditions, in particular those of S213 (10) and (11) are satisfied.
S213 (6)(a), 8(b), and (8)(d) substantially the whole
In the context of these particular provisions, substantially the whole is taken to mean around
90 per cent or more.
S213 (8)(a) interest ... in that trade
The legislation does not define this expression. In the Revenue's view, it must be given a wide
meaning. A company would clearly retain an interest in a trade if it carried it on jointly or
otherwise had a right to the profits or assets or to any of them. But other circumstances could
exist in which it could be said to have an interest, for example, if it was or was entitled to be a
main supplier or customer, or possibly as a consequence of the two companies having common
management. In these kinds of case, the Revenue would not normally argue that the interest was
other than a minor interest unless the interest effectively gave control of the trade or of its
assets, or a material influence on the profits or on their destination. More generally, it will not
always be possible to quantify an interest in a trade; but where this can be done, minor is the
opposite of substantially the whole, i.e. around 10 per cent or less.
S213 (6)(b), (8)(c) and (8)(e) after
In the Revenue's view, these provisions require that the company should be bona fide trading
after the distribution; but in this context they do not regard after as meaning for ever after. If
there were any intention that the conditions would cease to be satisfied at some later time, the
application of S213 (10) and (11) would need to be considered.
S213 (11)(c)
The concurrent sale of another company in the same group as a subsidiary being demerged is not
necessarily a bar to relief. It would be so, for example, if that were a main purpose of a scheme
or arrangement of which the distribution formed a part.
S213 (11)(d) after
after in this context clearly means at any time after.
S215
Advice on the method of application under paragraph S215 (1) and on the information to be
included in it is contained in the Annex to this Statement. Where, exceptionally, it is not possible
to explain the purposes of a demerger adequately in writing, the Revenue will invite applicants to
an interview. If they have to refuse clearance under these provisions, they will normally state the
main reason for doing so.
All general enquiries on the demerger legislation should be directed to Business Tax Division
(Demergers), New Wing, Somerset House, London WC2R 1LB and not to local Inspectors of
Taxes. Particular enquiries on the capital gains aspect should however be directed to Capital and
Savings Division, Capital Gains Clearance Section at Sapphire House, 550 Streetsbrook Road,
Solihull, West Midlands B91 1QU.
S216 (1)
This subsection requires a company making an exempt distribution to make a return giving
particulars, inter alia, of the circumstances by reason of which it is exempt. In many cases a
clearance notification will previously have been given by the Commissioners for Her Majestys
Revenue and Customs under S215 (1). Where the distribution is precisely that for which a
clearance application was made, all relevant circumstances being as disclosed in that application,
it will suffice to refer to the notification and to confirm that that is so.
S768 ICTA 1988
Section 768 provides, broadly, that where within any three year period there is both a change in
the ownership of a company and a major change in the nature or conduct of a trade carried on by
it, then relief cannot be obtained against profits arising after the change of ownership for losses
incurred before the change.
The object of the demergers legislation is to make it easier for trading activities to be split (which
may involve a change in ownership of a company within the meaning of the Section) so that some
part of them at least may be managed more dynamically (which may involve a major change in
the nature or conduct of the trade). In the meantime, if full details are given, the Revenue will
consider sympathetically the application of the Section where the reason for Section 768 applying
is that the ownership of a trade being demerged under these provisions is passing from a company
to its shareholders, the underlying ownership of the trade being unchanged (e.g., the shareholders
after the distribution own directly the interests in a company which previously they owned
indirectly through the company which made the distribution).
NB
Extra-Statutory Concession C11 provides that a distributing company will not be
regarded as failing to meet Section 213 (7) or (9) merely because it retains, after the distribution,
sufficient funds to meet the cost of liquidation and to cover the amount of the share capital
remaining, depending on the amount of that remaining share capital. The full text of ESC C11
may be found on the internet at www.inlandrevenue.gov.uk/leaflets/ir1.pdf
ANNEX TO SP13/80
APPLICATIONS FOR CLEARANCE UNDER S215 (1)
Procedure
Application for clearance under Section 215 ICTA 1988 should be sent to: IF NOT MARKET SENSITIVE
Mohini Sawhney
5th Floor
22 Kingsway
LONDON
WC2B 6NR
IF MARKET SENSITIVE
Ray McCann
5th Floor
22 Kingsway
LONDON
WC2B 6NR
Applications under Section 215 ICTA and one or both of Sections 138/9 TCGA or 703 ICTA can
be sent to the same address with a copy of the application and all supporting documents for each
clearance sought. Applications will then be forwarded to the relevant offices. Alternatively the
other applications may be made directly to: HMRC
Capital and Savings

Capital Gains Clearance Section
Sapphire
Solihull
West
B91
House
550, Streetsbrook Rd
Midlands
1QU
and
HMRC
5th
22
LOND
WC2B
Special Investigations Section

Floor
Kingsway
ON
6NR
respectively.
Form of application
To assist companies in preparing clearance applications under paragraph S215 (1) and to facilitate
their consideration by the Commissioners for Her Majestys Revenue and Customs, an outline of
the basic information needed is given below. It is not an exhaustive statement and each applicant
in giving the particulars of the relevant transactions required by S215 (5) must fully and
accurately disclose all facts and circumstances material for the decision of the Commissioners for
Her Majestys Revenue and Customs (S215 (8)).
This advice refers only to applications under S215 (1). Where a single application is made under
that and other provisions, e.g. Section 138 TCGA 1992, it should open by stating clearly the
provisions under which it is made and should be expanded to include any additional information
needed for the application(s) under the other provision(s).
It will be helpful if applications follow the order of items below, each item being expanded as
necessary and further information being added at the end.
1.
Companies
The name of each relevant company (S213 (3)) showing
a.
whether it is a distributing subsidiary or transferee company
b.
its tax district and reference
c.
whether it is resident in the UK
d.
status i.e. holding company or trading company within the S218 (1) definition or some
other type of company e.g. investment company or holding or trading company not
within the definition.
2.
Groups
Where appropriate a statement or diagram showing the shareholding interest of each group
company in other group companies. A group for this purpose is the largest 51 per cent group (as
defined in S218 (1)) to which the distributing company belongs.
3.
Purpose and benefits
A statement of the reasons for the demerger, the trading activities to be divided, the trading
benefits expected and any other benefits expected to accrue whether or not to the company
concerned.
If this can be stated more easily after giving a detailed description of the proposed transactions
this item may be included in the application after item 4.
4.
Transactions
A detailed description of all the proposed transactions including a.
Share capital
Particulars (class, amount and voting rights) of all share capital of the companies in 1. above,
issued (or to be issued) in the course of the demerger showing the shares to be transferred and/or
issued (or exchanged) in the demerger and to which shareholders (or classes of shareholders) or
companies. Particulars of any changes to be made in shareholders' rights or loan capital
arrangements in connection with the demerger should also be given.
b.
Transfer of trade (as distinct from a trading subsidiary)
Particulars of the transfer including all trading and other assets and liabilities to be transferred and
retained. (Approximate statements of affairs for the distributing and transferee companies before
and after the demerger would be helpful.) Particulars of any interest in the trade to be retained by
the distributing company or its group should also be given.
c.
Prior transactions
Particulars of any prior transactions or rearrangements within a group in preparation for the
demerger.
The description should make it clear why it is considered that all the relevant conditions of S213
(3)-(10) and (12) are satisfied.
5.
S213 (11) conditions
Confirmation, together with all relevant information, that the distribution is not part of a
scheme etc within S213 (11). A statement should also be given of the circumstances, if any, in
which it is envisaged that control of a relevant company (listed in 1. above) might be acquired
by someone other than members of the distributing company or a trade carried on by one of
those companies before or after the demerger might cease or be sold. (Such circumstances might
of course exist but not as part of a scheme or arrangement or otherwise to cause any of the
qualifying conditions to be failed.)
6.
Balance sheet and Profit and Loss Account
The latest available balance sheets and profit and loss accounts of the existing companies in 1.
above and in the case of a group the consolidated balance sheet and profit and loss account with a
note of any material relevant changes between the balance sheet date and the proposed demerger
(the latest balance sheet etc available may of course be later than the last sent to the appropriate
tax district).
SP14/80
Relief for owner occupiers
FA 1980 introduced a new relief from capital gains tax for owner occupiers who let living
accommodation in their homes. The legislation has been consolidated as -TCGA1992s223 (4).
The purpose of this statement is to give to people who are, (or are thinking of) letting the whole
or part of their homes an indication whether they are likely to be liable to any capital gains tax
when they dispose of them. Anyone who would like further information about the application to
his own circumstances of the rules and practice described in this statement is advised to get in
touch with -his Tax Office which will be pleased to give further help.
1.
Full exemption
Where the owner of a dwelling house has occupied the whole of it as his only or main residence
throughout his period of ownership
Since 6 April 1965 if he acquired it before then and disposed of it before 6 April 1988,
or
Since 31 March 1982 if he acquired it before then and disposed of it on or after 6 April 1988.
Any gain on disposal is entirely exempt from capital gains tax.
2.
Lodger living with the family
Where a lodger lives as a member of the owner's family, sharing their living accommodation and
taking meals with them, no part of the accommodation is treated as having ceased to be occupied
as the owner's main residence, and the exemption is not restricted at all.
3.
The relief for lettings
The new relief will apply where the owner disposes after 5 April 1980 -of a dwelling house which
has been his only or main residence during his period of ownership but which he has wholly or
partly let as residential accommodation. That part of the gain which would previously have been
- taxable, ignoring the relief for lettings, will now be exempt from capital gains tax up to the
lower of
40,000 for disposals on or after 19 March 1991
and the amount of the exemption attributable to their own occupation. The amount of the gain on
the let part depends on two things: i.
how much has been let; and
ii. the length of time during which it was let.

For example, someone occupies the whole of his home (acquired after 6 April 1982) for six years
out of a 10 year period of ownership. One-third of it is let throughout the other 4 years. The gain
on the house as a whole is 30,000. Ignoring the relief for lettings, 26,000 would be exempt
from capital gains tax and 4,000 (1/3 x 4/10 x 30,000) would be chargeable.
Relief for lettings applies to the 4,000 (which is less than the two limits referred to above) so
that the whole of the gain of 30,000 is now exempt.
4.
When relief for lettings is available
Whether the let accommodation is part of the owner's dwelling house or is itself a separate
dwelling house depends on the facts of particular cases. The Commissioners for Her Majestys
Revenue and Customs wish to make known, however, their view of the application of the relief to
the common case where the owner of a house, which was previously occupied as his (or the
family) home, lets part as a flat or set of rooms without structural alteration (or with only minor
adaptations). For the purposes of relief for lettings the Commissioners for Her Majestys
Revenue and Customs regard this as a letting of part of the owner's dwelling house, whether or
not the tenants have separate washing and cooking facilities. But the relief does not extend to
property which, although it may be part of the same building, forms a dwelling house separate
from that which is, or has been, the owner's (for example, a fully self-contained flat with its own
access from the road).
SP15/80
Maintenance payments: Payment of school fees
Where a Court Order requiring a former spouse to make maintenance payments direct to his/her
child, who is living with the other spouse, includes an element to cover the cost of school fees of
that child it is sometimes the practice for the payment of those fees to be made direct to the
school under the Order which would normally be in the following form:
that that part of the Order which reflects the school fees shall be paid to the [headmaster]
[bursar] [school secretary] as agent for the said child and the receipt of that payee shall be
sufficient discharge.
Provided this Order reflects what is happening in practice tax relief will be given to the payer for
these payments which will form part of the taxable income of the child. Changes to the taxation
of maintenance payments introduced by the 1988 Finance Act mean that no relief is available to
the payer unless the Order requiring payments to the child was made:
i.
by 30 June 1988, on an application to the Courts made before 15 March 1988; or
ii.
to replace, vary or supplement such an Order which itself requires payments direct to the
child.
Where relief is available, the payer's tax relief is limited to that available for 1988/89, even if the
payments increase in later years. The child's liability to tax on the income is similarly limited to
the amount which was taxable in 1988/89.
The Revenue's views of the circumstances which will properly reflect the presuppositions of such
an Order and of the responsibility for establishing that such circumstances exist are as follows:
The onus will be on the parties themselves to produce evidence, where requested, that the person
receiving the school fees has agreed to act as agent for the child and that the contract for the
payment of the fees (which will most easily be proved if in writing) is between the child (not the
spouse making the payments) and the school.
Changes to the tax rules for maintenance payments mean that for payments direct to children will
no longer be available from 6 April 2000.
SP16/80
Lorry drivers: Relief for expenditure on meals
SP17/80
SP18/80
Securities dealt in on the Stock Exchange Unlisted Securities Market: Status and
valuation for tax purposes Rendered obsolete on the closure of the Unlisted
Securities market
SP1/81
Non-statutory redundancy payments - Superseded by SP1/94
SP2/81
Contributions to retirement benefit schemes on termination of employment
SP3/81
Individuals coming to the UK: Ordinary residence withdrawn with effect from
6 April 2009
SP4/81
Stock relief: Recovery charges when level of trading is negligible
SP5/81
Expenditure on farm drainage
Land which in the past was reasonably well drained but subsequently become wholly or partly
waterlogged because the maintenance of efficient drainage was uneconomic is sometimes made
available for cultivation by the restoration of drainage or by re-draining. In such case so much of
the net expenditure incurred (after crediting any grants receivable) as would be necessary to
restore the drainage will be admitted as revenue expenditure in farm accounts provided it
excludes:
a.
any substantial element of improvement - for example, the substitution of tile drainage,
for mole drainage and
b.
the capital element in cases in which the present owner is known to have acquired the
land at a depressed price because of its swampy condition.
SP6/81
Maintenance payments under court orders: Retrospective dating
SP7/81

SP8/81
Rollover relief for replacement of business assets: Trades carried on successively
1.
Where a trader ceases carrying on his trade and commences carrying on another trade,
there will often be an interval between these events. In such cases, the Commissioners for Her
Majestys Revenue and Customs are prepared to regard the trades as having been carried on
successively within the meaning of Section 152(8) TCGA 1992 (Section 115(7) CGTA 1979)
provided that this interval does not exceed three years.
2.
If the assets on which the gains accrue are disposed of during this interval, relief under
Section 152 will nevertheless be available, adjusted as necessary under subsection (7). If the new
assets are acquired during the interval, the Commissioners for Her Majestys Revenue and
Customs are prepared to allow the gain to be rolled over into them provided that they are not used
or leased for any purpose in the period before the new trade commences and are taken into use for
the purposes of the trade on its commencement.
3.
In relation to a group of companies, Section 175(1) TCGA 1992 (Section 276(1) ICTA
1970) treats all of the trades of the members of the group as a single trade for the purposes of the
relief. Section 48 FA 1995 extends Section 175 TCGA 1992 to permit the relief to be claimed
provided that the relevant conditions are satisfied, where one member of the group makes the
disposal and another member makes the acquisition. Where the assets on which the gains accrue
are disposed of after the first company has ceased to trade, or where the new assets are acquired
before the second company has commenced to trade, the treatment in 2. above will apply.
4.
Nothing in this Statement overrides the requirement in Section 152(3) for the acquisition
to take place in the period beginning twelve months before and ending three years after the
disposal (unless the Commissioners for Her Majestys Revenue and Customs by notice in writing
extend these time limits).
5.
This practice will be applied to all cases in which the amount of the relief has not been
finally settled by the date of this Statement (18 September 1981). (But see Inland Revenue Press
Release of 1 September 1992 on Rollover Relief and Groups of Companies.)
SP9/81
Exercise of a power of appointment over settled property - Superseded by SP7/84
SP10/81
Payments on account of disability resulting in cessation of employment
1.
Section 401 ITEPA 2003 provides for the taxation of those payments on retirement or
removal from an office or employment which otherwise are not chargeable to tax. Section 406
(b) excludes from the ambit of Section 401 any payment made on account of injury to or
disability of the holder of an office or employment.
2.
The practice of HM Revenue and Customs prior to 1981 was governed by the view that
disability used in juxtaposition with the word injury meant a loss of physical or mental health
with which a person was afflicted suddenly at a particular time and which rendered him
physically or mentally incapable of carrying out the duties which he had previously performed. A
gradual decline in physical or mental disability caused by chronic illness culminating in
incapacity to perform the duties of an office or employment was not regarded as disability.
3.
As a result of a decision given by the Special Commissioners on 6 January 1981 the
Revenue reconsidered its practice and now accepts that disability covers not only a condition
resulting from a sudden affliction but also continuing incapacity to perform the duties of an office
or employment arising out of the culmination of a process of deterioration of physical or mental
health caused by chronic illness.
SP11/81
Additional redundancy payments
SP12/81
The construction industry tax deduction scheme: Carpet fitting
The Commissioners for Her Majestys Revenue and Customs, up until 20 November 1981, took
the view that where carpet fitting was included in a specification for the construction, alteration or
repair of a building, it was an operation included in the deduction scheme by virtue of Schedule
13, F (No 2) A 1975 (now S.67 (2), ICTA 1988). The Commissioners for Her Majestys Revenue
and Customs however, received legal advice on this subject. Although the matter was not free
from doubt, they concluded that carpet fitting, even if included in part of a building contract, is
not an operation which forms 'an integral part of ....' or is 'for rendering complete such operations
as are .... described ....' in the Act. Accordingly the Commissioners for Her Majestys Revenue
and Customs now treat carpet fitting as an operation outside the scope of the scheme.
SP1/82
The interaction of Income Tax and Inheritance Tax on assets put into settlements
1.
For many years the tax code has contained legislation to prevent a person avoiding higher
rate income tax by making a settlement, while still retaining some rights to enjoy the income or
capital of the settlement. This legislation, which is embodied in Part XV of the Taxes Act
1988(from 6 April 2005,Chapter 5,Part 5 ITTOIA 2005), provides in general terms that the
income of a settlement shall, for income tax purposes, be treated as that of the settlor in all
circumstances where the settlor might benefit directly or indirectly from the settlement.
2.
If the trustees have power to pay or do in fact pay inheritance tax due on assets which the
settlor puts into the settlement HM Revenue and Customs have taken the view that the settlor has
thereby an interest in the income or property of the settlement, and that the income of the
settlement should be treated as his for income tax purposes under Part XV ICTA 1988 (from 6
April 2005, Chapter 5, Part 5 ITTOIA 2005).
3.
The inheritance tax legislation (Section 199, IHTA) however provides that both the
settlor and the trustees are liable for any inheritance tax payable when a settlor puts assets into a
settlement. The Commissioners for Her Majestys Revenue and Customs have therefore decided
that they will no longer, in these circumstances, treat the income of the settlement as that of the
settlor for income tax purposes solely because the trustees have power to pay or do in fact pay
inheritance tax on assets put into settlements.
4.
SP2/82
This change of practice applies to settlement income from 1981-1982 et. seq.
Company's purchase of own shares: ICTA 1988 (See also Inland Revenue Tax
Bulletin, Issue 21, February 1996, page 280)
Where a company makes a purchase of own shares which involves a payment in excess of the
capital originally subscribed for the shares, the excess constitutes a distribution. However, such a
payment is treated as not giving rise to a distribution if, among other conditions, the purchase is
made wholly or mainly to benefit a trade carried on by the company, or by one of its 75%
subsidiaries. This Statement indicates how this test is applied by HM Revenue and Customs.
The Annex to this Statement gives guidance on how companies should apply for a ruling on
whether or not a purchase will be treated as a distribution.
Section 219(1)(a) - The Trade Benefit Test
1.
The Company's sole or main purpose in making the payment must be to benefit a trade
carried on by it or by its 75% subsidiary. The condition is not satisfied where, for example, the
transaction is designed to serve the personal or wider commercial interests of the vending
shareholder (although usually he will benefit from it) or where the intended benefit for the
company is to some non-trading activity which it also carries on.
2.
If there is a disagreement between the shareholders over the management of the company
and that disagreement is having or is expected to have an adverse effect on the company's trade,
then the purchase will be regarded as satisfying the trade benefit test provided the effect of the
transaction is to remove the dissenting shareholder entirely. Similarly, if the purpose is to ensure
that an unwilling shareholder who wishes to end his association with the company does not sell
his shares to someone who might not be acceptable to the other shareholders, the purchase will
normally be regarded as benefiting the company's trade. Examples of unwilling shareholders are:
an outside shareholder who has provided equity finance (whether or not with the expectation
of redemption or sale to the company) and who now wishes to withdraw that finance;
a controlling shareholder who is retiring as a director and wishes to make way for new
management;
personal representatives of a deceased shareholder, where they wish to realise the value of the
shares;
a legatee of a deceased shareholder, where he does not wish to hold shares in the company.
3.
If the company is not buying all the shares owned by the vendor, or if although the
vendor is selling all his shares he is retaining some other connection with the company - for
example, a directorship or an appointment as consultant - it would seem unlikely that the
transaction could benefit the company's trade, so the trade benefit test will probably not be
satisfied. However, there are exceptions; for example, where a company does not currently have
the resources to buy out its retiring controlling shareholder completely but purchases as many of
his shares as it can afford with the intention of buying the remainder where possible. In these
circumstances, it may still be possible for the company to show that the main purpose is to benefit
its trade. Also, the Commissioners for Her Majestys Revenue and Customs do not raise any
objection if for sentimental reasons it is desired that a retiring director of a company should retain
a small shareholding in it, not exceeding 5% of the issued share capital.
Annex to SP2/82
Applications for advance clearance under S.225 ICTA 1988
Procedure
If clearance under S.225 is desired the application should be sent to:
HMRC
Mohini Sawhney
5th Floor
22 Kingsway
London WC2B 6NR
If clearance is also being sought under Section 707, ICTA 1988 a single application may be made
under both provisions and should be directed to the address given above with an extra copy of
the application and enclosures. Such an application should open by stating clearly the
provisions under which it is made and should be expanded to include any additional information
needed for the application under the other provision.
Form of application - General
Section 219-229 contain conditions which must be satisfied before the tax treatment afforded by
S.219 can apply. A comprehensive application which has regard to each of these conditions will
remove the need for lengthy fact finding enquiries and enable the Commissioners for Her
Majestys Revenue and Customs to come to a decision on the application with the minimum of
delay.
To assist companies in preparing clearance applications under Section 225 and to facilitate their
consideration by the -Commissioners for Her Majestys Revenue and Customs, an outline of the
basic information needed is given below. However, it is not an exhaustive list, and in giving the
particulars of the relevant transactions required by Section 225(2) the applicant must fully and
accurately disclose all facts and circumstances material for the decision of the Commissioners for
Her Majestys Revenue and Customs (Section 225(5)).
In what follows, references to purchase of shares include references to repayment or redemption
of shares.
It will be helpful if applications follow the order set out below, each item being expanded as
necessary and any further information being added at the end.
Application for clearance under Section 225(1)(a)
It should be stated at the outset whether the purchase of shares is regarded as falling within
Section 219(1) by virtue of (a) or (b). If the purchasing company has previously made any
application under Section 225 it will be helpful if the Commissioners for Her Majestys Revenue
and Customs reference(s) can be quoted.
A.
Purchases within Section 219(1)(a)
1.
a.
The Company.
the name of the company making the purchase;
b.
its Tax District and reference;
c.
confirmation that it is an unquoted company as defined in Section 229(1);
d.
its status, that is, trading company or holding company of a trading group within the
Section 229(1) definitions or some other type of company not within the definitions.
2.
Groups.
Where the company is a member of a group (see below):
a.
the names of the group companies together with their Tax Districts and references:
b.
a statement or diagram showing the shareholding interests of each group company in

other group companies.
A group for the purpose of this paragraph is the largest 51 per cent group to which the purchasing
company belongs (Section 222(9)), but the meaning of group is extended, where appropriate, by
Section 222(10)) and (12).
3.
a.
The Payment.
Details of the shares to be purchased, the name of their present owner, the purchase price
and the method of payment.
b.
Details of any other transactions between the company and the vendor at or about the
same time.
c.
Confirmation that the company's Articles of Association allow it to purchase its own
shares.
4.
a.
Shareholders.
A list of the current shareholders in the purchasing company, and where appropriate, in
each company in a group as in 2 above, together with particulars (amount, class, dividend
rights etc) of their current holdings;
b.
a statement of any relationships of the shareholders to each other;
c.
where the shareholder is the son or daughter of another shareholder, an indication that he
or she is over 18 or else details of their age.
5.
Prior transactions.
Particulars of any prior transactions or rearrangements to be carried out in preparation for the
purchase.
6.
Purpose and benefits.
A statement of the reasons for the purchase, the trading benefits expected and any other benefits
expected to accrue, whether or not to the purchasing company.
7.
Conditions in Section 219.
Confirmation, together with all relevant information, that the purchase etc does not form part of a
scheme or arrangement the main purpose or one of the main purposes of which is to enable the
owner of the shares to participate in the profits of the company without receiving a dividend, or
the avoidance of tax. Confirmation that the vendor will receive no other payment from the
company, or details of any such payment to be made.
8.
a.
Conditions in Sections 220-224.

the present residence status of the vendor and any intended change (Section 220);
b.
the tax district, reference and National Insurance number of the vendor, or if not known
his or her private address (Section 220);
c.
the period of beneficial ownership by the vendor of the shares to be purchased (Section
220(5));
d.
confirmation, if appropriate, that the vendor's interest will be substantially reduced

Section 221(1));
e.
confirmation, if appropriate, that the combined interests as shareholders of the vendor and
his associates (see Section 227) will be substantially reduced (Section 221(2));
f.
confirmation, if appropriate, that the vendor's interest as a shareholder in the group will
be substantially reduced (Section 222(1));
g.
confirmation, if appropriate, that the combined interests as shareholders in the group of

the vendor and his associates will be substantially reduced (Section 222(3));
h.
confirmation that the vendor will not, immediately after the purchase, be connected
with (see Section 228) the company making the purchase or with any company which is
a member of the same group as that company (Section 223(1));
j.
confirmation that the purchase is not part of a scheme or arrangement within Section
223(2).
9.
Accounts and other financial information.
The application should be accompanied by a.
copies of the latest available financial statements for the purchasing company and for any
group companies (see paragraph 2 above), and in the case of a group the financial
statements for the group;
b.
a note of any material relevant changes since the balance sheet date or confirmation that
there are none;
c.
details of any loan or current account which the vendor maintains with the company or
with any group company.
B.
Purchase within Section 219(1)(b)
1.
a.
Company.
The name of the company making the purchase;
b.
its Tax District and reference;
c.
confirmation that it is unquoted as defined in Section 229(1);
d.
its status, i.e. trading company or the holding company of a trading group within the
definitions in Sections 229(1), or some other type of company not within the definitions.
2.
Groups.
Where the company is a member of a group (see A.2 above):
a.
The names of the group companies together with their Tax Districts and references;
b.

other group companies.
3.
a.
The Payment.
Details of the shares to be purchased, the name of the present owner, the purchase price
and method of payment.
b.
Details of any other transactions between the company and the vendor at or about the
same time;
c.
confirmation that the company's Articles of Association allow it to purchase its own
shares.
4.
a.
Inheritance Tax.
The name and date of death of the deceased;
the reference of the deceased at the Capital Taxes Office;
c.
the amount of the outstanding tax and whether or not liability has been finally agreed;
d.
the extent to which the purchase price is to be applied in satisfaction of the tax liability;
e.
a full explanation of the circumstances in which there would be undue hardship if the
tax liability were to be discharged otherwise than through the purchase of own shares
from this or another such company;
f.
the Tax District and reference of the person to whom undue hardship would be caused or
if not known the address of that person, and their National Insurance Number.
5.
Accounts and other financial information.
The application should be accompanied by a.
copies of the latest available financial statements for the purchasing company and for any
group companies (see paragraph A.2 above), and in the case of a group the financial
statements for the group;
b.
a note of any material relevant changes since the balance sheet date or confirmation that
there are none.
Applications for clearance under Section 225(1)(b)

1.
a.
Company.
The name of the company making the purchase;
b.
its tax district and reference.
2.
a.
The payment.
Details of the shares to be purchased, the vendor, the purchase price and the method of
payment.
b.
confirmation that the company's Articles of Association allow it to purchase its own
shares.
3.
a.
Account and other financial information.

Copies of the latest available financial statements for the purchasing company;
b.
A note of any material relevant changes since the balance sheet date or confirmation that
there are none.
4.
A statement of the reasons why it is believed that the proposed payment does not fall
within the provisions of Section 219.
SP1/83
Country-risk debts
SP2/83
SP3/83
Relief for losses on loans to traders: Time limit for claims - Superseded by ESC
D36
SP4/83
Approved savings - related share option schemes
SP5/83
Use of schedules in making personal tax returns
SP6/83
Company residence - Superseded by SP1/90
SP7/83
Business Expansion Scheme: Overseas activities Superseded by SP7/86
SP1/84
Trade unions: Provident benefits: Legal and administrative expenses
1.
Subject to certain conditions, a registered trade union is entitled, under Section 467 ICTA
1988, to exemption from tax in respect of its income and capital gains which, as provided for
under the rules of the union, are used for the purpose of provident benefits.
2.
The following expenses incurred by a registered trade union are regarded as payments
made for the purpose of provident benefits:
i.
Legal expenses in representing members at Industrial Tribunal hearings of cases alleging

unfair dismissal.
ii.
Legal expenses in connection with a member's claim in respect of an accident or injury he

has suffered.
iii.
General administrative expenses of providing provident benefits.
SP2/84
Payments to redundant steel workers
SP3/84
Stamp Duty: Convertible loan stock
Transfers of certain loan capital are exempted from stamp duty by Section 79, FA 1986. Subsection (2) provides that the exemption is not available where the loan capital carries an
unexpired right of conversion into shares or other securities or to the acquisition of shares or other
securities, including loan capital of the same description. The Commissioners for Her Majestys
Revenue and Customs are advised that sub-section (2) does not exclude from the exemption loan
capital which carries an unexpired right of conversion into or acquisition of loan capital which
itself comes within the terms of the exemption
SP4/84
Development Land Tax: Double taxation conventions
SP5/84
Employees resident but not ordinarily resident in the UK: General earnings
chargeable under Sections 25 and 26 Income Tax (Earnings and Pensions) Act
2003 (ITEPA) superseded by SP1/09
SP6/84
Non-resident lessors: Section 830 ICTA 1988
Where mobile drilling rigs, vessels or equipment leased by a non-resident lessor are used in
connection with exploration or exploitation activities carried on in the United Kingdom or in a
designated area, the question of whether the profits or gains arising from the lease constitute
income from such activities depends on the facts and circumstances of each particular case.
However, the practice of HM Revenue and Customs- HM Revenue and Customs is not to seek to
charge such profits or gains to tax under S.830 ICTA 1988 if all of the following conditions are
satisfied:
1
the contract is concluded outside the United Kingdom and the designated areas;
the lessor's obligations are limited to the provision of the asset, for example, a rig on
bare-boat terms, that is to say, if the lessor has not undertaken to provide any facilities,
service or personnel;
the lessee takes delivery of the asset outside the designated areas, and is responsible for
moving it to the place where it is used, and is not restricted to using it solely in the
United Kingdom or a designated area;
the lessee and lessor are not connected persons, and no facilities, services or personnel
related to the operation of the asset are provided by any person connected with the lessor.
SP7/84
Exercise of a power of appointment or advancement over settled property
The Commissioners for Her Majestys Revenue and Customs Statement of Practice SP9/81,
which was issued on 23 September 1981 following discussions with the Law Society, set out the
Revenue's views on the capital gains tax implications of the exercise of a Power of Appointment
or Advancement when continuing trusts are declared, in the light of the decision of the House of
Lords in Roome & Denne v Edwards. Those views have been modified to some extent by the
decision of the Court of Appeal in Bond v Pickford.
In Roome & Denne v Edwards the House of Lords held that where a separate settlement is
created there is a deemed disposal of the relevant assets by the old trustees for the purposes of
Section 71(1) TCGA 1992 -. But the judgements emphasised that, in deciding whether or not a
new settlement has been created by the exercise of a Power of Appointment or Advancement,
each case must be considered on its own facts, and by applying established legal doctrine to the
facts in a practical and commonsense manner. In Bond v Pickford the judgements in the Court
of Appeal explained that the consideration of the facts must include examination of the powers
which the trustees purported to exercise, and determination of the intention of the parties, viewed
objectively.
It is now clear that a deemed disposal under Section 71(1) cannot arise unless the power exercised
by the trustees, or the instrument conferring the power, expressly or by necessary implication,
confers on the trustees authority to remove assets from the original settlement by subjecting them
to the trusts of a different settlement. Such powers (which may be powers of advancement or
appointment) are referred to by the Court of Appeal as powers in the wider form. However, the
Commissioners for Her Majestys Revenue and Customs considers that a deemed disposal will
not arise when such a power is exercised and trusts are declared in circumstances such that: a.
the appointment is revocable, or
b.
the trusts declared of the advanced or appointed funds are not exhaustive so that there
exists a possibility at the time when the advancement or appointment is made that the
funds covered by it will on the occasion of some event cease to be held upon such trusts
and once again come to be held upon the original trusts of the settlement.
Further, when such a power is exercised the Commissioners for Her Majestys Revenue and
Customs considers it unlikely that a deemed disposal will arise when trusts are declared if duties
in regard to the appointed assets still fall to the trustees of the original settlement in their capacity
as trustees of that settlement, bearing in mind the provision in Section 69(1) TCGA 1992 - that
the trustees of a settlement form a single and continuing body (distinct from the persons who may
from time to time be the trustees).
Finally, the Commissioners for Her Majestys Revenue and Customs accept that a Power of
Appointment or Advancement can be exercised over only part of the settled property and that the
above consequences would apply to that part.
SP8/84
Section 124 ICTA 1988: Interest on quoted Eurobonds
SP9/84
Stamp duty: Treatment of securities dealt in on the Stock Exchange Unlisted

Securities Market
SP10/84
Foreign bank accounts
1.
At present, under Section 252(1) TCGA 1992 (Section 135(1) CGTA 1979), direct
transfers from one foreign bank account to another are treated as a disposal and an acquisition of
assets for capital gains tax purposes.
2.
Except in relation to an account to which Section 275(1) TCGA 1992 (Section 69 FA
1984) applies (accounts held by non-domiciled individuals), a taxpayer may treat all bank
accounts in his name containing a particular foreign currency as one account and disregard direct
transfers among such accounts for capital gains tax purposes. This practice once adopted must be
applied to all future direct transfers among bank accounts in that taxpayer's name containing that
particular foreign currency until such time as all debt represented in the bank accounts has been
repaid to the taxpayer.
3.
This practice may be applied to all cases where the capital gains tax computations have
not been settled.
SP11/84
Estate Duty: Calculation of duty payable on a chargeable event affecting heritage

objects previously granted conditional exemption
Under the estate duty provisions, an object which in the opinion of the Treasury was of national,
scientific, historic or artistic interest could be exempt from duty if undertakings were given to
preserve it and keep it in the United Kingdom. If an object which had been exempted from duty
was subsequently sold (unless the purchaser was a national institution or similar body), or if the
undertaking was broken, duty became chargeable, generally either on the sale proceeds or on the
value of the object at the date of the charge. These clawback charges may still apply now in
relation to objects which have previously been exempted from estate duty.
Estate duty applied not only to property passing on death but also to property given away by the
deceased within a certain period before his death. In these latter cases the duty chargeable could
be reduced by a taper relief (Section 64 of the Finance Act 1960). The exemption described in
the preceding paragraph could also apply to an object which came within the charge to duty
because it was the subject of an inter vivos gift. The Commissioners for Her Majestys Revenue
and Customs have been advised that in these circumstances taper relief under Section 64 is not
available to reduce the amount liable to the clawback charge, and that the amount chargeable to
duty is the full value or sale proceeds.
SP1/85
Treatment of certain payments to relocated employees
SP2/85
SP3/85
SP4/85
Relief for interest on loan used to buy land for partnership or company business
purposes
SP5/85
Division of a company on a share for share basis
SP6/85
Incentive awards
1.
Incentive scheme awards are often provided by way of vouchers. Section 87 Income Tax
(Earnings and Pensions) ACT 2003(ITEPA) [formerly 141, ICTA 1988], treats as earnings a
benefit an employee can obtain with a voucher provided for him by reason of his employment.
The measure of the earnings is the expense incurred by the person providing the voucher in or in
connection with the provision of the voucher and the money, goods or services for which it is
capable of being exchanged S 87 ITEPA [formerly Section 141 (1), ICTA 1988].
2.
It is not always easy to decide which incentive scheme expenses beyond the direct cost of
buying the goods or services provided for the employee have been incurred in connection with
the voucher and the benefit it provides. In general, the expenses which should be included in the
emoluments calculation are those which contribute more or less directly to the advantage enjoyed
by the employee. Remoter expenses - for example, the cost of devising and planning an incentive
scheme under which vouchers are to be distributed - need not be included. More details are given
below.
Award of goods or services provided via vouchers
3.
(a)
Expenses included in the computation of emoluments.
i.
Cost of buying the goods or providing services.
ii.
Cost of selecting and testing those goods or services.
iii.
Cost of storing, distributing and installing the goods or, if appropriate, services.
iv.
Cost of servicing and other after sales expenses.
v.
Where a third party is used to distribute the awards or to run an incentive

campaign, his fees for handling functions within i-iv above.
(b)
Expenses excluded from the computation of emoluments.
i.
Cost of management time in considering whether or not to launch a scheme

involving the provision of vouchers.
ii.
Cost of researching, devising and planning such a scheme.
iii.
Cost of preparing and printing promotional material relating to the provision of

the voucher.
iv.
Cost of administration (including the costs of meeting the Revenue's

requirements) except for the functions covered in (a) above.
v.
Where a third party is involved, as in (a) v above, his fees for handling functions
within (b) i-iv above.
Retail vouchers
4.
Awards sometimes consist of vouchers which are exchangeable for goods etc at retail
shops or stores. Generally, the costs set out in 3(a) i-iv above will largely consist of the price
paid to the shop etc for the vouchers. The cost of distributing the vouchers to award winners and
the fees of any third party within 3(a) v will also need to be included.
Other benefits
5.
The computation of the benefit of incentive awards assessable under ITEPA s94 and s203
[formerly TA 1988, ss.142, 144,154] will follow broadly similar principles.
Computations
6.
When agreeing the assessable benefit of awards made under incentive schemes the total
costs should be analysed between headings in paragraphs 3(a) and 3(b) above.
Taxed Award Scheme
On 2 November 1984 a Press Release announced voluntary arrangements for collecting tax at the
basic rate on non-cash incentive prizes awarded to employees. On 18 January 1990 an Inland
Revenue Press Release announced the arrangements had been extended to cover higher rate
liabilities. These arrangements are known as Taxed Award Schemes. The approach described
above will apply to awards dealt with under such arrangements as well as to all other incentive
awards. The Incentive Award Unit will continue to deal with all applications for Taxed Award
Schemes and will agree the amounts to be treated as emoluments. Awards under other schemes
will be dealt with by the Tax Office which normally handles the PAYE Scheme of the provider of
the award. Further details of Taxed Award Schemes may be obtained from - HM Revenue and
Customs, Incentive Award Unit, Chapel Wharf Area, Floor4, Trinity Bridge House, 2 Dearmans
Place, Salford, M3 5BH. Tel 0161 261 3269; Fax: 0161 261 3354, e-mail: chapelwharfiau@gtnet.gov.uk
SP7/85
Reliefs for non-residents: Treatment of wife's income
SP1/86
Capital allowances: Machinery and plant: Short-life assets
Sections 37 and 38, CAA 1990

1.
Several representative bodies have raised with HM Revenue and Customs some practical
questions arising out of the new rules for capital allowances on certain short-life machinery and
plant which came into effect on 1 April 1986. The new rules enable allowances on machinery
and plant for which an election is made to be dealt with outside the main capital allowance pool.
2.
In discussions between these bodies and HM Revenue and Customs several areas were
identified where businesses and their accountants might find guidance helpful. This note sets out,
in broad terms, how they can be dealt with in ways which will be acceptable to local Inspectors of
Taxes. In general, Inspectors will want to be satisfied that the accounting and other records are
adequate to support short-life asset elections and computations and that the new legislation is not
being abused.
3.
These guidelines are not, however, a substitute for the statutory rules. Their aim is to
complement the legislation so that the new arrangements are introduced and continue to operate
as efficiently as possible for businesses themselves, their professional advisers and HM Revenue
and Customs. The intention is to review the guidelines when the arrangements have settled in
and, if necessary, revise them in the light of experience.
Election for short-life asset treatment
4.
The rules for making elections are set out in Section 37(2). They enable all the
machinery and plant acquired in a chargeable period (or its basis period) for which short-life asset
treatment is wanted, to be included in one election signed by the taxpayer for that period.
5.
In general, Inspectors will want to be sure that elections and any supporting material,
such as a schedule attached to the election or cross references to schedules or analyses supplied
with the accounts, provide sufficient information to minimise the possibility of any difference of
view at a later date (for example, on a disposal) about what was and what was not covered by an
election for any chargeable period etc and that the assets are not in one of the classes excluded by
Section 38.
6.
In particular, however, where separate identification of the short-life assets acquired in a
chargeable period etc is either impossible or possible but impracticable (for example similar small
or relatively inexpensive assets held in very large numbers perhaps in several locations) then the
information on the election about the assets, required by Section 37(2)(b), may be provided by
reference to batches of acquisitions. Where large numbers of similar short-life assets are acquired
throughout a chargeable period etc it will be acceptable if the costs of those assets for the period
are aggregated and shown on the election in one sum.
Capital allowance computations
7.
HM Revenue and Customs accept that it may not be practicable for individual capital
allowance computations to be maintained for each and every short-life asset especially where the
assets are held in very large numbers.
8.
Where, therefore, the Inspector is satisfied that the actual life in the business of a distinct
class of assets with broadly similar average lives before they are sold or scrapped is likely to be
less than five years (that is, the year of acquisition plus the four following years) computations in
the form set out in Example 1 below will be acceptable. On this basis a balancing allowance will
normally become available for the last year of the agreed life of the assets.
9.
Where disposal proceeds can be attributed to assets acquired in a particular year they
should be brought into the appropriate column(s) of the computation relating to those assets for
the year(s) in which the proceeds are received. If attribution in this way is not possible, disposal
proceeds may be credited on a FIFO basis; that is all receipts from disposals in any chargeable
period etc are to be regarded as related to the earliest period for which a short-life asset pool on
the lines of these arrangements is in existence.
10.
This form of computation is intended primarily for short-life assets costing similar
amounts which cannot be identified individually. It is possible however that similar arrangements
may be helpful where short-life assets which have a separate identity are acquired in large
numbers such that the business does not in fact keep track of them individually and it would not
be reasonable to expect it to do so. Where this is the case, computations based on the above
principles and along the lines of Example 2 below will normally be acceptable to Inspectors.
11.
Given the wide variety of potential short-life assets and the widely varying size and
circumstances of individual businesses, other forms of computation may also be acceptable.
Submission of election and computations to Inspectors
12.
It is suggested that either on the first occasion when an election is made or when any
abridged or simplified computations are submitted to Inspectors for the first time, an explanation
of the way in which the computations will be or have been put together is provided together with
a description of the underlying records on which they are based. Inspectors will want to be
satisfied that, together, the elections and the computations provide the correct statutory result and
that if, for any reason, questions are asked about individual items (for example, on a disposal
several years after acquisition), sufficient information will be available to the business or to its
accountants to enable complete and satisfactory answers to be given.
EXAMPLE 1
Assets held in large numbers with a very short life where individual identification is
impossible (for example, returnable containers, linen, tools).
The taxpayer satisfies the Inspector that the average actual life (NB not useful life) of tools used
in his trade is 3 years; it is therefore reasonable to presume that those items acquired in year 1 are
all disposed of in year 4. He elects for short-life asset treatment.
Year of acquisition
1986
1987
1988
Cost of tools
1986 WDA
1000
250
1200
800
Total
1989
1000
each year
250
750
1987 WDA
1988 WDA
1989
Presumed scrapped
Disposal value
Balancing allowance
WDA
Qualifying expenditure
carried forward
188
300
562
900
140
422
225
675
488
200
600
565
Nil
422
169
150
250
506
450
750
991
Where scrap or sale proceeds are not in practice taxed as trading receipts and can be identified but
not related to particular acquisitions, they should be regarded as disposal value of the earliest
period for which a short life asset pool is in existence. For example, if proceeds from the sale of
all tools scrapped in 1989 were 50, the balancing allowance in the example would be 372.
EXAMPLE 2
Assets held in large numbers where individual identification is possible but impracticable in
the circumstances of the case
The taxpayer uses in his trade large numbers of relatively small items such as scientific or
technical instruments, calculators, or amusement machines and elects for short-life asset
treatment. His accounting records enable him to identify for each kind the number and cost of
acquisition, and both the number and sale proceeds of disposals and the number on hand at the
end of the short-life asset period related to those acquisitions.
Technical instruments
Number
Cost
Acquisition in 1986
Sold in 1988
Sold in 1989
On hand 1990
100
20
40
40
10,000
Computation
10,000
2,500
7,500
1987 WDA
2,500
1,875
5,625
1,875
4,500 )
1,125 )
3,375
1,750
1,125
WDA
(80 instruments)
1989 disposals: 40 instruments
Expenditure unallowed
40/(3,375 x 80) = 1,688
Disposal value
400
Balancing allowance 1,288
WDA
500
400
Total allowed.
1986 expenditure on 100 instruments

WDA
1988 disposal of 20 instruments

Expenditure unallowed
20/(5,625 x 100) = 1,125
Disposal value
500
Balancing allowance 625
Disposal
value
(40 instruments)
1990 WDA
Expenditure unallowed (40 instruments)
1991 Transfer to main pool
1,688
422 )
1,265
314
951
951
1,710
314
It is presumed in this example that all the items cost the same amount; where similar items
cost different but broadly similar amounts, this method of computation may still be used.
SP2/86
Offshore funds
1.
This statement sets out the Revenue's views on the interpretation of certain provisions of
this legislation, on which queries have been raised.
Material interests in offshore funds
2.
The legislation applies to material interests in offshore funds. For such an interest to
exist, the investor, at the time of acquiring his investment, must have a reasonable expectation of
being able to realise it within seven years for an amount reasonably approximate to that portion
which the investment represents of the market value of the entity's underlying assets.
Investments in commercial loans and bonds
3.
Normal commercial loans or other debt instruments which entitle the lender to no more
than a fixed return of principal on redemption, and which are not geared to the underlying asset
value of the borrower's business, would not be regarded as a material interest within the
legislation.
Stock exchange listings of shares
4.
Where shares in an overseas company are listed on a stock exchange, it is possible that
the quoted price will on occasions correspond to underlying net asset value. This will however
not of itself make the shares a material interest in an offshore fund. The shares would be
considered a material interest only if, at the time they were acquired, the investor had a
reasonable expectation of a future sale at or near net asset value. If historically the shares have
been habitually traded at or near net asset value an investor is likely to have acquired a material
interest.
Conditions for distributor status
5.
The legislation divides offshore funds into two groups: distributing funds, which must:
a. meet specified investment restrictions, and
b. distribute at least 85% of their income (as computed in their accounts) and 85% of
what would be their taxable profits were they UK-resident companies (the UK
equivalent profits);
and other funds.
Computation of what would be the UK equivalent profits
(a)
Is the fund trading?
6.
Where a fund is regarded as trading, the resulting profits will be brought into the
computation of UK equivalent profits. Whether the activities of an offshore fund amount to
trading will turn on the facts of the particular case; and it is not possible to give any specific
guidance on this aspect. Even a single transaction can on occasion constitute an adventure or
concern in the nature of trade; but in general a fund would not normally be regarded as trading in
respect of transactions which were relatively infrequent or, for example, where the intention was
merely to hedge specific investments which were not associated with activities which themselves
constituted trading.
(b)
Interest paid by offshore funds to non-residents
7.
In arriving at the computation of UK equivalent profits, a deduction is available for
interest paid by a fund to a person resident outside the UK in the same way as it would be if the
interest were paid to a UK resident.
(c)
Income taxed in the UK
8.
Where an offshore fund receives income that has suffered tax at source in the UK, it is
the net income (rather than the gross) that is included in the calculation of the UK equivalent
profit.
9.
A deduction will also be available for any tax suffered by direct assessment in the UK.
The basis of the relief will be determined by reference to the individual case.
SP3/86
Payments to a non-resident from UK discretionary trusts or UK estates during

the administration period: Double taxation relief
Introduction
1.
This Statement explains how relief from UK tax under double taxation agreements will
be given in respect of payments made to a non-resident for a UK discretionary trust or a UK
estate.
Background
Discretionary trusts
2.
Generally speaking, a non-resident beneficiary receiving payments from a UK
discretionary trust is not entitled to repayment of the tax paid by the trustees on the trust income.
However, under extra-statutory concession B18 (which embodies a longstanding practice) HM
Revenue and Customs looks through the trust income to the underlying component parts of that
income. The purpose of this looking through is to allow the recipient of the income any relief
that would have been available to him under the Taxes Acts had the income come to him direct
instead of through the trustees.
3.
Where the beneficiary is resident in a country with which the UK has a double taxation
agreement, further relief under the looking through principle may be due. Thus, for example, if
the agreement provides for a withholding rate on interest of 15% and interest liable to UK tax
formed part of the trust income which had suffered tax at -40% (i.e. the rate applicable to trusts)
then, under the looking through principle, the beneficiary would be repaid the amount of tax
suffered in excess of the withholding rate, in this case 25%.
4.
Some of the UK's double taxation agreements include an other income article. The
purpose of this article is to determine in which country income not expressly dealt with elsewhere
in the agreement should be taxed. In the UK's agreement the article sometimes gives sole taxing
rights in respect of such income to the recipient's country of residence.
5.
It has been the practice of HM Revenue and Customs to apply the looking through
principle to all cases where relief in respect of the discretionary payment was sought and to refuse
claims where full repayment of UK tax was claimed under the provision of other income article
in the agreement.
Payments out of UK estates during administration period
6.
The same principles set out in paragraphs 2-5 apply in the case of payments to nonresident residuary beneficiaries out of UK estates during the administration period. In these
cases, the looking through concession was explained in Statement of Practice 7/80 and is now
contained in extra-statutory concession A14. Again it has been HM Revenue and Customs
practice to make repayment to beneficiaries on the looking through basis in all cases.
Change of practice
7.
Following a review of its practice in these two areas, HM Revenue and Customs has
accepted that if a payment made by trustees out of a UK discretionary trust falls to be treated as a
net amount in accordance with Section 687(2) ICTA 1988 the looking through principle is not
appropriate where the beneficiary is resident in a country with which the UK has a double
taxation agreement and the other income article gives sole taxing rights in respect of such
income to that country. (This will usually be the case where income from trusts is not specifically
excluded from the article.) This means that tax paid by the trustees in respect of the discretionary
payment will be repayable to the beneficiary, provided that any conditions set out in the other
income article are met. For example, the recipient may be required to show that he is subject to
tax on the income in his country of residence.
8.
The practice set out in paragraph 7 will also be applied to payments from the residuary
income of a UK estate during the administration period. Under Sections 652 or 654 Income Tax
(Trading and Other income) Act 2005 such payments are deemed to be income of the beneficiary
which has suffered UK tax at the basic rate.
9.
Where the other income article does not give sole taxing rights to the country of
residence in respect of the trust or estate income or there is no double taxation agreement with the
country concerned, the existing looking through practice will continue to be applied where it is
to the advantage of the beneficiary.
Claims for relief under the new practice
10.
The change in practice will be applied to all new and open claims. HM Revenue and
Customs will also accept supplementary claims which are made within the time limits applicable
to the original claim under the provisions of Section 42(8), TMA 1970. The normal time limit is
6 years from the end of the year to which the claim relates but this may be extended by Section
682(5) ITTOIA 2005 - in the case of estates.
Procedure for dealing with claims for previous years
11.
The change in practice may require a consequential adjustment to claims under Section
278, ICTA 1988. HM Revenue and Customs will automatically review a beneficiary's
entitlement to this relief and make any adjustments necessary.
12.
In relation to deceased estates, the provisions of Part XVI ICTA 1988 were rewritten as
Part 5, Chapter 6 ITTOIA 2005 with effect from 6 April 2005, so for all payments made before
this date, the relevant provisions of Part XVI ICTA 1988 apply,
SP4/86
Payments made by employers to employees when in full-time attendance at

universities and technical colleges
Scholarships, exhibitions, bursaries etc held by a person receiving full-time instruction at

university, technical college or similar educational establishment are exempted from income tax
by Section 776 ITTOIA 2005.
This Statement of Practice sets out the circumstances when payments made by an employer to an
employee for periods of attendance on a full-time course (including sandwich courses) can be
exempted from income tax. The following conditions and exclusion apply.
Conditions
1.
The employer requires that the employee must be enrolled at the educational
establishment for at least one academic year and must attend the course for at least twenty weeks
in that academic year. Or if the course is longer the employee must attend for at least twenty
weeks on average, in an academic year over the period of the course.
2.
The educational establishments must be recognised universities, technical colleges or
similar educational establishments, which are open to members of the public generally and offer
more than one course of practical or academic instruction. For example an employers internal
training school or one run by an employers trade organisation will not satisfy the educational
establishment condition for the Statement of Practice.
3.
For courses commencing on or after 1 September 2007, the payments, including lodging,
subsistence and travelling allowances, but excluding any tuition fees payable by the employee to
the university etc, do not exceed 15,480 for the academic year.
Exclusion
4.
This exemption does not apply to payments of earnings made for any periods spent
working for the employer during vacations or otherwise.
If the rate exceeds 15,480 HMRC may look at the arrangements in detail. This is because the
level of payment exceeds what might reasonably be described as a scholarship or training
allowance. However, an increase in the rate of payment over the qualifying limit, part way
through a course, will not affect the exemption applying to any payments for the earlier part of
the course.
[The limit for the academic years ending on 31 August 2006 and 31 August 2007 applied from 1
September 2005 and was set at 15,000. For academic years ending on or before 31 August 2005
the limit was set at 7,000 or an amount which a public awarding body such as a Research
Council, would have granted to a student with similar personal circumstances. Inland Revenue
Press Release, 18 November 1992 gives the details. Information for the 2005/06 academic year
commencing 1 September 2005 is in Inland Revenue Budget Note 32, 16 March 2005.]
SP5/86
Relief for replacement of business assets: Employees and office holders
Relief which is available to a person carrying on a trade under Sections 152-156 TCGA 1992
(Sections 115 to 119, CGTA 1979) is extended by Section 158(1)(c), TCGA 1992
(Section 121(1)(c), CGTA 1979) to include employees and office-holders.
If land or buildings are owned by an employee etc, but made available to the employer for general
use in his trade, the employee etc may nonetheless satisfy the occupation test of Section 155
provided the employer does not make any payment (or give other consideration) for his use of the
property nor otherwise occupy it under a lease or tenancy.
The qualifying use of assets by an employee etc for the purposes of Section 152 and 153 will
include any use or occupation of those assets by him, in the course of performing the duties of his
employment or office, as directed by the employer.
This practice may be applied to all cases where the capital gains tax computations have not been
settled at 21 August 1986.
SP6/86
Investigation settlements: Inclusion of interest clause in letters or offer Replaced by leaflet IR73, Inland Revenue Investigations - How Settlements are
Negotiated.
SP7/86
Business Expansion Scheme: Overseas activities - Superseded by SP4/87
SP8/86
Treatment of income of discretionary trusts
This statement sets out the Board's practice concerning the Inheritance Tax/Capital Transfer Tax
treatment of income of discretionary trusts.
The Commissioners for Her Majestys Revenue and Customs take the view that:
-
Undistributed and unaccumulated income should not be treated as a taxable trust asset;
and
For the purposes of determining the rate of charge on accumulated income, the income
should be treated as becoming a taxable asset of the trust on the date when the
accumulation is made.
This practice applies from 10 November 1986 to all new cases and to existing cases where the tax
liability has not been settled.
SP9/86
Partnership mergers and demergers
1.
This statement explains the basis on which the Revenue apply the provisions of S113,
ICTA 1988 (change in ownership of trade, profession or vocation) to mergers and demergers of
partnership businesses. In the following paragraphs, the word business means trades,
professions or vocations carried on in partnership.
MERGERS
2.
When two businesses which are carried on in partnership and which are different in
nature merge, it may be that the result of the merger is a new business, different in nature from
either of the previous business. Whether this is so is a question of fact to be determined according
to the circumstances of each case. Where it is the case, the old businesses will have been
permanently discontinued, and a new business commenced; S113, ICTA 1988 will therefore not
apply and the normal commencement and cessation provisions will apply to each business
respectively.
3.
However, where two partnership businesses in different ownership carrying on the same
sort of activities are merged and then carried on by the joint owners in partnership, the total
activities of both businesses may continue, even though in a merged form, i.e. the new
partnership may succeed to the businesses of the old partnership. In that event S113 (2), ICTA
1988 applies to both successions, so that both businesses are deemed to have continued.
4.
It will of course be a question of fact whether succession has occurred and in this
connection disparity in size between the old partnerships will not of itself be a significant matter.
DEMERGERS
5.
When a business carried on in partnership is divided up, and several separate partnerships
are formed, it will again be a question of fact, to be determined according to the circumstances of
each case, whether any of the separate partnerships carries on the same business as was carried on
previously by the original partnership. It might be that one of the businesses carried on after the
division was so large in relation to the rest as to be recognisably the business as previously
carried on; but that will frequently not be the case, and if it is not the case then the business will
have ceased.
6.
The Revenue would want to look carefully at any case where it was claimed that a
demerger of a partnership had occurred but it appeared that the demerger was more apparent than
real, and that the demerger seemed to have taken place for fiscal reasons. The Revenue might
wish to argue that in such a case the same trade was being carried on after the demerger as before.
[Note: Despite the references to partnership businesses in the text, the Revenue regard the
principles set out in SP9\86 as applying equally where
businesses previously carried on by sole traders are merged and are subsequently carried on by
a partnership; and
a business carried on by a partnership is demerged and the businesses are subsequently carried
on by sole traders.]
SP10/86
Death benefits under superannuation arrangements
The Commissioners for Her Majestys Revenue and Customs confirm that their previous practice
(see SPE3) of not charging capital transfer tax on death benefits that are payable from taxapproved occupational pension and retirement annuity schemes under discretionary trusts also
applies to inheritance tax.
The practice extends to tax under the gifts-with-reservation rules as well as to tax under the
ordinary inheritance rules.
SP1/87
Exchange rate fluctuations- Now replaced by SP2/02
SP2/87
Close Company apportionment
SP3/87
Repayment of tax to charities on covenanted and other income
SP4/87
Business expansion scheme: Overseas activities
SP5/87
Tax returns: The use of substitute forms
Introduction
HM Revenue and Customs have recognised their interpretation of Section 113(1) TMA 1970 in
the light of improvements in office technology and its more widespread adoption, in order to help
taxpayers and their professional advisers to benefit fully from such developments. This
Statement explains the Revenue's current approach towards the acceptance of tax returns and
other forms by way of facsimiles or photocopies, as substitutes for officially produced printed
forms.
The legislation
Section 113(1) says that any Returns under the Taxes Act shall be in such form as Board
prescribe. The Board are satisfied that where a photocopy of an official Return or an accurate
facsimile are used these will satisfy the requirements of the Section. Further details about these
two alternatives are given below.
Accurate facsimiles
For any substitute Tax Return to be acceptable, it must satisfactorily present to the taxpayer the
information which -the commissioners for Her Majestys Revenue and Customs have determined
shall be before him when he signs the declaration that the Return is correct and complete to the
best of his knowledge. Put another way, the form, which need not be colour printed, must
otherwise be an accurate facsimile of the official form in terms of the words which appear and the
general layout. It should also be readily recognisable as a Return when it is received in HM
Revenue and Customs Offices, and the entries of the taxpayer's details should be distinguishable
from the background text. Recent advances in printing technology now mean that accurate
facsimile Returns can be produced. The Commissioners for Her Majestys Revenue and Customs
will accept such Returns if approval of their wording and design has been obtained before they
are sent in to Tax Districts. Any substitute which is produced with approval will need to bear an
agreed unique imprint of some sort so that its source can be readily identified at all times.
To facilitate the production of substitute Returns, the Revenue have arranged for advance copies
of the major Income Tax Returns for 1987/88 to be made available to professional bodies and
software houses. The Revenue intend that this will become an annual practice so that
modifications to the Returns can be incorporated in the computer produced facsimiles in time for
their submission.
The Revenue hope that the 1988/89 returns will be available in January 1988. At that time a
Press Release will be issued advising of the availability and detailing how advance copies may be
obtained by others.
All applications for approval will be considered as quickly as possible but there may be delays in
the immediate run up to the Budget. Applications made before 15 February will be cleared
before 6 April in that year.
Applications for approval should be made to:
HM Revenue and Customs
Forms
1st Floor, New Wing
Somerset House
Strand
LONDON -WC2R ILB
020 7438 7312
Photocopies
A Return made on a photocopy of an official form is a valid Return provided that it is identical to
the official form. It is sufficient that all of the pages are present and attached in the correct order
if the facility to produce double sided photocopies is not available. The Revenue will also accept
other types of forms (i.e. forms which are not strictly speaking returns) which are sent in as
photocopies. The requirement for all pages to be present is important where one side of the form
contain notes, as it does in wife's earnings elections and separate assessment cases. Any copy
which does not also duplicate the notes on the original will not be acceptable. This is because
such elections may not be valid in that absence of the notes being before the signatories.
The photocopying of official forms is in strictness a breach of copyright. If this is done on an
individual basis the Revenue will however take no action. On the other hand if forms are
photocopied on a large scale for commercial gain the Revenue will advise HMSO who will
collect copyright fees. In the large majority of cases there is no objection to the copying of
another Revenue form where the original is lost. This is not to say that the Revenue actively
welcomes photocopies as they have disadvantages, particularly if colour and size are important
features in handling the completed forms.
To avoid any misunderstanding, the Revenue cannot accept a photocopy of a completed return or
form. In other words, the document sent in must bear the actual signature of the relevant person.
References
Where a facsimile or a photocopy is submitted instead of an official form it is important that is
bears the correct reference which appeared on the original form. Additionally where an original
form was not supplied it is equally important that the taxpayer's reference should be inserted.
SP6/87
Acceptance of property in lieu of Inheritance Tax, Capital Transfer Tax and

Estate Duty
1.
The Commissioners for Her Majestys Revenue and Customs, with the agreement of the
Secretary of State for Culture, Media and Sport (and, where appropriate, other Ministers), accept
heritage property in whole or part satisfaction of an inheritance tax, capital transfer tax or estate
duty debt and any interest payable on the tax.
2.
No capital tax is payable on property that is accepted in lieu of tax. The amount of tax
satisfied is determined by agreeing a special price. This price is found by establishing an agreed
value for the item and deducting a proportion of the tax given up on the item itself, using an
arrangement known as the douceur. The terms on which property is accepted are a matter for
negotiation.
3.
Sections 60 FA 1987 and 97 F (No 2) A 1987 provide that, where the special price is
based on the value of the item at a date earlier than the date on which it is accepted, interest on
the tax which is being satisfied may cease to accrue from that earlier date.
4.
The persons liable for the tax which is to be satisfied by an acceptance in lieu can choose
between having the special price calculated from the value of the item when they offer it or when
the Commissioners for Her Majestys Revenue and Customs accept it. Since most offers are
made initially on the basis of the current value of the item, HM Revenue and Customs considers
them on the basis of the value at the offer date, unless the offeror notifies them that he wishes to
adopt the acceptance date basis of valuation. The offerors option will normally remain open
until the item is formally accepted. But this will be subject to review if more than 2 years elapse
from the date of the offer without the terms being settled. The Commissioners for Her Majestys
Revenue and Customs may then give 6 months notice that they will no longer be prepared to
accept the item on the offer date basis.
5.
Where the offer date option remains open and is chosen, interest on the tax to be
satisfied by the item will cease to accrue from that date.
SP7/87
Deduction for reasonable funeral expenses
The Commissioners for Her Majestys Revenue and Customs take the view that the term funeral
expenses in Section 172 IHTA 1984 allows a deduction from the value of a deceased's estate for
the cost of a tombstone or gravestone.
SP8/87
Close company apportionment: Member of a trading group
SP9/87
Capital allowances: Hotels
SP10/87
Stamp duty: Conveyances and leases of building plots - Superseded by SP8/93
SP1/88
Tax treatment of forward currency transactions by investment trusts Superseded by SP14/91
SP2/88
Civil tax penalties and criminal prosecution cases Please see Codes of Practice 8
and 9
SP3/88
Delay in rendering tax returns: Interest on overdue tax
SP4/88
Tax treatment of transactions in financial futures and options - Superseded by

SP14/91
SP5/88
Taxation of car telephones provided by employers
SP6/88
Double taxation relief: Chargeable gains
General
1.
Section 277 TCGA 1992 applies to capital gains tax the double taxation provisions set
out in Sections 788-806 ICTA 1988, with the necessary modifications. Section 797 of the Taxes
Act applies the provisions to corporation tax on chargeable gains.
2.
The standard credit articles in our double taxation agreements (which are made under
Section 788) says, in effect, that subject to the provisions of the law of the United Kingdom, tax
payable under the law of the treaty partner on capital gains from sources within that territory shall
be allowed as credit against any United Kingdom tax computed by reference to the same gains by
reference to which the overseas tax is computed. Section 790 allows unilateral relief for overseas
tax and subsection (4) is in similar terms to the standard credit article.
3.
The principal requirement for the granting of credit for overseas tax against liability to
capital gains tax (or corporation tax on chargeable gains) is therefore that the overseas tax should
be computed by reference to the same gain as the United Kingdom tax. There is no requirement
that the respective tax liabilities should arise at the same time nor that they should be charged on
the same person.
Specific examples
4.
The Revenue's view is that the following sets of circumstances fall within the terms of the
standard credit article and Section 790 and may therefore give rise to a credit for overseas tax
against United Kingdom capital gains tax or corporation tax on chargeable gains.
i.
The overseas tax charges capital gains as income.
ii.
Overseas tax is payable on a disposal falling within Section 171 TCGA 1992 (transfers
within a group of companies treated as taking place on a no gain/no loss basis) and a
liability to United Kingdom tax arises on a subsequent disposal.
iii.
An overseas trade carried on through a branch or agency is domesticated (i.e. transferred

to a local subsidiary) and relief is given under Section 140 TCGA 1992. There is a
subsequent disposal of the securities (or the subsidiary disposes of the assets within 6
years) giving rise to a liability to United Kingdom tax and overseas tax is charged in
whole or in part by reference to the gain accruing at the date of domestication.
iv.
Overseas tax is payable by reference to increases in the value of assets although there has
been no disposal. There is a subsequent disposal of the assets on which a liability to
United Kingdom tax arises.
5.
It will be seen that relief is conditional upon the subject of the overseas tax being
identified with the gains on which the United Kingdom tax liability arises. In contrast, where
roll-over relief is claimed, for example under Section 152 TCGA 1992, the gain on disposal of
the old asset is not subjected to United Kingdom tax. The gain on realisation of the new asset
remains a gain separate from that realised on sale of the old asset and overseas tax payable as a
result of the sale of the old asset is not creditable against United Kingdom tax payable on the gain
realised on sale of the new asset. However, in such circumstances, Section 278 TCGA 1992,
allows the overseas tax to be claimed as a deduction in computing the gain for roll-over relief
purposes.
SP1/89
Partnerships: Further extension of Statement of Practice D12
Rebasing
The Commissioners for Her Majestys Revenue and Customs have agreed that a disposal of a
share of partnership assets to which paragraph 4 of the Statement of Practice D12 applies so that
neither a chargeable gain nor an allowable loss accrues (before indexation, for disposals before
6 April 1988) may be treated for the purposes of Section 35 and Schedule 3 TCGA 1992 (Section
96 and Schedule 8 FA 1988) as if it were a no gain/no loss disposal within paragraph 1 of that
Schedule.
Deferred Charges
A disposal of a share of partnership assets to which paragraph 4 of the Statement of Practice D12
applies so that neither a chargeable gain nor an allowable loss accrues (before indexation, for
disposals before 6 April 1988) may be treated for the purposes of Section 36 and Schedule 4
TCGA 1992 (Section 97 and Schedule 9 FA 1988) as if it were a no gain/no loss disposal within
paragraph 1 of Schedule 3 TCGA 1992
Indexation
When, on or after 6 April 1988, a partner disposes of all or part of his share of partnership assets
in circumstances to which paragraph 4 of the Statement of Practice of D12 applies so that neither
a chargeable gain nor an allowable loss accrues, the amount of the consideration will be
calculated on the assumption that an unindexed gain will accrue to the transferor equal to the
indexation allowance, so that after taking account of the indexation allowance, neither a gain nor
a loss accrues.
Where a partner disposes on or after 6 April 1988 of all or part of his share of partnership assets,
and he is treated by virtue of this Statement as having owned the share on 31 March 1982, the
indexation allowance on the disposal may be computed as if he had acquired the share on
31 March 1982. A disposal of a share in a partnership asset on or after 31 March 1982 to which
paragraph 4 of the Statement of Practice D12 applies so that neither a chargeable gain nor an
allowable loss accrues may be treated for the purposes of Section 55(5) TCGA 1992 (Section
68(7) FA 1985) as if it were a no gain/no loss disposal within subsection 5 of that Section. A
special rule will however apply where the share changed hands on or after 6 April 1985 (1 April
in the case of an acquisition from a company) and before 6 April 1988: in these circumstances the
indexation allowance will be computed by reference to the 31 March 1982 value but from the
date of the last disposal of the share before 6 April 1988.
SP2/89
Rebasing elections - Superseded by SP4/92
SP3/89
Unit trust and investment trust monthly savings schemes Superseded by

SP2/97
SP4/89
Company's purchase of own shares: Capital gains treatment of distribution

received by corporate shareholder
If the purchase of its own shares by a company resident in the United Kingdom gives rise to a
distribution, and a shareholder receiving such a distribution is itself a company, the distribution is
included in the consideration for the disposal of the shares for the purposes of the charge to
corporation tax on chargeable gains. In HM Revenue and Customs view the effect of
Sections 208 ICTA 1988 and Section 8(4) TCGA 1992 (formerly 345(3) ICTA 1988) is that the
distribution does not suffer a tax charge as income within the terms of Section 37(1) TCGA 1992
(formerly Section 31(1) Capital Gains Tax Act 1979.) The Revenue will apply this Statement of
Practice where a company purchases its own shares after 19 April 1989.
SP5/89
Rebasing and indexation: Shares held at 31 March 1982
Under Section 35 and Schedule 3 TCGA 1992 (Section 96 and Schedule 8, Finance Act 1988), a
person is treated as having held an asset at 31 March 1982 if he acquired it after that date by a
transfer, or series of transfers, treated as giving rise to neither a gain nor a loss for capital gains
purposes, from someone who did hold it at that date. Shares or securities of the same class in any
company which are acquired in this way will be added to any shares or securities of the same
class in the same company held by the transferee at 31 March 1982. Where, for rebasing and
indexation purposes, it is necessary to determine the market value of the shares or securities at
31 March 1982 they will be valued as a single holding.
If the shares or securities in the relevant disposal represent some but not all of those valued at
31 March 1982 then the allowable cost or indexation allowance as appropriate will be based on
the proportion that the shares or securities disposed of bears to the total holding.
The no gain/no loss transfers relevant in this context are those listed in Section 35(3)(d) TCGA
1992 (paragraph 1(3) of Schedule 8 Finance Act 1988).
SP6/89
Delay in rendering tax returns: Interest on overdue tax (TMA 1970, Section 88)
1.
Where an assessment has been made late or is inadequate because there has been a delay
in making a tax return, interest is payable (under TMA 1970, s.88) on unpaid tax from the date on
which the tax should have been paid. The Commissioners for Her Majestys Revenue and
Customs, however, have specific discretion under s.88 to mitigate that interest charge. On 10
May 1977, the Board drew attention - by way of a press notice - to the department's practice of
claiming such interest where the delay was substantial.
2.
Enquiries have been received as to what degree of delay is regarded as substantial,
particularly in relation to returns by individuals of their capital gains.
3.
In respect of (i) new sources of income, (ii) continuing sources where inadequate
estimated assessments are not appealed against or (iii) chargeable gains, the delay is regarded as
substantial, and consideration will be given to charging interest under s.88, if the relevant tax
return has not been made within 30 days of the date on which it was issued or, if later, by 31
October following the end of the tax year in which the income or chargeable gain arose.
Where it is not possible to lodge the return, a s.88 charge will not be raised if the Inspector is
provided, within these time limits, with sufficient information to enable an adequate estimated
assessment to be made - e.g. in the case of the disposal of a chargeable asset, at least the sale
price of that asset.
5.
Section 88 has been repealed for 1996-97 and subsequent years of assessment (1997-98
and subsequent years for partnerships set up before 6 April 1994), and also for 1995-96 and
earlier years where an assessment is made on or after 6 April 1998. This Statement of Practice
only applies to assessments where Section 88 does apply.
SP7/89
Surrender of Advance Corporation Tax
Advance corporation tax was abolished from 6 April 1999 onwards. Prior to 6 April 1999
Section 240 ICTA 1988 provides that a company may surrender to a 51 per cent subsidiary the
benefit of advance corporation tax (ACT) on dividends. The time limit for claims to surrender is
6 years from the end of the accounting period in which the dividend was paid. A company can
claim to surrender ACT whether or not it is surplus to the amount which under the rules in
Section 239 ICTA 1988 can be set against the corporation tax (CT) charged on its own profits for
that accounting period.
The Commissioners for Her Majestys Revenue and Customs had taken the view that if ACT had
already been set against the tax payable on an assessment which had become final, that ACT
could not subsequently be surrendered. Following a decision on an appeal to the Special
Commissioners the Commissioners for Her Majestys Revenue and Customs has been advised
that the determination of an assessment does not preclude the subsequent surrender of ACT set
off in the assessment. This practice is applied to all claims for surrender made on or after 12
October 1989 and to existing claims which were not settled at 12 October 1989.
SP8/89
Independent taxation: Mortgage interest relief: Time limit for married couples'
allocation of interest elections
Under ICTA 1988 s.356B (2)(a), (4)(b), as inserted by FA 1988 Sch 3 para 14, an election by a
married couple to allocate mortgage interest between them, or to revoke such an election, must be
made not later than 12 months after the end of the relevant year of assessment or within such
longer period as The Commissioners for Her Majestys Revenue and Customs may in any
particular case allow.
The Commissioners for Her Majestys Revenue and Customs will normally exercise its discretion
to extend the time limit where it can be demonstrated that failure to comply with the time limit
has been caused by sickness, absence abroad, or serious personal difficulties, or by the
unavailability (within the time limit) through no fault of taxpayers or their advisers of information
essential to the decision to make or revoke an election.
SP1/90
Company residence
1.
Residence has always been a material factor, for companies as well as individuals, in
determining tax liability. But statute law has never laid down comprehensive rules for
determining where a company is resident and until 1988 the question was left solely to the Courts
to decide. Section 66 FA 1988 introduced the rule that a company incorporated in the UK is
resident there for the purposes of the Taxes Acts. Case law still applies in determining the
residence of companies excepted from the incorporation rule or which are not incorporated in the
UK.
A. The incorporation rule
2.
The incorporation rule applies to companies incorporated in the UK subject to the
exceptions in Schedule 7 FA 1988 for some companies incorporated before 15 March 1988.
(This legislation is reproduced for convenience as an Appendix to this Statement). Paragraphs 3
to 8 below explain how the Revenue interpret various terms used in the legislation.
Carrying on business
3.
The exceptions from the incorporation test in Schedule 7 depend in part on the company
carrying on business at a specified time or during a relevant period. The question whether a
company carries on business is one of fact to be decided according to the particular circumstances
of the company. Detailed guidance is not practicable but the Revenue take the view that
'business' has a wider meaning than 'trade'; it can include transactions, such as the purchase of
stock, carried out for the purposes of a trade about to be commenced and the holding of
investments including shares in a subsidiary company. Such a holding could consist of a single
investment from which no income was derived.
4.
A company such as a shelf company whose transactions have been limited to those
formalities necessary to keep the company on the register of companies will not be regarded as
carrying on business.
5.
For the purpose of the case law test (see B below) the residence of a company is
determined by the place where its real business is carried on. A company which can demonstrate
that in these terms it is or was resident outside the UK will have carried on business for the
purposes of Schedule 7.
"Taxable in a territory outside the UK"
6.
A further condition for some companies for exception from the incorporation test is
provided by Schedule 7 Para 1(1)(c) and Para 5(1). The company has to be taxable in a territory
outside the UK. "Taxable" means that the company is liable to tax on income by reason of
domicile, residence or place of management. This is similar to the approach adopted in the
residence provisions of many double taxation agreements. Territories which impose tax on
companies by reference to incorporation or registration or similar criteria are covered by the term
'domicile'. Territories which impose tax by reference to criteria such as "effective management",
"central administration", "head office" or "principal place of business" are covered by the term
'place of management'.
7.
A company has to be liable to tax on income so that a company which is, for example,
liable only to a flat rate fee or lump sum duty does not fulfil the test. On the other hand a
company is regarded as liable to tax in a particular territory if it is within the charge there even
though it may pay no tax because, for example, it makes losses or claims double taxation relief.
"Treasury consent"
8.
Before 15 March 1988 it was unlawful for a company to cease to be resident in the UK
without the consent of the Treasury. Companies which have ceased to be resident in pursuance of
a Treasury consent, as defined in Schedule 7 Paragraph 5(1), are excepted from the incorporation
rule subject to certain conditions. A few companies ceased to be resident without Treasury
Consent but were informed subsequently by letter that the Treasury would take no action against
them under the relevant legislation. Such letter is not a retrospective grant of consent and the
companies concerned cannot benefit from the exceptions which depend on Treasury consent.
B. The case law test
9.
This test of company residence is that enunciated by Lord Loreburn in De Beers
Consolidated Mines v Howe (5 TC 198) at the beginning of this century:
"A company resides, for the purposes of Income Tax, where its real business is carried on ... I
regard that as the true rule; and the real business is carried on where the central management and
control actually abides".
10.
The "central management and control" test, as set out in De Beers, has been endorsed by
a series of subsequent decisions. In particular, it was described by Lord Radcliffe in the 1959
case of Bullock v Unit Construction Company (38 TC 712) at page 738 as being:
"as precise and unequivocal as a positive statutory injunction ... I do not know of any other test
which has either been substituted for that of central management and control, or has been defined
with sufficient precision to be regarded as an acceptable alternative to it. To me ... it seems
impossible to read Lord Loreburn's words without seeing that he regarded the formula he was
propounding as constituting the test of residence".
Nothing which has happened since has in any way altered this basic principle for a company the
residence of which is not governed by the incorporation rule; under current UK case law such a
company is regarded as resident for tax purposes where central management and control is to be
found.
Place of "central management and control"
11.
In determining whether or not an individual company outside the scope of the
incorporation test is resident in the UK, it thus becomes necessary to locate its place of "central
management and control". The case law concept of central management and control is, in broad
terms, directed at the highest level of control of the business of a company. It is to be

distinguished from the place where the main operations of a business are to be found, though
those two places may often coincide. Moreover, the exercise of control does not necessarily
demand any minimum standard of active involvement: it may, in appropriate circumstances, be
exercised tacitly through passive oversight.
12.
Successive decided cases have emphasised that the place of central management and
control is wholly a question of fact. For example, Lord Radcliffe in Unit Construction said that
"the question where control and management abide must be treated as one of fact or "actuality""
(p.741). It follows that factors which together are decisive in one instance may individually carry
little weight in another. Nevertheless the decided cases do give some pointers. In particular a
series of decisions has attached importance to the place where the company's board of directors
meet. There are very many cases in which the board meets in the same country as that in which
the business operations take place, and central management and control is clearly located in that
one place. In other cases central management and control may be exercised by directors in one
country though the actual business operations may, perhaps under the immediate management of
local directors, take place elsewhere.
13.
But the location of board meetings, although important in the normal case, is not
necessarily conclusive. Lord Radcliffe in Unit Construction pointed out (p.738) that the site of
the meetings of the directors' board had not been chosen as "the test" of company residence. In
some cases, for example, central management and control is exercised by a single individual.
This may happen when a chairman or managing director exercises powers formally conferred by
the company's Articles and the other board members are little more than cyphers, or by reason of
a dominant shareholding or for some other reason. In those cases the residence of the company is
where the controlling individual exercises his powers.
14.
In general the place of directors' meetings is significant only insofar as those meetings
constitute the medium through which central management and control is exercised. If, for
example, the directors of a company were engaged together actively in the UK in the complete
running of a business which was wholly in the UK, the company would not be regarded as
resident outside the UK merely because the directors held formal meetings outside the UK.
While it is possible to identify extreme situations in which central management and control
plainly is, or is not, exercised by directors in formal meetings, the conclusion in any case is
wholly one of fact depending of the relative weight to be given to various factors. Any attempt to
lay down rigid guidelines would only be misleading.
15.
Generally, however, where doubts arise about a particular company's residence status, the
Inland Revenue adopt the following approach:
(i)
They first try to ascertain whether the directors of the company in fact exercise central
management and control.
(ii)
If so, they seek to determine where the directors exercise this central management and
control (which is not necessarily where they meet).
(iii)
In cases where the directors apparently do not exercise central management and control
of the company, the Revenue then look to establish where and by whom it is exercised.
Parent/subsidiary relationship
16.
It is particularly difficult to apply the "central management and control" test in the
situation where a subsidiary company and its parent operate in different territories. In this
situation, the parent will normally influence, to a greater or lesser extent, the actions of the
subsidiary. Where that influence is exerted by the parent exercising the powers which a sole or
majority shareholder has in general meetings of the subsidiary, for example to appoint and
dismiss members of board of the subsidiary and to initiate or approve alterations to its financial
structure, the Revenue would not seek to argue that central management and control of the
subsidiary is located where the parent company is resident. However, in cases where the parent
usurps the functions of the board of the subsidiary (such as Unit Construction itself) or where
that board merely rubber stamps the parent company's decisions without giving them any
independent consideration of its own, the Revenue draw the conclusion that the subsidiary has the
same residence for tax purposes as its parent.
17.
The Revenue recognise that there may be many cases where a company is a member of a
group having its ultimate holding company in another country which will not fall readily into
either of the categories referred to above. In considering whether the board of such a subsidiary
company exercises central management and control of the subsidiary's business, they have regard
to the degree of autonomy which those directors have in conducting the company's business.
Matters (among others) that may be taken into account are the extent to which the directors of the
subsidiary take decisions on their own authority as to investment, production, marketing and
procurement without reference to the parent.
Conclusion
18.
In outlining factors relevant to the application of the case law test, this statement assumes
that they exist for genuine commercial reasons. Where, however, as may happen, it appears that a
major objective underlying the existence of certain factors is the obtaining of tax benefits from
residence or non-residence, the Revenue examine the facts particularly closely in order to see
whether there has been an attempt to create the appearance of central management and control in
a particular place without the reality.
19.
The case law test examined in this Statement is not always easy to apply. The Courts
have recognised that there may be difficulties where it is not possible to identify any one country
as the seat of central management and control. The principles to apply in those circumstances
have not been fully developed in case law. In addition, the last relevant case was decided almost
30 years ago, and there have been many developments in communications since then, which in
particular may enable a company to be controlled from a place far distant from where the day-today management is carried on. As the Statement makes clear, while the general principle has
been laid down by the Courts, its application must depend on the precise facts.
C. Double taxation agreements
20.
In general our double taxation agreements do not affect the UK residence of a company
as established for UK tax purposes. But where the partner country adopts a different definition of
residence, it may happen that a UK resident company is treated, under the partner country's
domestic law, as also resident there. In these cases, the agreement normally specifies what the
tax consequences of this "double" residence shall be.
21.
Under the double taxation agreement with the United States, for example, the UK
residence of a company for UK tax purposes is unaffected. But where that company is also a US
corporation, it is excluded from some of the reliefs conferred by the agreement. On the other
hand, under a double taxation agreement which follows the 1977 OECD Model Taxation
Convention, a company classed as resident by both the UK and the partner country is, for the
purposes of the agreement, treated as resident where its "place of effective management" is
situated.
22.
The Commentary in paragraph 3 of Article 4 of the OECD Model records the UK view
that, in agreements (such as those with some Commonwealth countries) which treat a company as
resident in a state in which "its business is managed and controlled", this expression means "the
effective management of the enterprise". More detailed consideration of the question in the light
of the approach of Continental legal systems and of Community law to the question of company
residence has led the Revenue to revise this view. It is now considered that effective
management may, in some cases, be found at a place different from the place of central
management and control. This could happen, for example, where a company is run by executives
based abroad, but the final directing power rests with non-executive directors who meet in the
UK. In such circumstances the company's place of effective management might well be abroad
but, depending on the precise powers of the non-executive directors, it might be centrally
managed and controlled (and therefore resident) in the UK.
23.
The incorporation rule in Section 66(1) FA 1988 determines a residence which
supersedes a different place "given by any rule of law". This incorporation rule determines
residence under UK domestic law and is subject to the provisions of any applicable double
taxation agreement. It does not override the provisions of a double taxation agreement which
may make a UK incorporated company a resident of an overseas territory for the purposes of the
agreement (see 20 and 21 above).
Appendix to SP1/90
Finance Act 1988
1.
Subject to the provisions of Schedule 7 to this Act, a company which is incorporated in
the United Kingdom shall be regarded for the purposes of the Taxes Acts as resident there; and
accordingly, if a different place of residence is given by any rule of law, that place shall no longer
be taken into account for those purposes.
2.
For the purposes of the Taxes Acts, a company which -
(a)
is no longer carrying on any business; or
(b)
is being wound up outside the United Kingdom,
shall be regarded as continuing to be resident in the United Kingdom if it was so regarded for
those purposes immediately before it ceased to carry on business or, as the case may be, before
any of its activities came under the control of a person exercising functions which, in the United
Kingdom, would be exercisable by a liquidator.
3.
1970.
In this section "the Taxes Acts" has the same meaning as in the Taxes Management Act
4.
This section and Schedule 7 to this Act shall be deemed to have come into force on 15
March 1988.
Schedule 7 - Exceptions to rule in Section 66(1)
Cases where rule does not apply
1.
(1)
Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not
apply in relation to a company which, immediately before the commencement date (a)
was carrying on business;
(b)
was not resident in the United Kingdom, having ceased to be so resident

in pursuance of a Treasury consent; and
(c)
where that consent was a general consent, was taxable in a territory

outside the United Kingdom.
(2)
If at any time on or after the commencement date a company falling within subparagraph (1) above (a)
ceases to carry on business, or
(b)
where the Treasury consent there referred to was a

general consent, ceases to be taxable in a territory outside the United
Kingdom,
Section 66(1) of this Act shall apply in relation to the company after that time or after the
end of the transitional period, whichever is the later.
(3)
If at any time on or after the commencement date a company falling within subparagraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act
shall apply in relation to the company after that time.
2.
(1)
Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not
apply in relation to a company which (a)
carried on business at any time before the commencement date;
(b)
ceases to be resident in the United Kingdom at any time on or after that

date in pursuance of a Treasury consent; and
(c)
is carrying on business immediately after that time.
(2)
If at any time after it ceases to be resident in the United Kingdom a company
falling within sub-paragraph (1) above ceases to carry on business, Section 66(1) of this
Act shall apply in relation to the company after that time or after the end of the
transitional period, whichever is the later.
(3)
falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section
66(1) of this Act shall apply in relation to the company after that time.
Cases where rule does not apply until end of transitional period.
3.
(1)
Subject to sub-paragraph (2) below, in relation to a company which (a)
(b)
was not resident in the United Kingdom immediately before that date;
and
(c)
is not a company falling within paragraph 1(1) above,
Section 66(1) of this Act shall not apply until after the end of the transitional period.
(2)
If at any time on or after the commencement date a company falling within subparagraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act
shall apply in relation to the company after that time.
4.
(1)
Subject to sub-paragraph (2) below, in relation to a company which (a)
(b)
ceases to be resident in the United Kingdom at any time on or after that

date in pursuance of a Treasury consent; and
(c)
is not a company falling within paragraph 2(1) above,
Section 66(1) of this Act shall not apply until after the end of the transitional period.
(2)
falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section
66(1) of this Act shall apply in relation to the company after that time.
Supplemental
5.
(1)
In this Schedule "the commencement date" means the date of the coming into force of this Schedule;
"general consent" means a consent under any section to which sub-paragraph (2) below
applies given generally within the meaning of subsection (4) of that section;
"taxable" means liable to tax on income by reason of domicile, residence or place of
management;
"the transitional period" means the period of five years beginning with the
commencement date;
"Treasury consent" means a consent under any section to which sub-paragraph (2) below
applies given for the purposes of subsection 1(a) of that section.
(2)
This sub-paragraph applies to the following sections (restrictions on the
migration etc of companies), namely Section 765 of the Taxes Act 1988;
Section 482 of the Taxes Act 1970;
Section 468 of the Income Tax Act 1952; and
Section 36 of the Finance Act 1951.
(3)
Any question which arises under any of the provisions of this Schedule shall be
determined without regard to the provision made by Section 66(1) of this Act.
SP2/90
Guidance notes for migrating companies: Notice and arrangements for payment
of tax
1.
Section 130 FA 1988 requires a company to notify the Commissioners for Her Majestys
Revenue and Customs of its intention to cease to be resident in the United Kingdom and to obtain
the Commissioners for Her Majestys Revenue and Customs approval of arrangements for
payment of the company's tax liabilities. These notes explain the procedure to be followed, the
information required in support of a request for approval and the arrangements which will
normally be acceptable to the Commissioners for Her Majestys Revenue and Customs.
2.
2.1
Notice
A notice under Section 130(2) (a) should be sent to:
HMRC
CT & VAT: International (Company Migrations)

Floor 3c
100 Parliament Street
London
SW1A 2BQ
The notice should give the intended date of migration (see paragraph 5 below). The information
required by Section 130 (2) (b) and (c) should normally be sent with the notice (i.e. the statement
of tax liabilities and proposals for securing payment - see 3(d) and (e) below).
2.2
As the Board will have to check the statement of tax payable with the company's tax
district, it would be useful if a copy of the notice and of the tax computation could be sent
to the company's tax district at the same time.
3.
a.
Information to be supplied
The name of the company, its address in the UK and its place of incorporation.
b.
Its tax district and reference number.
c.
A copy of the latest available accounts.
d.
A detailed statement of all tax liabilities which are or will be due for periods commencing
before the date of migration. The statement should cover Corporation Tax and Advance
Corporation Tax and, if relevant, all taxes mentioned in subsection (7) of Section 130 and
any accrued interest on tax (subsection (8)). It should include any charges which arise as
a consequence of the migration itself e.g., under Section 337(1) ICTA 1988 and Section
185 TCGA 1992. (If an unlimited guarantee is to be offered - see paragraph 4.3 - the
statement can be restricted to a brief summary of the tax position.)
e.
The company's proposals for securing the payment of tax liabilities. These should
include the name and address of the proposed attorney and of the proposed guarantor (see
paragraphs 4.1 and 4.2).
f.
If a corporate guarantor other than a bank is proposed (see paragraph 4.2), a copy of its
memorandum and articles of association.
4.
Arrangements for securing payment of tax
4.1
a. It will normally be necessary to appoint an attorney to act for the company in tax
matters, e.g. to receive notices of assessment. The attorney must be a person resident in the
United Kingdom and will usually be an individual who is professionally qualified e.g., as a
solicitor or accountant. The Board will need to be satisfied that the migrating company has
power to appoint an attorney. Further information and drafts of the power of attorney in a form
approved by the Board are available from the above address.
4.1
b. The capacity of a migrating company to appoint an attorney may be demonstrated by
the opinion of a lawyer qualified in the appropriate local law upon the following matters:
i.
That the company has power by its constitution and/or by appropriate local law to appoint
an attorney in the terms of the draft Power of Attorney (see para 4.1.a. above).
ii.
To know what formalities, if any, are required for a valid exercise of the Power to
Appoint an Attorney.
iii.
How the Deed in the form of the Draft Power of Attorney should be executed and
whether execution should be Notarily Attested.
4.2
The precise form of the arrangements will vary from case to case. Normally they will
take the form of a guarantee from a company which must be either resident in the United
Kingdom or a UK branch of a foreign bank. A guarantor company must of course have power to
act as guarantor and a copy of its current memorandum and articles is required to satisfy the
Board of this. The memorandum and articles should be certified by a solicitor or an officer of the
company to be the version currently in force and as filed with the Registrar of Companies.
4.3
The guarantee may be unlimited or limited to a specified sum. An unlimited guarantee is
given for the total tax liabilities without specifying the amount. Where the migrating company
has an associated United Kingdom resident company of sufficient substance the Board will
normally look for an unlimited guarantee from that company. Where the guarantee is given by a
company not associated with the migrating company, usually by a bank, the Board understand
that the guarantor will require the guarantee to be limited to a specified sum. Under Section
130(4) any dispute as to the amount can be referred to the Special Commissioners.
4.4
Where it is not possible for a guarantee in one of the forms indicated above to be
provided, other arrangements may be acceptable. Further information is available from the above
address.
5.
Date of migration
5.1 The Board will act as speedily as possible to approve the arrangements but the time required
will depend on several factors. If possible the intended date of migration should not be less than
two months from the date of the notice. If it is necessary to agree values of assets in order to
estimate tax liabilities, the time required may be longer and companies should take this into
account. However, where an unlimited guarantee is proposed, it will not usually be necessary to
estimate the tax liabilities in detail and it may then be possible to approve the arrangements well
within two months of the notice.
5.2
A company may decide to change the intended date of migration either for its own
reasons or because, for example, the arrangements will clearly not be approved in time to meet
the original date. It should then give notice under Section 130 FA 1988 of the amended date and
provide details of any consequential changes in either the amount of tax and interest to be
included in the arrangements or the nature of the arrangements themselves.
6.
Non-compliance
Where a company migrates without the requirements of Section 130 being met, the persons
responsible, including individual directors, may be liable for substantial penalties under
Section 131. Where tax liabilities of a migrating company remain unpaid, those liabilities may
also be recovered from related companies, or from certain directors, under Section 132.
7.
Telephone enquiries
An initial enquiry may be made to the HM Revenue and Customs, Somerset House Public
Enquiry Room (020 7438 6420/5) - callers should ask for HMRC, CT&VAT International
(Company Migrations).
SP3/90
Stocks and long-term contracts
SP4/90
Charitable covenants
SP5/90
Accountants' working papers
1.
Section 20 TMA 1970 gives the Revenue powers to call for information relating to a
person's tax affairs. Section 20B TMA, which contains restrictions on the use of Section 20
powers, was amended by Finance Act 1989 to bring accountants working papers, which were
previously excluded, within the range of documents which the Revenue may require a third-party
to deliver or make available for inspection under these powers. This Statement explains how the
new rules work in relation to accountants working papers and how the Revenue will use these
powers in practice.
2.
Three classes of documents are still excluded from the papers which may be called for
from a third-party. First, there is no change in the protection given to documents brought into
existence specifically to support the conduct of a pending appeal. Second, audit papers are
protected from disclosure by an auditor. Third, communications relating to giving or obtaining
tax advice are protected from disclosure by a tax adviser. The protection given to audit papers
and tax advice is limited however where the papers contain essential information about the origin
of figures in accounts, returns and other information submitted to the Revenue or the relationship
of those figures with the books and records of the taxpayer.
3.
In addition, papers for which legal professional privilege could be claimed are protected
from disclosure by a lawyer in relation to a client's tax affairs and there are general protections for
medical records and other records kept by doctors, counsellors etc relating to an individual's
personal welfare and the working papers of a journalist.
Audit papers
4.
An auditor appointed under any statutory provision, e.g. Companies Act, Building
Societies Act, etc is not obliged to disclose audit papers to the Revenue under a third party notice,
i.e. Section 20(3) or 20(8A) TMA. Audit papers are papers which are the property of the person
appointed as an auditor under that enactment and which have been prepared by, or for, that person
in order to carry out the statutory duties of an auditor under that enactment.
5.
In practice the Revenue will allow equivalent protection where an accountant is
appointed to carry out a non-statutory, independent audit to standards similar to those required for
a Companies Act audit or to standards laid down by the client's professional body, provided the
work on the audit is kept separate from any work on the preparation of the accounts.
Tax advice
6.
A tax adviser is not obliged to disclose communications relating to the giving or
obtaining of tax advice to the Revenue under a third party notice. A tax adviser is any person
appointed by a client, either directly by the client or indirectly via another tax adviser, to give
advice on the client's tax affairs. The communications which are protected are ones between the
tax adviser and the client or another adviser, made for the purposes of giving or obtaining advice
about the client's tax affairs, and can include notes of meetings and telephone calls, internal
memoranda, copy letters and faxes as well as ordinary correspondence.
Restrictions on protection for audit papers and tax advice
7.
The protection given to audit papers and tax advice is restricted where the auditor or tax
adviser has assisted the taxpayer in the preparation of accounts, returns or other information to be
used for tax and the papers contain workings or other analytical information showing how an
entry in the accounts, returns or other information submitted to the Revenue was arrived at, which
has not previously been made available to the Revenue. In that event, the Revenue is entitled to
have access to the information showing how the entry was arrived at, although information
showing why the entry was arrived at in that way remains protected.
8.
Where an auditor or tax adviser wishes to claim protection for part of a paper, a copy,
which must be photographic or otherwise by way of facsimile, of the part which is not protected
may be supplied to the Revenue. But the original must also be made available for inspection by
the Revenue on request, when the protected parts may be kept covered up if the auditor or tax
adviser wishes.
9.
The protection given to audit papers and tax advice is restricted similarly where the
notice is made under Section 20(8A) TMA for information in respect of an unnamed taxpayer or
taxpayers and the papers contain details giving the identity or address of any of the unnamed
taxpayers or of any person who has acted on their behalf.
Use of Section 20 powers in respect of accountants working papers
10.
Accountants working papers will not be called for on a routine basis. The Revenue will
normally do so in connection with enquiries into a client's tax affairs only where they have been
unable to satisfy themselves otherwise that the client's accounts or returns are complete and
correct. Although the new provisions give the Revenue formal powers to require access to
accountants working papers, this has been given in the past on a voluntary basis where
appropriate. The Revenue will continue their general policy of seeking access on a voluntary
basis and will use their formal powers only where they consider it absolutely necessary.
11.
Requests will be limited as far as possible to information explaining specific entries. But
there may be occasions when the Revenue will wish to examine the whole or a particular part of
the working papers. The Revenue will usually be willing to visit the accountant's office or the
client's premises to examine the papers and to take copies or extracts.
Accountants convicted of a tax offence
12.
The restrictions on the use of the Revenue's powers to obtain access to an accountant's
working papers described above do not apply to the Revenue's powers under Section 20A TMA
to require access to the working papers of an accountant who has been convicted of a tax offence
or had a penalty awarded against him under Section 99 TMA.
Destruction of papers
13.
It is a criminal offence intentionally to falsify, conceal, destroy or otherwise dispose of
documents which the Revenue has called for under Section 20 or 20A TMA before the Revenue
has seen them. (Section 20BB TMA). This applies both where an informal request has been
made under Section 20B(1) TMA, which would be made in writing and clearly identified as such
when it was made, and where a formal notice has been given under Section 20 or 20A TMA.
SP6/90
Stamp Duty: Conveyances and transfers of property subject to a debt Section 57 Stamp Act 1891
Introduction
1.
Since the abolition of the duty on voluntary dispositions in 1985, many enquiries have
been received about the stamp duty chargeable on conveyances etc subject to a debt where no
chargeable consideration (e.g. money or stock) unrelated to the debt is given by the transferee.
The Statement of Practice sets out the Commissioners for Her Majestys Revenue and Customs
view of the correct stamp duty treatment of such conveyances.
2.
For the sake of completeness it should be noted that where chargeable consideration
unrelated to debt is given by the transferee, Section 57 renders the conveyance liable to
ad valorem duty on the aggregate of that consideration and the debt whether the transferee
assumes liability for the debt or not (IRC v City of Glasgow Bank 1881 8 R389, 18 SLR 242).
Section 57, Stamp Act 1891
3.
The most commonly misunderstood applications of Section 57 arise where
-
a mortgaged property held in the name of one spouse is transferred into the joint names of
both spouses;
a mortgaged property held in the name of one spouse or in their joint names is transferred
into the sole name of the other;
a mortgaged business property, frequently farmland, is conveyed from a sole proprietor to

a family partnership or from a family partnership to a fresh partnership bringing in other
members of the family.
4.
The critical question is whether the transaction to which the conveyance gives effect is or
is not a sale. If it is, Section 57 will apply and the conveyance will be chargeable to ad valorem
duty on the amount of the debt assumed. If it is not, then Section 57 will not apply and
ad valorem duty will not be payable.
Express covenants
5.
Where property is transferred subject to a debt, the transferee may covenant, either in the
instrument or by means of a separate written undertaking, to pay the debt or indemnify the
transferor against his personal liability to the lender. Such a covenant or undertaking constitutes
valuable consideration and, in view of Section 57, establishes the transaction as a sale for stamp
duty purposes.
6.
Where the transferor covenants to pay the debt and the transferee does not assume any
liability for it, no chargeable consideration has been given and there is no sale. The transfer
would then be a voluntary disposition - i.e. an unencumbered gift capable of being certified as
Category L under the Stamp Duty (Exempt Instruments) Regulations 1987 (SI 1987 No 516) and so exempt from the 50p charge that would otherwise arise.
Implied covenants
7.
Where no express covenant or undertaking is given by the transferee, the Commissioners
for Her Majestys Revenue and Customs are advised that, except in Scotland, a covenant by the
transferee may be implied. That makes the transaction a sale, as in paragraph 4 above.
8.
Such an implied covenant may be negated if there is evidence that it was the intention of
the parties at the time of the transfer that the transferor should continue to be liable for the whole
of the mortgage debt. Where evidence of such a contrary intention exists, the transfer would
again be treated for stamp duty purposes as a voluntary disposition.
9.
Where property in joint names subject to a debt is transferred to one of the joint holders
(though with no cash passing), a covenant by the transferee to indemnify the transferor may be
implied even where both were jointly liable on the mortgage.
Amount chargeable
10.
Where a conveyance of property subject to a debt is chargeable to ad valorem duty and
the express or implied covenant by the transferee relates only to part of the debt, only the amount
of that part is treated as chargeable consideration within Section 57. A certificate of value under
Section 34(4) FA 1958 may, where appropriate, be included in the conveyance where the relevant
amount of the debt does not exceed the amount certified.
Other provisions
11.
The foregoing does not affect any statutory exemption from duty that may apply, e.g. that
for transfers to a charity (Section 129 FA 1982) and that available for certain transfers of property
from one party to a marriage to the other in connection with their divorce or separation
(Section 83(1) FA 1985 and Category H of the Stamp Duty (Exempt Instruments) Regulations
1987).
Procedure
12.
Where the applicant is satisfied that the conveyance or transfer is made on sale, it may be
sent or taken for stamping with a remittance for the duty payable. If the transfer contains an
appropriate certificate of value - see paragraph 10 above - it may be sent direct to the Land
Registry in the usual way if appropriate. In either case, if the amount of the debt outstanding is
not given in the conveyance or transfer the amount should be stated in a covering letter.
13.
Where the conveyance or transfer contains a covenant by the transferor to pay the debt
(see paragraph 6) and is certified as within Category L of the Stamp Duty (Exempt Instruments)
Regulations 1987, it should also be sent direct to the Land Registry if appropriate.
14.
In any other case where the applicant believes that the conveyance or transfer effects
a voluntary disposition - see paragraph 8 above - it should be presented for adjudication
accompanied by a statement of the facts and any supporting evidence.
SP7/90
Compulsory acquisition of freehold reversion by tenant - Superseded by SP13/93
SP8/90
Losses on irrecoverable loans in the form of qualifying corporate bonds: Loss on

early redemption
If a qualifying corporate bond becomes of negligible value before its redemption date, relief may
be claimed under Section 254(3) TCGA 1992 (Section 136A(3) CGTA 1979) for the loss arising
on the underlying loan. In the case of a qualifying corporate bond which ceased to have any
value because it was redeemed early, HM Revenue and Customs accepts that relief under Section
254 may be claimed on the basis that the condition in Section 254(3)(a) is satisfied.
SP1/91
Small companies' rate of Corporation Tax and Corporation tax starting rate
1. Section 13 ICTA 1988 contains the rules for the small companies' rate of corporation tax and
marginal relief. If a company's profits for an accounting period do not exceed the lower
relevant maximum amount, the company may claim to be taxed at the small companies' rate.
If the profits exceed the lower relevant maximum amount but do not exceed the upper
relevant maximum amount, the company may make a claim for the marginal relief to apply.
2. Section 13AA ICTA 1988 contains the rules for and Corporation tax starting rate and
marginal relief. If a companys profits for an accounting period do not exceed the first
relevant amount, the company may claim to be taxed at the Corporation tax starting rate. If
the profits exceed the first relevant amount but do not exceed the second relevant amount, the
company may make a claim for the marginal relief to apply.
3. The lower and upper relevant maximum amounts (for Section 13) and the first and second
relevant amounts (for Section 13AA) are restricted where the company has one or more
associated companies. Two companies are associated if one controls the other or both are
under the control of the same person or persons.
4. If a company wishes to take advantage of Section 13 or Section 13AA, it is necessary for it to
make a claim. HM Revenue and Customs practice is to accept as a valid claim under Section
13 or Section 13AA a clear indication in a company's return (or corporation tax computation
or accompanying correspondence) for the relevant accounting period that the profits should
be charged at the small companies' rate, the Corporation tax starting rate or that the marginal
relief should be applied. Except in the case of an unincorporated association or other
members' club or society, the claim should include a statement of the number of associated
companies which the company had in the relevant accounting period. Where the company
had no associated companies in the accounting period, the claim should state this.
SP2/91
Residence in the UK: Visits extended because of exceptional circumstances

withdrawn with effect from 6 April 2009
SP3/91
Finance lease rental payments
1.
This statement sets out the view of the Commissioners for Her Majestys Revenue and
Customs of the correct treatment, for tax purposes, of rentals payable by a lessee under a finance
lease. That view reflects advice the Commissioners for Her Majestys Revenue and Customs have
received on the application of the correct principles of commercial accounting and relevant case
law. The statement sets out what will be HM Revenue and Customs practice in applying tax law
to rentals payable under a finance lease, in cases where Statement of Standard Accounting
Practice (SSAP) 21 has not been applied and in cases where SSAP 21 has been applied.
A. Cases where SSAP 21 is not applied
Accounting treatment
2.
The Commissioners for Her Majestys Revenue and Customs are advised that finance
lease rentals are revenue payments for the use of the asset over time and, in accordance with the
correct principles of commercial accounting, should be allocated to the periods of account for
which the asset is leased under the accruals concept.
3.
Where a lease provides not only a primary period (i.e. the period over which the lessee
initially contracts to lease the asset), but also secondary periods (i.e. periods for which the lessee
has the option to continue to lease the asset), then in determining what are the periods of account
to which the rentals are to be allocated regard should be had not only to the primary period but
also to the economic life of the asset and its likely period of use by the lessee.
Tax treatment
4.
The Commissioners for Her Majestys Revenue and Customs are advised that for tax
purposes, the rentals are deductible in computing profits on the same basis as they are correctly
allocated to the periods of account under the accruals concept.
5.
There is no entitlement to deduct the rentals for tax purposes, merely by reference to the
due dates of payment.
Revenue practice
6.
Inspectors of Taxes will normally be prepared to accept, for tax purposes, the lessee's
accounting treatment of rental payments where that treatment is consistent with the accounting
principles described at paragraphs 2 and 3 above.
7.
Where the lessee's treatment of rental payments in the accounts does not accord with the
basis indicated above, Inspectors will seek to negotiate the computational adjustments necessary
to secure for tax purposes, an appropriate spreading of the rental payments, in accordance with
the accruals concept.
B. Cases where SSAP 21 is applied
Accounting treatment
8.
SSAP 21 recognises the transfer of effective ownership of the asset to the lessee who is
required to record the lease in the balance sheet, as the acquisition of the asset subject to a loan.
The asset is to be depreciated over its expected useful life in the hands of the lessee. Rentals are
treated as comprising a finance charge element and a capital repayment element.
Tax treatment
9.
Notwithstanding that SSAP 21 requires a proportion of the rentals payable to be treated
as capital repayment, the rentals remain in law revenue payments for the use of the asset, and for
tax purposes the whole of the rentals should be allocated to the periods of account for which the
asset is leased in accordance with the accruals concept.
Revenue practice
10.
Where the lessee has accounted for a lease in accordance with SSAP 21 Inspectors of
Taxes will normally accept for tax purposes, that the finance charge element of the rentals
allocated to a period of account is deductible in computing the profits of that period.
11.
In determining what proportion of the capital repayment element should be allowed for
tax purposes in a period of account, Inspectors will normally be prepared to accept that the
properly computed commercial depreciation of the asset which is charged to the profit and loss
account in that period represents the appropriate amount.
12.
Where, however, the depreciation charge is not calculated on normal commercial
accounting principles then it will not represent the appropriate proportion of the capital
repayment element of the rental. In such cases, the Inspector will allow such part of the rentals
for the period as represents the properly calculated proportion of the capital repayment element
which should be allocated to that period in accordance with the accruals concept.
Timing of introduction
13.
The practice described in paragraphs 6-7 and 10-12 above will be applied to leases
entered into after the date of this statement, 11 April 1991.
See also Inland Revenue Tax Bulletin, Issue 15, February 1995, pages 189 - 193.
SP4/91
Tax returns
SP5/91
Investment trusts investing in authorised unit trusts - Superseded by SP7/94
SP6/91
Stamp Duty and VAT: Interaction - Superseded by SP11/91
SP7/91
Double taxation relief: Business profits: Unilateral relief
1.
Section 790 ICTA 1988 sets out the basis under which relief (unilateral relief) may be
given for foreign tax in the absence of a Double Taxation Agreement. The Section sets out the
conditions precedent to the granting of relief. So far as business profits are concerned the foreign
tax is admissible for relief only if it is a tax which is payable under the law of the foreign
territory; a tax which is computed by reference to income arising in the foreign territory; a tax
which is charged upon income; and a tax which corresponds to income tax or corporation tax.
2.
Hitherto HM Revenue and Customs have interpreted the conditions so as to exclude from
relief a number of foreign taxes having characteristics similar to turnover taxes, that is to say
taxes computed by reference to a prescribed proportion of a gross amount of fee or contractual
sum from which expenses fall to be deducted in arriving both at the commercial profit and at the
amount which, in the UK, would be assessable under Case I or II of Schedule D. The taxes
excluded from relief were those where the proportion of the gross amount charged to tax
prompted the view that the tax could not reasonably be regarded as corresponding to UK income
tax or corporation tax charged upon net profits.
3.
Following consideration of the point in the High Court*, HM Revenue and Customs have
decided to change their interpretation. In future the question of whether or not a foreign tax is
admissible for unilateral relief under Section 790 ICTA 1988 will be determined by examining
the tax within its legislative context in the foreign territory and deciding whether it serves the
same function as income and corporation tax serve in the UK in relation to the profits of the
business. Turnover taxes, as such, are not therefore affected by the revised interpretation and will
continue to be inadmissible for relief. The revised interpretation will take effect from Wednesday
13 February 1991 when judgement was given in the High Court, and will apply to claims made
on or after that date and to earlier claims unsettled at that date. Taxpayers who would like HM
Revenue and Customs to review a previous decision in respect of a specific foreign tax are invited
to address their enquiry to HM Revenue and Customs, CT & VAT, 100, Parliament Street,
London SW1A 2BQ.
4.
It should be noted however that the admissibility of the foreign tax is only one aspect of
unilateral relief which can give rise to disputes between HM Revenue and Customs and the
taxpayer. Relief is only available in respect of the foreign tax on income arising in the foreign
territory, and according to the facts of the particular case there may be room for argument as to
where the income arose and to the amount of the income, having regard to the different principles
of law in the foreign territory and in the UK. In the light of the High Court decision HM Revenue
and Customs practice will continue to be to determine questions of this sort by reference to
principles of UK tax law. It follows that the charging of foreign tax upon an amount of income
will not of itself be sufficient to establish that income of that amount arose in the foreign territory,
and it is necessary to apply principles of UK tax law in order to ascertain the amount of the
foreign income. As credit for foreign tax is restricted to the income tax or corporation tax
attributable to the foreign income, this last point is one of some importance.
*
SP8/91
Yates v GCA International Ltd (formerly Gaffney Cline and Associates Ltd)
(64 TC 37)
Discovery assessments
General
1.
This Statement of Practice explains, in relation to income tax, corporation tax and capital
gains tax, the circumstances in which - HM Revenue and Customs seeks to recover tax when a
person has not been assessed or has been inadequately assessed. The Statement does not cover
cases where there may have been fraud or negligence by or on behalf of the taxpayer.
2.
The Statement draws attention to the relevant statute and case law, in particular to the
cases of
Cenlon Finance Co Ltd v Ellwood (1) and
Scorer v Olin Energy Systems Ltd (2)
(See references at end of this Statement).
3.
The following paragraphs should be read as subject to the general proviso that it is
fundamental to the operation of the tax system that it is for the taxpayer, who is in possession of
the facts, to supply them to the Revenue so that his tax liability may be determined. Case law
confirms that, if the relevant facts have not been accurately, fully and clearly disclosed by the
taxpayer at the time, the Revenue should not regard agreements reached, or action taken or
omitted by its officials as binding it to accept less than the full amount of tax legally due.
4.
This statement of practice applies to the following for the years specified:
Individuals - for returns for years to and including 1995/96.
Partnerships whose trade, profession of business were set up and commenced

before 6 April 1994 - for returns for the years to and including 1996/97.
For bodies within the charge to Corporation Tax - for accounting periods ending
before 1 July 1999.
For periods after those referred to above TMA 1970 s.29 as amended by FA 1994
ss191 applies, except for companies. In the case of companies paragraphs 41-45,
Schedule 18 FA 98 apply.
Inspectors' discovery powers

5.
Section 29(3) TMA 1970 provides that where, after an assessment has been made or a
decision has been taken that an assessment is not required, an Inspector of Taxes discovers that
any taxable profits have not been assessed, he may make an assessment in the amount he
considers ought to be charged. Similarly, a further assessment may be made if an Inspector
discovers that an assessment is insufficient or that a relief should be withdrawn. These powers
may also be exercised by the Commissioners for Her Majestys Revenue and Customs. There
are also other discovery provisions in the Taxes Acts which empower an Inspector to make
assessments to recover excessive reliefs, tax unpaid and over-repayments of tax, for example
Section 30 TMA and Sections 252 and 412(3) ICTA 1988. Normally any assessment or further
assessment must be made not later than six years after the end of the chargeable period to which it
relates (Section 34(1) of the TMA).
6.
The Courts have established that, subject to the decisions in the Cenlon and Olin cases, a
change of opinion can amount to discovery; that discovery can be made by an Inspector other
than the one who made the first assessment; and that discovery can extend to a finding that the
law has been incorrectly applied as well as the coming to light of additional facts. The word has
been held to include any situation in which for any reason it newly appears to an Inspector that a
taxpayer has been undercharged.
The main principles
7.
Two main principles are relevant in considering whether a discovery assessment may be
made in any particular circumstances.
First, HM Revenue and Customs does not go back on a specific agreement made by an Inspector
on a particular point and raise a discovery assessment in respect of that point, whether or not the
Inspector correctly took account of current law and practice in entering into that agreement;
Second, in circumstances where it cannot be said that the particular point was the subject of a
specific agreement, the Revenue regards itself as bound by the Inspector's acceptance of a
computation if the view of the point implicit in the computation was a tenable one.
But the Revenue does not regard itself as bound by any agreement made, or considered to be
made, or any decision taken by an Inspector, if any of the information supplied on which that
agreement or decision was founded was misleading.
The position in more detail
i)
Specific agreement: appeal cases
Cenlon
8.
First, there is the case where there has been a specific agreement made by an Inspector on
a particular point, i.e. where an issue has been raised expressly by the Inspector, the taxpayer or
his agent (whether orally or in writing) and agreement has been reached on the treatment of that
issue for tax purposes. The decision in the Cenlon case established that, if an assessment has
been determined on appeal in accordance with Section 54 TMA 1970, a discovery assessment
should not be made in respect of any particular point which had been specifically dealt with in the
course of the determination of that appeal.
Olin
9.
The decision in the Olin case gives guidance on deciding whether (in the absence of
express words making the position clear) a particular point has been agreed, or could be said to
have been agreed, in the course of reaching an overall agreement on a person's tax liability for a
particular period. The Olin case makes it clear that a particular point agreed may not only be an
issue raised expressly by the Inspector, the taxpayer, or his agent, (whether orally or in writing),
but also any point which was fundamental to the whole basis of the computation of the taxpayer's
liability, and so clearly and fully described in the accounts or computations that its significance
for the computation of the taxpayer's liability was clearly and immediately apparent. In these
circumstances the Inspector could not reasonably be regarded as having agreed the computation
without having appreciated and accepted the point. In other words the Inspector must have been
clearly put on notice of the point.
10.
The question whether a particular point is fundamental to the whole basis of the
computation of the liability is one which must depend for its answer on the facts and
circumstances of the particular case. At one extreme, there will be cases like Olin itself where the
claim to set off the losses of the defunct trade against the profits of the continuing trade was
fundamental in that it had a major impact on the computation of the liability and, moreover, was
so clearly and fully described in the computations that the Inspector must have appreciated what
was being claimed. In the House of Lords, Lord Keith concluded that the Inspector's agreement
to the computations would have led a reasonable man to believe that the Inspector had decided to
admit the claim. In circumstances like these, the Revenue would accept that the particular point
was covered by the agreement reached and could not subsequently be the subject of a discovery
assessment.
11.
At the other extreme, there will be cases in which a point is not fundamental to the basis
of the computation, in that it does not have a major impact on the liability, or it is not so clearly
and fully described in the accounts or computations that its significance is clearly and
immediately apparent from the information supplied. For example, in cases where the taxpayer
or his agent are claiming a particular deduction in arriving at profits, and among a multiplicity of
items contained in the accounts and supporting material is a piece of information which, if the
Inspector had studied it in detail and thought through the implications, could have alerted him to
the fact that the claim was not valid, the Revenue would not accept that a discovery assessment
could not be raised in respect of the particular (incorrect) deduction. Moreover, if further
information were needed before the Inspector could reasonably be expected to appreciate the
significance of the point for the taxpayer's liability, the Revenue would not accept that the
Inspector should be regarded as having considered and agreed that point.
12.
The treatment of cases in between these two extremes must be a matter of judgement,
depending on the particular facts. It will be necessary to decide, taking a reasonable and
commonsense view of the matter, whether a taxpayer or his adviser would consider that a
competent Inspector, in examining the accounts and computations, must be considered to have
addressed his mind to the point at issue before signifying his agreement to the computation of the
liability. This will be so only if the point was both fundamental to the whole basis of the
computation, and was so clearly and fully described that its significance for the computation of
the taxpayer's liability was clearly and immediately apparent. In these circumstances the
Inspector could not reasonably be regarded as having agreed the computation without having
appreciated and accepted the point.
ii)
Specific agreement: non-appeal cases
13.
The principles established in the Cenlon and Olin cases strictly apply only where there
was an appeal against an assessment or an appeal against a decision on a claim given in
accordance with Section 42, TMA 1970 which was subsequently determined either by the
Commissioners or under Section 54 of that Act. But, even if there was no determination of an
appeal, a discovery assessment will not be made if the particular point on which the Inspector
takes a revised view was, or (as in the Olin case, see paragraph 8 above) could be said to have
been, the subject of the specific agreement of the final figures for assessment purposes. These
circumstances may arise because the figures were agreed before an assessment was made,
because the Inspector decided not to make an assessment, or because the Inspector's decision on
the claim was accepted.
iii)
No specific agreement: appeal and non-appeal cases
14.
There will also be circumstances in which the Cenlon and Olin principles are not
applicable. Thus, the particular point on which the Inspector subsequently takes a revised view
and considers making a discovery assessment may not have been the subject of a specific
agreement or, because the point was not fundamental, cannot be said to have been the subject of a
specific agreement (see paragraph 8 above). In these circumstances, a discovery assessment will
not be made, provided that the Inspector's original decision, whether on a claim or on the proper
amount of an assessment, was based on a full and accurate disclosure of all the relevant facts and
was a tenable view, so that the taxpayer could reasonably have believed that the Inspector's
decision was correct. And it follows that if the Inspector's original decision was consistent with a
view of the law and practice generally received or adopted at the time, a discovery assessment
would not be made where, for example, there is a subsequent change in that practice - e.g.
following a Court decision.
Some particular circumstances where discovery assessments will be made
15.
The application in any individual case of the general principles described in the preceding
paragraphs will, of course, depend on the particular facts and circumstances. But there are certain
specific circumstances in which there will clearly be no grounds for an Inspector not to make a
discovery assessment, i.e. where
-
profits or income have not earlier been charged to tax because of any form of fraudulent
or negligent conduct;
the Inspector has been misled or misinformed in any way about the particular matter at
issue;
there is an arithmetical error in a computation which had not been spotted at the time
agreement was reached, and which can be corrected by the making of an in date
discovery assessment;
an error is made in accounts and computations which it cannot be reasonably be alleged

was correct or intended, e.g. the double deduction from taxable profits of a particular
item (say group relief).
(1)
[1962] AC 782; [1962] 2 WLR 871; [1962] 1 A11 ER 854; 40 TC 176
(2)
[1985] AC 645; [1985] 2 WLR 668; [1985] 2 A11 ER 375; [1985] STC 218; 58 TC
592.
SP9/91
Investigation settlements: Retirement annuities and personal pension relief
1.
When an assessment to tax becomes final and conclusive more than six years after the
end of the year to which it relates, Sections 625(3) and 642(4) ICTA 1988 provide special rules
for taking account of any unused personal pension or retirement annuity relief arising from the
assessment. In particular the taxpayer may pay contributions to utilise that relief and elect that
the relief shall be allowed for the year of assessment in which the contributions are paid. These
must be in addition to the normal maximum for that year under either Section 619(2) (for
retirement annuities) or Section 640 (for personal pensions). Both the payment of the
contributions and the making of the election must take place within 6 months of the assessment
becoming final.
2.
Where incorrect returns and accounts are found to have been submitted, offers in
settlement of liability to tax, interest and penalties are often accepted by the Commissioners for
Her Majestys Revenue and Customs without assessment of all the tax. In such an investigation
settlement the absence of assessments means that the conditions for obtaining unused relief under
either Section 625(3) or Section 642(4) are not satisfied.
3.
Nevertheless, where a settlement is reached in circumstances where:
assessments which would have given rise to unused relief are not made; or
assessments have been made and appealed against but not formally determined, and the
tax for the years of assessment concerned is included in the settlement;
claims under Section 625(3) or Section 642(4) will be accepted if:

a.
the settlement includes tax on relevant earnings for a year of assessment which ended
more than six years before the date of the letter accepting the offer and which, if assessed,
would give rise to unused relief; and
b.
within six months of the date of the letter accepting the offer the taxpayer both
i.
pays a qualifying contribution or premium to cover all or part of the unused

relief, and
ii.
makes a formal election under either Section 625(3)(b) or Section 642(4)(b).
4.
It should be noted that unused relief carried forward can only be utilised by the payment
of contributions or premiums in excess of the maximum applying under whichever is applicable
of Section 619 or Section 640. It is only this excess that must be paid within the 6 months period
referred to in paragraph 3(b). Contributions or premiums up to the normal limits for the year of
assessment may be paid within the normal time span for Sections 619, 639 and 641.
SP10/91
Corporation Tax: Major change in the nature or conduct of a trade or business
1.
This statement explains the basis on which HM Revenue and Customs interpret the term
`a major change in the nature or conduct of a trade' (or, as appropriate, `business') for various
corporation tax purposes.
2.
The term is relevant in the following provisions:
Section 245 ICTA 1988, which prevents advance corporation tax paid in respect of distributions
made, or deemed to be made, in an accounting period before a change of ownership from being
carried forward to set against a corporation tax liability in an accounting period after a change of
ownership, or carried back from an accounting period after the change of ownership to be set
against a corporation tax liability of an accounting period before the change of ownership, when
in any period of three years there is a change in the ownership of a company and a major change
in the nature or conduct of a trade or business carried on by the company.
Section 245A ICTA 1988, which prevents advance corporation tax surrendered to a subsidiary
company under Section 240 from being carried forward from an accounting period before the
change of ownership to set against the corporation tax liability in an accounting period after the
change of ownership when in a period of six years beginning three years before the change in the
ownership there is a change in the ownership of the subsidiary company and a major change in
the nature or conduct of a trade or business carried on by the surrendering company.
Section 767A ICTA 1988, which prevents the use of company purchase schemes to avoid
payment of corporation tax, by enabling HM Revenue and Customs to collect any unpaid tax
from the persons who previously controlled the company, or from companies under the control of
such persons. It applies in certain circumstances where there is a change of ownership of a
company and there is a major change in the nature or conduct of a trade or business of the
company during the period of six years beginning three years before the change in ownership.
Section 768 ICTA 1988, which prevents a trading loss incurred in an accounting period before the
change of ownership from being carried forward to set against trading income of an accounting
period after the change of ownership when in any period of three years there is a change in the
ownership of a company and a major change in the nature or conduct of a trade carried on by the
company.
Section 768A ICTA 1988, which prevents a trading loss incurred in an accounting period after the
change of ownership from being carried back to set against profits of an accounting period before
the change of ownership when in any period of three years there is a change in the ownership of a
company and a major change in the nature or conduct of a trade carried on by the company.
Section 768B ICTA 1988, which prevents excess management expenses or certain interest
whether otherwise allowable as a charge or as a Case III debit from a period before the change of
ownership from being deducted in computing the corporation tax profits of a period after the
change of ownership, when in a period of six years beginning three years before the change in the
ownership there is a major change in the nature or conduct of the business of the company.
Schedule 7A TCGA 1992, which restricts the set-off of pre-entry capital losses brought by a
company into a group. Paragraph 7 Schedule 7A specifies the gains from which pre-entry losses
are deductible and includes special rules for trades. Paragraph 8 Schedule 7A disregards the
existence of a trade in relation to the period before a company joins a group if, within 3 years
before or after that event, there is a major change in the nature or conduct of the trade.
The rules for ascertaining whether there has been a change in the ownership of a company for the
purposes of Sections 245, 245A, 767A, 768, 768A and 768B are in Section 769. The rules for
determining whether a company is a member of a group are in Section 170 TCGA 1992. These
rules apply for the purposes of Schedule 7A subject to certain modifications contained within
Schedule 7A itself.
3.
Section 768 (4) sets out some of the circumstances which may amount to a major change
in the nature or conduct of a trade for the purposes of Sections 768 and 768A.
Section 245 (4) sets out some of the circumstances which may amount to a major change
in the nature or conduct of a trade or business for the purposes of Sections 245, 245A and
767A.
Section 768B (3) sets out one of the circumstances which may amount to a major change
in the nature or conduct of a business for the purposes of Section 768B.
Paragraph 8 (2) Schedule 7A TCGA 1992 sets out some of the circumstances which may
amount to a major change in the nature or conduct of a trade for the purposes of Schedule
7A.
HM Revenue and Customs will have regard to any of the circumstances specified in the relevant
subsection, such as a major change in services or facilities provided in the trade, or a major
change in customers of the trade or a change in the nature of the investments held. HM Revenue
and Customs will also have regard, if appropriate, to changes in other factors, such as the location
of the company's business premises, the identity of the company's suppliers, management, or
staff, the company's methods of manufacture, or the company's pricing or purchasing policies to
the extent that these factors indicate that a major change has occurred.
4.
In considering whether there has been a major change in the nature or conduct of a trade
or business, HM Revenue and Customs will have regard to a comparison of the conditions
applying at any two points in the three years which includes the date of the change of ownership
of the company or, for the purpose of Section 245A, Section 767A and Section 768B, at any two
points in the period of six years beginning three years before the change of ownership. It will not
matter whether the change occurs at a particular point in time or is the result of a gradual process.
The gradual process may itself have begun before the beginning of the appropriate three (or six)
year period.
5.
All of the relevant factors will be evaluated as a whole although, on occasion, a change in
one factor may be decisive.
6.
In the light of the judgement in the Court of Appeal (Northern Ireland) in the case of
Willis v Peeters Picture Frames Ltd (56TC436) and the comments on that case in the High Court
judgement in Purchase v Tesco Stores Ltd (58TC46), HM Revenue and Customs will have regard
to both qualitative issues (such as whether something is or is not a change) and to quantitative
issues (such as whether or not a change is a major change). To be a major change, the change
must be more than significant (Gibson LJ in Willis v Peeters Picture Frames Ltd) though it does
not necessarily have to be fundamental (Warner J in Purchase v Tesco Stores Ltd).
7.
HM Revenue and Customs will not regard a major change in the nature or conduct of a
trade as having occurred when all that happens is that a company makes changes to increase its
efficiency, or makes changes which are needed to keep pace with the developing technology in
the industry concerned or with developing management techniques.
8.
Similarly, HM Revenue and Customs will not regard a major change in the nature or
conduct of a trade as having occurred when all that happens is that a company rationalises its
product range by withdrawing unprofitable items and, possibly, replacing them with new items of
a kind related to those already being produced.
9.
For some tax purposes, where part of a trade is transferred by one company to another in
the same ownership, the different parts are treated as separate trades. This occurs in the rules for
certain company reconstructions in Section 343 (8). For the purposes of Sections 768 and 768A
only, where a transfer of part of a trade falls within Section 343 the transfer will not, by itself, be
regarded as a major change in the nature or conduct of either the part-trade transferred or the parttrade retained by the transferring company, where it is relevant to consider either part separately.
Instead, the trade of each company after the transfer (or, if appropriate, the relevant part of a
combined trade) will be compared with the equivalent part of the combined trade before the
transfer. This will apply whether the transfer occurs before or after the relevant change in the
ownership. Where the transfer occurs after the change in the ownership, however, it may be
necessary to consider whether it involves a major change in the nature or conduct of the
undivided trade, as it subsisted at the date of the change in the ownership. In such cases it may be
appropriate to regard the transfer as constituting a major change, depending on the surrounding
circumstances. In practice, however, HM Revenue and Customs would not contend that the
transfer constituted a major change if there was no other major change in either the original trade,
or the parts into which it became divided, within the relevant three year period. The transfer of
the whole or part of a trade or business may, however, constitute a major change for the purposes
of Sections 245, 245A, 767A and 768B ICTA and Schedule 7A TCGA 1992.
10.
Though the courts have made it clear that each case should be looked at in the light of all
its facts, the following may assist in showing where HM Revenue and Customs regard the
borderline falling in particular circumstances:
EXAMPLES WHERE A CHANGE WOULD NOT OF ITSELF BE REGARDED AS A
MAJOR CHANGE
a)
A company manufacturing kitchen fitments in three obsolescent factories moves

production to one new factory (increasing efficiency).
b)
A company manufacturing kitchen utensils replaces enamel by plastic, or a company

manufacturing time pieces replaces mechanical by electronic components (keeping pace
with developing technology).
A company operating a dealership in one make of car switches to operating a dealership
in another make of car satisfying the same market (not a major change in the type of
property dealt in).
c)
d)
A company manufacturing both filament and fluorescent lamps (of which filament lamps
form the greater part of the output) concentrates solely on filament lamps (a
rationalisation of product range without a major change in the type of property dealt in).
e)
A company whose business consists of making and holding investments in UK quoted

shares and securities makes changes to its portfolio of quoted shares and securities (not a
change in the nature of investments held).
EXAMPLES WHERE A MAJOR CHANGE WOULD BE REGARDED AS OCCURRING

f)
A company operating a dealership in saloon cars switches to operating a dealership in

tractors (a major change in the type of property dealt in).
g)
A company owning a public house switches to operating a discotheque in the same, but
converted, premises (a major change in the services or facilities provided).
h)
A company fattening pigs for their owners switches to buying pigs for fattening and
resale (a major change in the nature of the trade, being a change from providing a service
to being a primary producer).
i)
A company switches from investing in quoted shares to investing in real property for rent
(a change in the nature of investments held).
SP11/91
Stamp Duty and VAT: Interaction
1.
This Statement is a revised version of the Statement about stamp duty and VAT issued on
22 July 1991, SP6/91, and replaces it.
Introduction
2.
To comply with a judgement of the European Court of Justice in June 1988, standard rate
UK VAT has been applied to non-residential construction with effect from 1 April 1989 (Section
18 Finance Act 1989). VAT is compulsory on sales of buildings treated as new for this purpose,
which are mainly buildings under three years old that have been completed after March 1989.
And owners of non-residential property were given the option from 1 August 1989 of charging
VAT on sales of old buildings and on leases.
3.
These new charges have prompted a number of enquiries about the relationship between
stamp duty and VAT where both taxes arise on a sale or lease of commercial property or,
occasionally, other assets.
Sales of new non-domestic buildings
4.
The Commissioners for Her Majestys Revenue and Customs are advised that for stamp
duty purposes the amount or value of the consideration for a sale is the gross amount inclusive of
VAT. Therefore where VAT is payable on the sale of new non-residential property, stamp duty is
calculated on the VAT-inclusive consideration.
Other non-domestic transactions
5.
Transactions in non-residential property other than sales of new buildings are exempt
from VAT. These include:
-
sales of old buildings;
the assignment of existing leases, or the creation of new leases, in old or new property.
However, the vendor or lessor can elect to waive the exemption.

6.
that:
The Commissioners for Her Majestys Revenue and Customs have received legal advice
where the election has already been exercised at the time of the transaction, stamp duty is
chargeable on the purchase price, premium or rent including VAT;
where the election has not been exercised at that time, VAT should similarly be included
in any payments to which an election could still apply (which will depend on the facts of
each case).
7.
The Commissioners for Her Majestys Revenue and Customs propose to follow this
advice, which will result in a change of practice: in the past, the Stamp Office did not seek to
include the VAT element in the stamp duty charge in cases where an election to waive the
exemption from VAT had not yet been exercised. The new practice applies to documents
executed on or after 1 August 1991.
8.
Neither a formal notice of election made to HM Customs and Excise, nor any notification
to the purchaser or lessee that such an election has been made, will attract stamp duty.
Rent
9.
Where VAT is charged on the rent under a lease, and is itself treated as rent under the
lease, stamp duty at the appropriate rate according to the length of the term will be charged on the
VAT-inclusive figure. If the lease provides for payment of VAT on the rent otherwise than as
rent, duty will be charged on the VAT element as consideration payable periodically (Section 56
Stamp Act 1891). In either case the rate of VAT in force at the date of execution of the lease will
be used in the calculation.
10.
In the case of a formal Deed of Variation or similar document varying the terms of the
original lease so as to provide for payment of VAT by way of additional rent, further stamp duty
may be payable (Section 77(5) Stamp Act 1891).
Agreements for leases
11.
Paragraphs 5 to 10 above also apply to an agreement for lease if that is the instrument to
be stamped (Section 75 Stamp Act 1891).
Procedure
12.
Applicants for stamping are requested to make clear, either in the conveyance or lease
document itself, or in a covering letter to the Stamp Office, whether the property is commercial or
residential.
13.
Deeds of Variation etc (paragraph 10 above) should be presented for adjudication
together with a copy of the original lease.
No VAT on Stamp Duty
14.
It is sometimes suggested that stamp duty might itself attract a charge to VAT. This is
not the case. The value for VAT depends on the amount (consideration) obtained by the supplier
from the purchaser, less the included VAT itself. Stamp duty is paid by the purchaser/lessee of
property direct to HM Revenue and Customs and not to the supplier; it does not therefore form
part of the consideration for VAT purposes.
SP12/91
Income Tax: In the ordinary course of banking business
SP13/91
Ex-gratia awards made on termination of an office or employment by retirement

or death
1.
An ex-gratia payment made on or in connection with an employee's death or retirement
from an office or employment is a relevant benefit as defined in Section 612 ICTA 1988. (But
this term does not include payments made solely because of death or disablement by accident or
severance payments on redundancy or loss of office).
2.
An ex-gratia payment is made under a retirement benefits scheme if the decision to make
the payment involves an arrangement. Self evidently, there will be an arrangement if the
payment flows from any prior formal or informal understanding with the employee. But the term
arrangement in this context goes wider and includes any system, plan, pattern or policy
connected with the payment of a gratuity. Some examples are:
a.
a decision at a meeting to make an ex-gratia payment on an employee's retirement; or
b.
where, say, a personnel manager makes an ex-gratia payment under a delegated authority
or on the basis of some outline structure or policy; or
c.
where it is common practice for an employer to make an ex-gratia payment to a particular

class of employee.
3.
There may be some exceptional situations where a gratuity is not paid under an
arrangement. The position in individual cases can be determined only on their facts. If an
employer is unsure whether a gratuity is paid under an arrangement advice may be sought from
the IR Savings Pensions Shares Schemes Office at Yorke House, PO Box 62, Castle Meadow
Road, Nottingham, NG2 1BG. Any such request should give full details of the circumstances in
which the gratuity is to be paid.
4.
The following paragraphs explain the tax treatment of these ex-gratia arrangements. All
statutory references are to the ICTA 1988 unless otherwise stated.
Pensions
5.
An ex-gratia pension to an employee or the employee's spouse or dependent will be
chargeable to income tax as taxable pension income under Part 9 of the Income Tax (Earnings &
Pensions) Act 2003 whether or not paid under a tax approved scheme.
Lump sums
6.
Lump sum relevant benefits are not taxable when paid under an approved scheme. In the
past, approval has been given only to contractual schemes. But approval may now be given to
certain ex-gratia lump sum payments in the circumstances described in paragraph 7; or payments
may be treated as from an approved scheme where paragraph 8 applies.
7.
An employer may apply for tax approval of an arrangement to pay an ex-gratia lump sum
relevant benefit. In order to qualify for approval, the payment must:
a.
be the only lump sum relevant benefit potentially payable in respect of the employment;
in other words the employee should not be a member of either of the following i.
a retirement benefits scheme that is either approved or is being considered for

approval, or
ii.
a Relevant Statutory Scheme (as defined in Section 611A),
unless the payment is made on retirement and the scheme provides benefits only on death
in service; and
b.
satisfy the normal requirements for tax approval of a retirement benefits scheme (which
are described in the booklet Practice Notes on Approval of Occupational Pension
Schemes (IR 12)). These include a limit on the amount of lump sum payable. On
retirement, for example, the limit is 3/80ths of final salary for each year of service with
an employer (up to 40 years), while on death it is normally two times salary, though it
can be as high as four times salary.
Details on how to apply for approval may be obtained from IR Savings Pensions Shares Schemes
in Nottingham (address at paragraph 3 above). Where a payment is made before confirmation of
approval is received the employer should deduct tax in accordance with the PAYE system. If and
when approval is granted the employee will be able to claim repayment of the tax deducted.
8.
In addition, HM Revenue and Customs will accept that an arrangement to pay a single
ex-gratia lump sum relevant benefit to a particular employee need not be submitted for approval
where:
a.
the condition at paragraph 7a above is satisfied; and
b.
the total of all lump sum payments from all associated employers (as defined in
Section 590A(3)) made in connection with the retirement or death does not exceed onetwelfth of the earnings cap prescribed under Section 590C for the year of assessment in
which the payments are made. For the year ended 5 April 2005, the limit is 8500.
In these cases the payments will be treated as from an approved retirement benefits scheme.
They will therefore not be chargeable to income tax and so need not be reported by an employer
to its tax office.
9.
An ex-gratia lump sum relevant benefit not falling within paragraphs 7 or 8 above, will
constitute a non-approved retirement benefits scheme. It will be charged to tax as employment
income under Section 394 of the Income Tax (Earnings and Pension) Act 2003 on the recipient
for the year of assessment in which the benefit is received. When making such payments an
employer should deduct tax in accordance with the PAYE system.
Payments for redundancy or termination of employment caused by accident
10.
An ex-gratia payment made to an employee on severance of an employment due to
redundancy or loss of office, or because of death or disability due to an accident, is not affected
by this Statement of Practice where the arrangements for making the payment are designed solely
to meet such a situation. Nor will the tax treatment of any such payment be affected by the
payment of early retirement benefits under other arrangements (such as the employer's approved
pension scheme). The taxation of such lump sum payments is not therefore affected by this
Statement of Practice. In particular, genuine redundancy payments within the terms of Statement
of Practice 1/94 will be taxed under Section 403 Income Tax (Earnings and Pensions) Act 2003
(subject to the exemption in section 403(1)).
SP14/91
Tax treatment of transactions in financial futures and options Superseded by

SP3/02
SP15/91
SP1/01
Treatment of investment managers and their overseas clients replaced by
SP16/91
Accountancy expenses arising out of accounts investigations
It is the practice to allow, in computing profits assessable under Case I and II of Schedule D, the
normal accountancy expenses incurred in preparing accounts and agreeing taxation liabilities.
Additional accountancy expenses arising out of an investigation of a particular year's accounts
will not be allowed where the investigation reveals discrepancies and additional liabilities for
earlier years, or a settlement involving only one year includes interest or interest and penalties.
Where, however, the investigation results in no addition to profits, or an adjustment to profits for
the year of review only without a charge to interest or interest and penalties, the additional
accountancy expenses will normally be allowed.
SP17/91
Residence in the UK: When ordinary residence is regarded as commencing

where the period to be spent here is less than three years withdrawn with effect
from 6 April 2009
SP18/91
Foreign earnings deduction
SP1/92
Directors' and employees' emoluments: Extension of time limits for relief on

transition to receipts basis of assessment
SP2/92
Transactions within Section 765A ICTA 1988: Movements of capital between

residents of EC member states
Background
1.
Article 67 of the Treaty establishing the European Economic Community provides, inter
alia, that Member States shall progressively abolish between themselves all restrictions on the
movement of capital belonging to persons resident in Member States. This provision is
implemented by the Directive of the Council of the European Communities No 88/361/EEC of 24
June 1988. Article 1 of the Directive requires Member States to abolish restrictions on
movements of capital taking place between persons resident in Member States.
2.
As a consequence, the provision of Section 765 ICTA 1988, which make certain
transactions unlawful if they are carried out without Treasury consent, have been disapplied by
Section 765A(1) ICTA 1988 so that as from 1 July 1990, the date from which the Directive took
effect, a UK resident body corporate no longer requires Treasury consent before carrying out a
transaction which is a movement of capital to which Article 1 of the Directive applies. However,
Section 765A(2) requires the body corporate to provide HM Revenue and Customs with
information on certain of the transactions within six months of carrying them out.
Purpose of this Statement
3.
Paragraphs 5-23 of this statement seek to explain the views of the Treasury and HM
Revenue and Customs where there may be doubt as to whether a transaction is a movement of
capital to which Article 1 of the Directive applies. Their purpose is to assist UK resident bodies
corporate in deciding whether they should seek Treasury consent for a transaction or report it to
HM Revenue and Customs. However, it is the responsibility of the UK resident body corporate
which considers that a transaction which it has carried out (or proposes to carry out) is one
liberalised by the Directive to justify that view.
4.
Paragraphs 24-26 give guidance on procedure to bodies corporate making a report under
Section 765A(2) in accordance with the Regulations made under the Section.
The Channel Islands, Isle of Man and Gibraltar
5.
The provisions of the Directive do not apply to movements of capital between residents
of Member States and residents of the Channel Islands and the Isle of Man. But by virtue of
Article 227(4) of the Treaty establishing the EEC, that Treaty applies to Gibraltar, subject to the
exceptions mentioned in Article 28 of the Act of Accession of Denmark, Ireland and the United
Kingdom. It follows that the Directive is as fully applicable to Gibraltar as to any other
Community Territory. However, Gibraltar is not itself a Member State being regarded for the
purposes of Community Law as part of the territory of the United Kingdom. It follows that,
while transactions which are movements of capital between residents of Gibraltar and residents of
other Member States are within Section 765A rather than Section 765, movements of capital
between residents of Gibraltar and residents of the United Kingdom are wholly internal to the
United Kingdom and are still governed by Section 765.
Difference between general and special consent transactions
6.
Section 765 has ceased to apply to all transactions which are movements of capital within
Article 1 of the Directive. But a body corporate has to report to HM Revenue and Customs only
those transactions for which it would need to apply to the Treasury for special consent if they
were not movements of capital within the Directive. A transaction which would be covered by a
general consent if it were not a movement of capital within the Directive would be lawful when
carried out even if the Directive did not apply to it and so should not be reported under Section
765A(2).
Movements of capital
7.
The Nomenclature in Annex 1 to the Directive lists a wide range of operations which are
within the Directive. These include all the operations necessary for the purpose of capital
movements: conclusion and performance of the transaction and related transfers but the list is not
exhaustive: the Directive makes clear that it is looking to the principle of full liberalisation of
capital movements. The Treasury and HM Revenue and Customs have been advised that all
issues and transfers of shares and debentures within subsection (1) of Section 765 which take
place between residents of Member States may be considered movements of capital within the
Directive subject to the reservation in paragraphs 8-9.
8.
Section 1 of the Nomenclature is concerned with direct investment. The explanatory
notes define direct investment generally as investments of all kinds by natural persons or
commercial, industrial or financial undertakings, and which serve to establish or to maintain
lasting and direct links between the person providing the capital and the entrepreneur to whom or
the undertaking to which the capital is made available in order to carry on an economic activity.
The expression with a view to establishing or maintaining lasting economic links is also used in
the description of certain operations listed in Part 1. In the view of the Treasury and Inland
Revenue, it can be inferred that a transaction otherwise falling within the description of direct
investment which is not carried out with a view to establishing or maintaining such links is not a
movement of capital to which the Directive applies.
9.
The Treasury and Inland Revenue recognise that transactions of a direct investment type
with companies resident in Member States will normally be carried out with a view to
establishing or maintaining lasting economic links with those companies. But that may not
always be so and the treatment of particular cases will depend on their facts. Where, for example,
a company is used as nothing more than a conduit the transaction is unlikely to be carried out
with a view to establishing or maintaining such links with that company. This may be the case
where a subsidiary resident in another Member State issues a debenture to its United Kingdom
resident parent for a sum which is immediately loaned back to the parent or another member of
the United Kingdom group.
Issues and transfers of shares and debentures between residents of member states
10.
A transaction is excluded from Section 765 by Section 765A only if it is a movement of
capital between residents of Member States. Thus, for example, a parent company which is a
resident of the UK may hold directly all the shares in a company which is a resident of the
Netherlands and all the shares in a US company which is not a resident of a Member State. If the
parent company transfers its shares in the Netherlands company to the US company that
transaction will require Treasury consent because the transfer is not between residents of Member
States. But if the parent company transfers its shares in the US company to the Netherlands
company that transfer is between residents of Member States and is within Section 765A and so
excluded from Section 765.
11.
Similarly, a subsidiary company which is a non-resident body corporate within Section
765(1)(c) and a resident of a Member State may issue shares at the same time to persons who are
not so resident. The former issue is a movement of capital between residents of Member States
and excluded from Section 765. But the latter issue is still within Section 765 and Treasury
consent will be required.
12.
Article 67 and consequently Council Directive 88/361/EEC relate to restrictions which
apply as between Member States. They have no application to movements of capital and
restrictions which are wholly internal to a single Member State. For example, a company which
is a resident of the UK holds all the shares in a US company which is not a resident of Member
State. If the UK company transfers the shares to another company which is a resident of the UK
that is not a capital movement which is within the terms of the Directive. The transaction will
require Treasury consent. (Such transfers will often be within the terms of the General Consents).
13.
A transaction for which a UK resident company requires consent under Section 765
unless Section 765A applies may be a movement of capital between persons resident in the same
Member State other than the United Kingdom. The Treasury and HM Revenue and Customs
regard that transaction as not being wholly internal to a single Member State and therefore within
Section 765A because the body corporate requiring consent is resident in the United Kingdom
which is a different Member State. (Such transactions if consent under Section 765 were required
would often be within the terms of the General Consents).
Residents of member states within the meaning of the Directive
14.
The explanatory notes to the Directive give to Residents or non-residents the meaning
of Natural and legal persons according to the definitions laid down in the exchange control
regulations in force in each Member State. Natural or legal persons are as defined by the
national rules. In most cases, the territory where a company or natural person is resident will be
self-evident.
15.
Some Member States still have exchange control regulations in force although that may
not always be so. Others, including the United Kingdom, have no such regulations. In the view
of the Treasury and HM Revenue and Customs this cannot mean that Section 765A and, still less,
the Directive will be ineffective. But it does introduce an element of uncertainty into the
application of the Directive to transactions within Section 765. Paragraphs 16-23 explain the
approach of the Treasury and HM Revenue and Customs to the question of residence for the
purposes of determining whether a movement of capital is between residents of different Member
States so that Section 765A applies or whether the movement of capital is wholly within the
United Kingdom or across the external frontier of the Community so that it is still within Section
765.
The UK resident body corporate in Section 765
16.
Since the main effect of the Directive in the United Kingdom is to render unlawful the
restrictions which are placed by Section 765 on bodies corporate which are resident in the United
Kingdom entering into transactions which are capital movements between Member States, it is
logical to regard bodies corporate which are resident in the UK for the purposes of that Section as
being residents of the United Kingdom within the meaning of the Directive. Consequently a body
corporate will be considered to be a resident for the purposes of the Directive if it is resident in
the United Kingdom for tax purposes. However, the persons from which those restrictions are
lifted by the Directive are not the only persons whose residence has to be ascertained in order to
discover the scope of the Directive.
Other persons resident in member states
17.
Exchange control regulations
So long as there are exchange control regulations in force in a Member State, they will determine
residence or non-residence in that State for the purposes of the Directive. As the position of
Member States on exchange control at the time this Statement was prepared was in the process of
change, it is not possible to indicate in this Statement which States retain regulations.
18.
The Relevance of Tax Residence
If there are no exchange control regulations, the Treasury and Inland Revenue will usually regard
a person as a resident in a Member State (including the United Kingdom) if that person is resident
in that State for its tax purposes. But there may be circumstances in which tax residence is too
restrictive a criterion to determine whether a transaction is a movement of capital to which the
Directive applies.
19.
Economic Activities
A person who is not a tax resident in a Member State may have a presence in a Member State for
the purpose of a continuing economic activity there. A company may have a branch in a Member
State (see paragraph 20). Or an individual may have moved to a Member State with the intention
of remaining there to carry on business but may not yet be resident for tax purposes. If a
movement of capital is part of that economic activity it would be regarded as made to or by a
person resident in that State for the purpose of determining whether a transaction is within
Section 765A.
20.
Branches in member states
As paragraph 19 suggests, a transaction carried out by a branch in a Member State may be
regarded as a transaction by a person resident in that State. For example, a UK company holds all
the shares in a US company which is not a resident of a Member State and all the shares in a
French company which is a resident of a Member State. The US company has a branch in the UK
and lends money to the French company which issues a debenture. The loan is made by the UK
branch of the US company. Normally a transaction between the US company and the French
company would not be within the Directive. But the UK branch can be treated as a resident of the
UK for the purposes of the Directive and the transaction is therefore within Section 765A and
Treasury consent is not required. Whether or not a transaction is carried out by a branch will be a
question of fact.
21.
Branches not in member states
There may be a movement of capital to or from a branch not in a Member State of a company
which is resident in a Member State. The Treasury and Inland Revenue will regard that as a
movement of capital by or to a person resident in the Member State unless Exchange Control
Regulations in the State in which the company is resident treat branches outside the State as nonresident.
22.
Resident of Gibraltar
Although Gibraltar is not a Member State (See 5 above) it will be necessary under some
circumstances to decide if a person is a resident of Gibraltar. In relation to transactions with a
Member State other than the UK a company will be considered to be resident in Gibraltar if it is
liable to tax on income by reason of residence, domicile, place of management or other criterion
of a similar nature or the transaction is carried out by the Gibraltar branch of a company which is
not otherwise resident in Gibraltar. Whether the transaction is carried out by the Gibraltar branch
will be a question of fact. An individual will be resident in Gibraltar for these limited purposes if
he or she is resident in Gibraltar for the purposes of Gibraltar tax.
23.
Information on residence
The Movements of Capital (Required Information) Regulations 1990 (SI 1671) require the
resident body corporate to state, where relevant, the grounds on which a person is claimed to be
resident in a Member State for the purposes of the Directive. A company which owes its status as
a body corporate to the laws of a Member State and has its main place of business there will
usually be a resident of that State for both exchange control (if any) and tax purposes, as will
individuals who have their usual place of residence there. The Treasury and Inland Revenue will
normally accept a presumption that such a company or individual is a resident of that State for the
purposes of the Directive.
Procedure for providing information under Section 765A(2) ICTA 1988
24.
The nature and extent of the information to be reported under Section 765A(2) are laid
down in the Movements of Capital (Required Information) Regulations 1990 (SI 1671). Copies
of the regulations are available from Her Majesty's Stationery Office. The information should be
given in a letter addressed to
CT&

VAT
100, Parliament Street
London SW1A 2BQ
It would be helpful if an additional copy of the letter could be supplied.

25.
Provided all the information required by the Regulations is covered, the letter need not be
in any particular form. But it will usually be helpful if it follows broadly the order in which the
information is requested in the Regulations.
26.
Section 765A requires a transaction to be reported after it has taken place. It may be part
of a series of transactions for one or more of which the company making the report has obtained
Treasury consent under Section 765. If in that case part or all of the information required by the
Regulations has been given to the Treasury or to the Revenue in connection with the application
for consent, it is necessary only to identify in the report under Section 765A(2)(a) the relevant
letters in which the information was given.
SP3/92
Double taxation relief: Status of UK/USSR convention for the avoidance of

double taxation Superseded by SP4/01
SP4/92
Capital Gains Tax: Rebasing elections
1.
Section 35(6) TCGA 1992 (Section 96(6) FA 1988) provides that an election under
Section 35(5) (Section 96(5)) should be made within two years of the end of the year of
assessment or accounting period in which the first relevant disposal is made, or such longer
period as the Commissioners for Her Majestys Revenue and Customs may allow.
2.
The Board will always exercise their discretion to extend the time limit to at least the date
on which the statutory time limit would expire if disposals of a certain kind did not count as a
first relevant disposal of either
(i)
an asset held at 31 March 1982; and
(ii)
an asset treated by paragraph 1 Schedule 3, TCGA 1992 (paragraph 1 Schedule 8 Finance

Act 1988) as having been held at that date.
3.
There are three kinds of disposals in relation to which the Commissioners for Her
Majestys Revenue and Customs will exercise their discretion in this way.
4.
First, those on which the gain would not be a chargeable gain by virtue of a particular
statutory provision. Such disposals can be left out of account in deciding when to make an
election.
5.
The main examples of these provisions are in the annex attached to this Statement of
Practice.
6.
Second, those disposals which in practice do not give rise to a chargeable gain or
allowable loss. The main examples of such disposals are:
Building Society accounts
Withdrawals from Building Society accounts on which no chargeable gain or allowable
loss arises.
Private residences
The disposal by an individual of his or her dwelling house where the whole of any gain
would qualify for relief under Section 223(1) TCGA 1992 (Section 102(1) CGTA 1979.)
No gain/no loss transfers
Transfers which give rise to neither a chargeable gain nor an allowable loss by virtue of
the operation of statutory no gain/no loss provisions listed at Section 35(3)(d) TCGA
1992 (paragraph 1(3), Schedule 8, Finance Act 1988). These included gifts to charities
and transfers between spouses.
7.
Third, those disposals in respect of which a Section 35(5) (Section 96(5)) election cannot
be made. These are specified in paragraph 7, Schedule 3 TCGA 1992 (formerly paragraph 12
Schedule 8 FA 88) and are, in general terms, disposals of:
(i)
Plant and machinery
or
(ii)
Assets used in connection with a trade of working mineral deposits
but in either case only if capital allowances were or could have been given.
or
(iii) Oil
licences
or
(iv)
Shares deriving their value from oil exploration or exploitation
In each case, a rebasing election cannot apply to such disposals, but they will nevertheless count
strictly as first relevant disposals. Consequently, in all cases the Commissioners for Her
Majestys Revenue and Customs will exercise their discretion to extend the time limit to at least
the date on which the statutory time limit would expire if such disposals did not count as a first
relevant disposal.
Persons becoming resident in the UK after 6 April 1988
8.
A person who is non UK resident on 6 April 1988 may make a disposal which will count
as a first relevant disposal between then and the date on which they first become UK resident.
The Commissioners for Her Majestys Revenue and Customs will generally give sympathetic
consideration to extending the time limit to the end of the second year of assessment or, in the
case of companies, accounting period after the year in which the first disposal is made after
taking up UK residence. The extension will not normally be available where the taxpayer has
disposed of an asset, held on 31 March 1982, within Section 10 TCGA 1992 (Section 12 CGTA
1979 and Section 11 ICTA 1988) in the period between 6 April 1988 and the date of becoming
UK resident.
Other situations in which the statutory time limit may be extended
9.
There are a variety of other circumstances in which the Commissioners for Her Majestys
Revenue and Customs may exercise their discretion to extend the statutory time limit. In all cases
an extension will depend on the particular facts and circumstances of each individual case.
What may be regarded as a first relevant disposal?
10.
There are also some circumstances where it may help to clarify what is regarded as a first
relevant disposal:
(i)
Capacity in which person makes an election under Section 35(5)

Where a person makes an election under Section 35(5) in relation to assets held in one
capacity the election does not apply to assets held in another capacity. This is because of
the provisions of Section 35(7). For this purpose a person may hold assets in several
capacities as, for example, an individual, trustee, partner or member of a European
Economic Interest Grouping. It follows that there will be a first relevant disposal and a
separate time limit for making an election for each holding of assets which a person holds
in different capacities.
Individuals who hold assets in different capacities should indicate at the time they make
an election in what capacity it should be regarded as applying.
(ii)
Disposals of non UK assets by an individual resident but not domiciled in the UK

In the case of individuals who are resident but not domiciled in the UK a disposal of an
asset situated outside the UK may be a first relevant disposal. For Section 35(5) purposes
the date on which the proceeds are remitted to the UK is taken to be the date on which the
disposal occurs and not the date when the asset was disposed of. This means that the date
of the first relevant disposal will therefore be the date on which remittances are received
from an overseas gain after 5 April 1988 or the date of the first disposal of a UK asset,
whichever occurs first.
(iii)
Disposals by a UK resident during a period of non-residence

An individual who is UK resident on 6 April 1988 may then have a period of nonresidence before resuming UK residence. In these circumstances the first relevant
disposal will be treated as the first disposal after 5 April 1988 on which the individual is
chargeable to UK capital gains tax. So if, for example, a disposal was made between 6
April 1988 and the date the individual became non-resident that will be treated as the first
relevant disposal. If there was no disposal in this period the first relevant disposal will be
the first disposal after residence is resumed. Where an individual is not entitled to be
treated as resuming residence part-way through a tax year by virtue of Extra-Statutory
Concession ESC D2, the first disposal will be the first made in the year in which
residence is resumed.
11.
This Statement of Practice provides an indication of the main circumstances where, and
the extent to which, The Commissioners for Her Majestys Revenue and Customs will or may
exercise their discretion under Section 35(6)(b) TCGA 1992. It is not intended to be an
exhaustive list of disposals where, having regard to the individual facts and circumstances, such
discretion may be exercised.
Annex to SP4/92
Disposals on which any gain would not be a chargeable gain by virtue of specific statutory
provision are:
(i)
Private cars (Section 263 TCGA 1992) [formerly Section 130 CGTA 1979]
(ii)
Chattels, including household goods, and personal belongings, but excepting commodity
futures and foreign currency, worth less than the chattel exemption at the date of disposal
(Section 262(1) TCGA 1992) [formerly Section 128(1) CGTA 1979]
(iii)
All chattels that are wasting assets, except plant and machinery used in business (but see
also (ii) above and paragraph 7(i) of the Statement of Practice) and commodity futures
(iv)
Government non-marketable securities, including savings certificates, premium and

British Savings bonds (Section 121 TCGA 1992) [formerly Section 71 CGTA 1979]
(v)
Gilt-edged securities and qualifying corporate bonds, except those received in exchange
for shares or other securities (Section 115 TCGA 1992) [formerly Section 67 CGTA
1979]
(vi)
Life assurance policies and deferred annuity contracts unless purchased from a third party
(vii)
Foreign currency acquired to meet personal or family expenditure abroad (Section 269
TCGA 1992) [formerly Section 133 CGTA 1979]
(viii)
Rights to compensation or damages for any wrong or injury suffered by an individual in

his person, profession or vocation (Section 51(2) TCGA 1992) [formerly Section 19(5)
CGTA 1979]
(ix)
Debts, other than debts on a security, held by the original creditor, his personal
representative or legatee (Section 251(1) TCGA 1992) [formerly Section 134(1) CGTA
1979]
(x)
Business expansion scheme shares in respect of which relief has been given and not
withdrawn (Section 150(2) TCGA 1992) [formerly Section 149C(2) CGTA 1979]
(xi)
Shares held as part of a personal equity plan investment (Regulation 1 SI 1989 No 469, as
amended)
(xii)
Gifts of eligible property, including works of art, for the benefit of the public (Section
258(1) and (2) TCGA 1992) [formerly Section 147(1) and (2) CGTA 1979]
(xiii)
Decorations for valour or gallantry (Section 268 TCGA 1992) [formerly Section 131
CGTA 1979]
(xiv)
Rights to or any part of an allowance, annuity or capital sum from a superannuation fund
or any other annuity (except under a deferred annual policy) or annual payments
receivable under a covenant which is not secured on property (Section 237 TCGA 1992)
[formerly Section 144 CGTA 1979]
The disposal of sterling, which is not an asset for capital gains tax purposes (Section 21(1) TCGA
1992) [formerly Section 19(1) CGTA] does not count as a first relevant disposal.
SP5/92
Non-resident trusts (See also Inland Revenue Tax Bulletin, Issues 8 and 16,
August 1993 and April 1995)
I.
Introduction
1.
Sections 83-92 and Schedules 16-18 FA 1991 introduced new rules for capital gains of
certain offshore trusts. These are now at Sections 80-98 and Schedule 5 TCGA 1992. This
Statement explains the practice HM Revenue and Customs will follow in applying the new rules
in the circumstances set out below. Statutory references are to TCGA 1992 unless indicated
otherwise.
II.
Charge on migration: Residence
2.
Under Section 69, a body of trustees is regarded as capable of changing its residence
status part-way through a year of assessment. It must be borne in mind, however, that Section
2(1) provides that the trustees are liable to tax on all chargeable gains of a tax year during any
part of which they are resident or during which they are ordinarily resident in the UK.
3.
Trustees who became not resident and not ordinarily resident in the UK between 6 April
1990 and 18 March 1991 (inclusive), and remain so until after 5 April 1991 are not liable to a
charge under Section 80, nor are they regarded as having met the condition in paragraph 9(4) of
Schedule 5 for 1990/91.
III.
Charge on migration: Past trustees' liabilities
4.
Sections 80-85 impose a capital gains tax charge on the unrealised gains of a UK trust
which ceases to be within the UK tax charge. The charge applies to a trust which migrates on or
after 19 March 1991. Where the tax which is due under this charge is not paid by the current
trustees, Section 82 enables HM Revenue and Customs to look to certain former trustees to meet
the liability. No liability can be sought from the personal representatives of a former trustee who
dies before a notice of liability has been served on him. Those who can show that there was no
proposal, at the time of their resignation, that the trustees might become not resident and not
ordinarily resident in the UK are not liable under this Section.
5.
Payment can only be sought from former trustees where the Revenue is unable to obtain
payment from current trustees. In the first instance, payment will generally be sought from those
persons who resigned as trustees immediately before the trust migrated and then from earlier
trustees. Each case will, however, need to be considered in the light of the relevant facts.
6.
An amount recovered from present trustees by a former trustee in respect of capital gains
tax under Section 82 is not regarded as a capital payment under Section 97. Further, such
amounts do not fall within the provisions of Part XV, Section 739 or Section 740, ICTA 1988 nor
are there any inheritance tax implications.
IV.
Charge on the settlor: Settlor's right to repayment from the trustees
7.
Section 86 and Schedule 5 charge settlors to capital gains tax where chargeable gains
accrue within certain offshore trusts from which the settlor, members of the settlor's immediate
family, or companies which they control, can or do benefit. This goes wider than the provisions
of Part XV, Income and Corporation Taxes Act 1988, e.g. the settlor could be chargeable on gains
realised within a trust from which his adult children could benefit even though there was no
possible benefit to the settlor, his spouse or minor children.
8.
The settlor's right, under paragraph 6 of Schedule 5, to reimbursement (or any payment in
reimbursement) of tax paid under that Schedule is not regarded as creating an interest in a trust
for the settlor under the provisions of Part XV, ICTA 1988 where the settlor, the settlor's spouse,
and any companies in which they are participators cannot otherwise benefit from the trust e.g.
where the only beneficiaries are the settlor's children. Similarly, this statutory right to, or
payment in, reimbursement is not regarded as bringing the settlor within the provisions of
Sections 677, 739 and 740 ICTA 1988, nor as a capital payment for the purposes of Section 97.
9.
Further, this statutory right is not regarded as a reservation of benefit for inheritance tax
purposes; nor is a provision in the trust deed either requiring the trustees to recognise the settlor's
right to reimbursement under paragraph 6 of Schedule 5 or to reimburse the settlor. But where a
settlor does not pursue the statutory right to reimbursement, the failure to exercise this right may
give rise to an inheritance tax claim under Section 3(3) Inheritance Tax Act 1984, in which case
the usual rules for lifetime transfers would apply.
10.
A provision written into a settlement deed requiring the trustees to recognise the settlor's
right to reimbursement under paragraph 6 of Schedule 5, or to reimburse the settlor, is not, of
itself, regarded as giving the settlor an interest in the settlement for the purposes of Schedule 5,
nor as bringing into play the provisions of Part XV, Sections 739 or 740 ICTA 1988.
V.
Charge on the settlor: certain trusts created before 17 March 1998
11.
All trusts are within the scope of Schedule 5, except for those falling within the definition
of a protected settlement in paragraph 9(10A) at 6 April 1999. A protected settlement has to
have been created before 19 March 1991. But a protected settlement will also be within the scope
of Schedule 5 where, on or after 19 March 1991, at least one of the conditions listed below is met.
Moreover, a settlor is not treated as having an interest in a trust created before 17 March 1998
under the terms of which the only defined persons (listed in paragraph 2(3)) who can benefit are
confined to the grandchildren of the settlor or of the settlors spouse etc, unless at least one of the
conditions listed below is met on or after that date.
The conditions referred to above are:
subject to certain exclusions, property or income is directly or indirectly provided for the
purposes of the trust (paragraphs 2A(2) and 9(3));
the trustees become non-resident in the UK or fall to be treated as such for the purposes
of a double taxation agreement (paragraphs 2A(4) and 9(4));
the terms of the settlement are varied to admit certain new beneficiaries (paragraphs
2A(5) and 9(5));
a benefit is enjoyed by a defined person who is not a beneficiary under the terms of the
trust (paragraphs 2A(6) and 9(6)).
[Paragraphs 1237 below only refer to paragraph 9, but the same principles will be followed in
deciding whether any of the conditions in paragraphs 2A(2)-(6) are met]
a.
Paragraph 9(3): Transactions entered into at arm's length
12.
The condition in paragraph 9(3) is not met where the property or income is provided to
the trust under a transaction entered into at arm's length - see paragraph 9(3)(a). This applies
irrespective of whether the parties to the transaction are connected persons under Section 286.
Each case depends on its own facts and circumstances but, a transaction is, in general, regarded as
being at arm's length where all the facts and circumstances of the transaction are such as might
have been expected if the parties to the transaction had been independent persons dealing at arm's
length i.e. dealing with each other in a normal commercial manner unaffected by any special
relationship between them.
13.
Solely for the purposes of paragraph 9(3)(a), a provision in the document governing the
transaction for an appropriate adjustment to the consideration where the value agreed by the
Revenue differs from the original consideration arrived at by an independent valuer and specified
in the sale document is, in general, regarded as falling within the terms of the above definition of
an arm's length transaction. The arm's length value of the transaction is to be determined in
accordance with the principles set out in paragraph 12 above. This will usually correspond to the
value for capital gains tax purposes except, for example, where Section 19 would apply.
14.
It would also be necessary for the terms of the contract to provide for compensating
interest at a commercial rate to be paid in either direction once the arm's length value is
determined. For this purpose, the official rate of interest for Section 160 ICTA 1988 purposes
will usually be regarded as equivalent to a commercial rate of interest, although a different rate
may be accepted as so equivalent if the circumstances of a particular case warrant this treatment.
15.
This practice is, however, subject to the consideration passing on sale being realistically
based, i.e. on a third party valuation by a qualified valuer, all the other terms of the transaction
being at arm's length and the compensating interest being timeously paid. The position in a
particular case depends on all the facts and circumstances.
b.
Paragraph 9(3): Close companies
16.
The condition in paragraph 9(3) may be satisfied where property or income is provided to
a company in which the trustees are participators. Where, however, the transaction is carried out
with the sole object of leaving funds within the company for the company's purposes and it can be
shown that any indirect benefit to the trust is merely incidental to that object, the transaction is
disregarded for the purposes of paragraph 9(3).
17.
Examples of transactions which may be so disregarded are
where another shareholder waives an entitlement to all or part of a dividend; or
a director restricts withdrawals of remuneration voted,
in order to assist the company's cash flow, and no payments are made, directly or indirectly, to
the trustees as a result of this. All relevant factors will be considered in determining whether it is
appropriate to apply this practice in a particular case.
c.
Paragraph 9(3): Transactions with wholly-owned companies
18.
In general, transactions between trustees and companies which they, directly or
indirectly, wholly own, or between such companies, are outside the scope of paragraph 9(3) of
Schedule 5 and are not treated as capital payments within Section 97. For this purpose, a
company is treated as directly wholly owned by the trustees where the whole of its issued share
capital is directly owned by the trustees of the settlement for the benefit of the beneficiaries of the
settlement. A company is treated as indirectly wholly owned by the trustees where the whole of
its issued share capital is directly and beneficially owned by a company which is directly wholly
owned by the trustees or it is the 100% subsidiary of such a company, or a chain of companies,
which is indirectly wholly owned by the trustees. This approach may not, however, be taken
where, on the facts of a particular case, it appears that the transaction has been entered into solely
or mainly for the purposes of obtaining a UK tax advantage.
d.
Paragraph 9(3): Loans made to settlements
i.
Loans made before 19 March 1991
19.
A fixed-period loan made, directly or indirectly, to a relevant settlement prior to 19
March 1991 on non-commercial terms, e.g. at a low or nil rate of interest is, generally, regarded
as a provision of property in pursuance of a liability incurred before 19 March 1991, provided the
loan remains outstanding on the same terms. As such, it falls within the terms of paragraph
9(3)(b) and the first condition set out in paragraph 9(3) is not met.
20.
There would, however, be a direct or indirect provision of property for the purposes of
the settlement where a fixed-period loan falls to be repaid after 18 March 1991 but repayment is
not made and so becomes a repayable on demand loan.
21.
An extra statutory concession, ESC D.41, which is being published at the same time as
this statement, sets out the position in the case of non-commercial, repayable on demand, loans
for the purposes of applying paragraph 9(3).
ii.
Loans made after 19 March 1991
22.
A loan made, directly or indirectly to a relevant settlement after 19 March 1991 on noncommercial terms, e.g. at a low or nil rate of interest is regarded as a provision of funds for the
purposes of paragraph 9(3). This is the case whether the loan is for a fixed period or repayable on
demand.
e.
Paragraph 9(3): Loans made by trustees
23.
The repayment of any loan made, directly or indirectly, to any person by the trustees is
not generally regarded as the provision of funds for the purposes of the settlement under
paragraph 9(3). This does not, however, apply where more is repaid than is due under the
original terms of the loan or, in the case of loans made after 19 March 1991, where the interest
charged under the terms of the loan exceeds a commercial rate.
f.
Paragraph 9(3): Failure to exercise rights to reimbursement
24.
Failure, by or on behalf of any relevant person, to exercise statutory rights to
reimbursement, e.g. under Part XV ICTA 1988 may be regarded as the provision of funds for the
purposes of the settlement under paragraph 9(3). The settlement could remain outside the terms
of paragraph 9(3) where the exercise of the right to reimbursement is unsuccessful, provided it
could be shown that there had been a genuine attempt to enforce rights to reimbursement.
g.
Paragraph 9(3): Administrative expenses
25.
As provided by paragraph 9(3), a trust may remain outside the scope of Schedule 5 where
funds are provided to pay certain expenses which exceed the income of the trust. These expenses
are defined as expenses relating to administration and taxation; and could be chargeable either
to the income or to the capital of the trust. Only sums provided to meet genuine expenses of
administration fall within the terms of the proviso: any payments which exceed such expenses are
regarded as meeting the condition in paragraph 9(3) and so bringing the trust within the scope of
Schedule 5.
26.
The following items are not regarded as expenses relating to administration within the
terms of the proviso to paragraph 9(3):
-
loan interest (other than interest on a loan taken out to meet expenses of administration
within the terms of the proviso);
the costs of acquiring, enhancing or disposing of an asset;
expenses incurred in connection with a particular trust asset to the extent that such
expenditure can be set against income arising from that asset. For the purpose of the
proviso to paragraph 9(3), the measure of the gross income from such a source is net of
expenses.
27.
The term expenses relating to ... taxation in subparagraph 9(3) is regarded as
encompassing UK or foreign taxes to which the trustees are liable, along with any interest and
penalties due on that tax. It could also include certain costs incurred by the trustees under the
terms of the trust in obtaining information regarding the beneficiaries' tax liabilities. One
example might be where the trustees, in order to ensure they were acting in a beneficiary's best
interests, had to ascertain the tax implications for the beneficiary in adopting a particular course
of action.
28.
It is only the settlement's expenses relating to administration or taxation which are
within the terms of the proviso to paragraph 9(3). Expenses of, for example, a company wholly
owned by the trustees fall outside its scope.
29.
An expense on capital account paid out of trust income is not treated as a provision of
income by a beneficiary for the purposes of paragraph 9(3) provided that either:
-
the trust deed permits payment of capital expenses from income and the beneficiary is
entitled only to net income after such payments; or
the trustees borrow money from the income account which is subsequently restored,
along with interest over the period of the loan. The appropriate rate of interest is
considered to be that which a Court of Equity would order on the replacement of trust
income.
30.
Normally the specific date on which the liability to an expense relating to administration
or taxation was incurred determines the year into which it falls for the purpose of applying the
proviso to paragraph 9(3). Where, however, the expense is incurred for a period rather than on a
specific date, the basis of allocating expenses adopted by the trustees in preparing trust accounts
or returns is, generally, regarded as acceptable provided that this basis is consistently adopted and
is in accordance with conventional trust accounting practice.
31.
Additions to meet the difference between expenses relating to administration and taxation
and any income arising to the trust do not have to be made by 5 April in the relevant year of
assessment. There must, however, be a clear connection between the amount added and the
computed shortfall. Additions should, therefore, be made as soon as the relevant figures are
available.
32.
Income, for the purposes of the proviso to paragraph 9(3), is the total income which
arises to the trustees in the relevant year, rather than the income which is (or would be if the trust
were resident in the United Kingdom) subject to UK tax. Usually, items of income will need to
be allocated to the year in which they arise for the purposes of the proviso, but, in practice,
income arising from a trade carried on by the trustees may be apportioned on a time basis,
provided that this basis is consistently followed.
h.
Paragraph 9(3): Life tenants
33.
A life tenant is not regarded as having provided income or property for the purposes of
the settlement merely because there is an administrative delay in paying out the income that has
vested in that beneficiary. If, however, the beneficiary directs the trustees to retain this income
on the terms of the settlement, this is regarded as a provision of funds within paragraph 9(3).
i.
Paragraph 9(3): Indemnities and guarantees
34.
An indemnity given by the new trustees to retiring trustees is not considered as the
provision of funds for the purposes of the settlement under paragraph 9(3). Other types of
indemnity are considered in light of the facts of a particular case.
35.
The giving of a guarantee is regarded as an indirect provision of funds under the terms of
paragraph 9(3). Payment of an obligation under a guarantee given before 19 March 1991 is, in
general, regarded as a payment in pursuance of a liability incurred before 19 March 1991 and
within paragraph 9(3)(b). This may not, however, apply where
-
the contingent liability under the guarantee cannot be quantified with a sufficient degree
of accuracy, e.g. where the guarantee is open-ended or the contingency is remote; or
the guarantor does not take reasonable steps to pursue his rights against the debtor.
j.
Paragraph 9(5): Variations
36.
This provision is concerned with situations where the terms of the settlement are varied
by the beneficiaries or a court to admit new beneficiaries within the class of persons defined at
paragraph 9(7) of the Schedule, without thereby bringing the settlement to an end and creating a
new one. For example, where the terms of the trust include a power to appoint anyone within a
specified range to be a beneficiary, exercise of that power after 19 March 1991 will not be
regarded as a variation of the settlement. The term spouse in paragraph 9(7) is not considered to
include a widow or a widower.
k.
Paragraph 9(6): Ultra vires payments
37.
For the purposes of clarification, this condition deals with ultra vires payments, i.e.
cases where one of the persons defined at paragraph 9(7) receives a benefit from the trust for the
first time and that person is not a beneficiary under the terms of the trust deed. It may also apply
where such a person benefits from a transaction with the settlement carried out, for example,
under the trustees' investment powers.
VI.
Charge on beneficiaries: Intragroup transfers
38.
Sections 87-89 charge UK resident beneficiaries to capital gains tax on certain capital
payments received from non-resident settlements. Section 96 is concerned with the application of
these provisions to capital payments made by companies which are controlled by the trustees and
capital payments received by certain non-resident companies.
39.
Section 96 provides that, where the trustees (or a company which they control) make a
payment to a closely-controlled non-resident company, the payment is, broadly, treated as made
to those who control the company. This may, for example, mean that a payment made by a
wholly-owned subsidiary to its holding company (in which the shares are, say, held 50% by the
settlor and 50% by the trustees of a non-resident trust) can be treated as being made by the
trustees to the settlor.
40.
The payment must, however, be a capital payment within Section 97(1) - i.e. it must not
be chargeable to income tax on the recipient nor be made under a transaction entered into at arm's
length. Intragroup payments which are not capital payments, for example a capital distribution on
winding up which represents merely a repayment of capital on shares, or a distribution chargeable
to corporation tax, do not fall within the ambit of Section 96.
SP6/92
Accident insurance policies: Chargeable events and gains on policies of life

Insurance
1.
HM Revenue and Customs take the view that certain accident insurance policies which
provide protection only, and no investment element, do not give rise to chargeable gains.
Relevant legislation
2.
Liability to tax may arise on the occurrence of a chargeable event in connection with a
policy of life insurance. The rules are at Chapter II, Part XIII, ICTA 1988. Chargeable event
and the gain to be taxed are defined at Sections 540 and 541 ICTA 1988 respectively. The
meaning of policy of life insurance is determined from general law and decisions of the courts.
Present practice
3.
Until now, HM Revenue and Customs have taken the view that the term policy of life
insurance included an accident insurance policy providing cover against dying as a result of an
accident. On that view, a taxable gain may arise in connection with an accident insurance
policy.
New practice
4.
HM Revenue and Customs now take the view that an accident insurance policy which
provides protection only should not be regarded as a policy of life insurance when applying the
rules at Chapter II, Part XIII, ICTA 1988. Taxable gains will not therefore be treated as arising
in connection with an accident insurance policy which:
(a)
affords protection against the risk of dying only if death is as a result of an accident; and
(b)
has no investment content; and
(c)
does not acquire a surrender value (other than one equal to a proportion of the premium
paid which is refundable if the policy is terminated early or in other circumstances).
5.
The accident insurance policies to which this practice will apply are those written as:
(a)
Contracts of general insurance of an Insurance company or a friendly society or

members of Lloyds within paragraph 1 Schedule 1 Part 1 of the Financial Services
Markers Act 2000 (Regulated Activities) Order 2001 (SI 2001/1544); or
(b)
similar protection only policies written by non-resident insurers.
Commencement
6.
This Statement of Practice will be applied in settling any tax liability which is not final at
the date of issue of this Statement. The statutory references applicable for the past are those from
which the current provisions are derived.
Background
7.
Some group life policies will be taken outside of the scope of the chargeable event rules
if they fail within any of the exclusions in section 539(2) ICTA 1988. These are policies which
are issued in connection with approved retirement benefit scheme or retirement annuity contracts,
policies which meet the conditions in section 539A to be excepted group life policy and certain
loan protection policies taken out by credit unions. But if a group life policy which is not within
these exclusions gives rise to more than one death benefit then some mortality benefits come into
the computation of the gain. This is a result of the rule dealing with partial surrenders of the rights
conferred by a policy. Benefits, including death benefits, paid at any time prior to the chargeable
event in question are included when computing gain.
8.
The rules make no special provision for group life insurance policies (although some,
issued in connection with approved retirement benefit schemes or retirement annuity contracts,
are completely outside the scope of the charge under the general exclusion for certain policies of
insurance at Section 539(2) ICTA 1988). If a group life insurance policy gives rise to more than
one death benefit some mortality benefits come into the computation of gain. This is a result of
the rule dealing with partial surrenders of the rights conferred by a policy. Benefits, including
death benefits, paid at any time prior to the chargeable event in question are included when
computing a gain.
Other points
9.
An accident insurance policy which provides cover against disablement only (not death)
as a result of an accident has never been considered to be a policy of life insurance. The tax
treatment of disability benefits from such a policy is not affected therefore by the new practice.
10.
Policy benefits may be otherwise chargeable to tax; for example, as receipts of a trade or
profession. Any such charge is unaffected by this Statement of Practice which is concerned only
with the application of the chargeable events legislation at Chapter II, Part XIII, ICTA 1988.
SP7/92
Profit-related pay: Use of pool determination formulae
SP8/92
Valuation of assets in respect of which Capital Gains Tax gifts holdover relief is
claimed (See also Inland Revenue Tax Bulletin, Issue 28, April 1997, Page 417)
Introduction
1.
This Statement sets out HM Revenue and Customs practice for dealing with the
valuation of assets in respect of which a claim to capital gains tax (CGT) gifts holdover relief has
been made. It applies to both new claims to holdover relief and existing claims in relation to
which valuation negotiations with HM Revenue and Customs may already have started.
Circumstances in which CGT gifts holdover relief is available
2.
Subject to an appropriate claim, gifts holdover relief is available where:
an individual makes a disposal not at arms length of:
an asset used for the purposes of a trade, profession or vocation carried on by the
transferor, his personal company or a member of a trading group of which the holding
company is the transferor's personal company - Section 165(2)(a) TCGA 1992
or
shares in a trading company or holding company of a trading group which are either
unlisted or are in the transferor's personal company - Section 165(2)(b) TCGA 1992
or
agricultural property as defined by IHTA 1984 - paragraph 1 Schedule 7 TCGA 1992

the trustees of a settlement make a disposal of certain settled property - paragraph 2 and 3,
Schedule 7 TCGA 1992
an individual or the trustees of a settlement make a disposal of an asset not at arm's length
which is either a chargeable transfer under the Inheritance Tax Act 1984, or is one of a
specified range of exempt transfers - Section 260(2) TCGA 1992.
What is the heldover gain?
3.
In the absence of a claim to holdover relief, Section 17 TCGA 1992 would treat both the
acquisition and disposal of the assets transferred to be for a consideration equal to their market
value. Where a valid claim is made the effect is that the transferor's chargeable gain is reduced to
nil and the transferee's acquisition cost is reduced by the amount of the heldover gain.
4.
The heldover gain is the amount of the chargeable gain which would have accrued to the
transferor, but for the claim to holdover relief. To compute the chargeable gain, and hence the
heldover gain, it is necessary to establish the market value of the asset at the date of the transfer.
5.
Where no other reliefs are involved, holdover relief will be available where the market
value of the asset transferred exceeds the transferor's allowable expenditure and the amount of
indexation allowance due up to the date of disposal. If holdover relief is claimed and no
consideration is paid then the transferee's acquisition cost will be equal to the sum of the
transferor's allowable expenditure plus indexation to the date of transfer. In holdover relief cases,
assuming none of the restrictions described in paragraphs 6 and 13 below apply, agreement of the
market value of the asset at the date of transfer has no bearing on the immediate CGT liability of
the transferor.
Position where consideration is paid by the transferee
6.
Additional rules apply which affect the amount of the heldover gain where actual
consideration is given to the transferor. Full holdover relief is only available if the actual
consideration received does not exceed the transferor's allowable expenditure (Section 38 TCGA
1992). If the actual consideration received exceeds the transferor's allowable expenditure on the
asset, the holdover relief is restricted by that excess (Sections 165(7) and 260(5) TCGA 1992).
7.
Where consideration is given, the transferee's acquisition cost will be equivalent to the
sum of the transferor's allowable expenditure, the indexation allowance due to the date of disposal
by the transferor and the gain immediately chargeable on the transferor.
Circumstances where in future market value at disposal need not be agreed with HM
Revenue and Customs
8.
Subject to the following conditions, HM Revenue and Customs will admit a claim for
holdover relief without requiring a computation of the heldover gain in any case where the
transferor and transferee complete the second page of the claim form attached to the Help Sheet
IR295. In particular this requires
a joint application by the transferor and the transferee
provision of details concerning the asset and its history or alternatively a calculation
incorporating informally estimated valuations if necessary and
a statement that both parties have satisfied themselves that the value of the asset at the date of
transfer was in excess of the allowable expenditure plus indexation to that date
The further conditions are that

once a claim made on this basis has been accepted by HM Revenue and Customs it may not be
subsequently withdrawn
if after acceptance by HM Revenue and Customs it emerges that any information provided or
statement made by either the transferor or transferee was incorrect or incomplete, in each case
their capital gains tax position in relation to the asset will be computed in accordance with the
relevant statutory provisions and assessments made as appropriate.
It should be noted that for years 1996/97 onwards all claims to holdover relief are to be made on
the claim form attached to Help Sheet IR295 or a copy of it.
9.
Where, under the terms of this Statement of Practice, a claim is admitted without the
heldover gain being computed, this does not mean that HM Revenue and Customs accepts as
factually correct or will subsequently be bound by any information or statements given by any
person, whether expressly or by implication, in connection with the claim. Neither HM Revenue
and Customs nor the claimants are bound in any way by any estimated values shown on the claim
form or in any calculations.
Assets held on 31 March 1982
10.
Unless actual consideration is given by the transferee, this practice will also apply to
assets held by the transferor on 31 March 1982. It will only be necessary to agree a value at 31
March 1982 when the transferee disposes of the asset.
11.
If the transferor has made an election under Section 35(5) TCGA 1992, the transferee's
acquisition cost of the asset will be equal to the 31 March 1982 value plus indexation up to the
date of the transfer. If there is no election under Section 35(5), the transferee's acquisition cost of
the asset will be equal to the transferor's original cost plus indexation up to the date of the transfer
or the 31 March 1982 value plus indexation up to the date of transfer - whichever is greater.
12.
If the transferee has given some consideration for the asset it will be necessary to agree
the 31 March 1982 value immediately. This is so that the excess over the allowable expenditure which is chargeable to CGT immediately - can be determined. However, HM Revenue and
Customs will still be prepared to accept a holdover relief claim without undertaking a valuation as
at the date of transfer.
Circumstances in which a valuation may be required
13.
There are certain cases where paragraphs 5, 6 or 7 of Schedule 7 TCGA restrict the
amount of the heldover gain. These are cases where an asset has at some time during the
transferors ownership been used for non-business purposes, or has only been used in part for
business purposes, and cases involving shares etc., in a company which has non-business assets.
This Statement of Practice cannot apply in any of these cases, because it is necessary to compute
the chargeable gain before holdover relief. Otherwise, HM Revenue and Customs expectation is,
subject to the circumstances described in paragraphs 8 and 10 to 12, that it will rarely be
necessary to determine the market value at the date of the gift. However, a valuation may
become necessary as a result of the interaction of the heldover gain with other CGT reliefs. It is
not expected that even in these cases will it be necessary to establish the market value
immediately. Instead, it is more likely that a valuation will not be required before, for instance, a
later disposal of the asset by the transferee. The following paragraphs cover the more common
circumstances.
Retirement relief
14.
Holdover relief is not available in the case of a disposal of an asset to the extent that any
gain benefits from retirement relief (Section 165(3)(a) and (b); Section 260(5) and Schedule 6
TCGA 1992). This means that holdover relief may be claimed if the market value at the date of
transfer is at least equal to the sum of the transferor's allowable expenditure, indexation allowance
to the date of disposal and the retirement relief due.
15.
Unless requested by the claimants, the agreement of the market value of the asset will be
deferred until either
it is necessary to determine the quantum of the retirement relief due. (Normally this will be
when the transferor makes another disposal which attracts retirement relief), or
it is necessary to determine the transferee's cost of the asset.
Relief in respect of deferred charges on gains before 31 March 1982 (Schedule 4 TCGA
1992)
16.
In the case of an asset acquired before 31 March 1982 and transferred before 6 April
1988 it is necessary to compute any heldover gain in order to give the benefit of the 50%
reduction available under Schedule 4. To the extent that the market value of the asset at the date
of transfer has not already been determined HM Revenue and Customs is prepared to defer the
need for a valuation until disposal by the transferee.
Time apportionment in the case of assets held on 6 April 1965
17.
In the case of an asset held at 6 April 1965 chargeable gains and allowable losses arising
on disposal are time apportioned so that only those accruing since 6 April 1965 are recognised
for CGT purposes. If holdover relief is claimed in relation to the gift of such an asset it is always
necessary to agree a valuation at the date of transfer in order to apply time apportionment to the
deferred gain. HM Revenue and Customs are content to defer this valuation until the asset is
disposed of by the transferee.
Application of Statement of Practice to existing holdover relief claims
18.
In relation to existing holdover relief claims, valuation negotiations with HM Revenue
and Customs may have commenced, but not yet been completed. Taxpayers who want to take
advantage of the practice in relation to such claims should write to the Inspector of Taxes to
whom they were submitted.
SP9/92
Partnerships: Circumstances in which late elections will be accepted
In cases where no statutory discretion is given to The Commissioners for Her Majestys Revenue
and Customs to extend a time limit for a claim or election, it must be assumed that Parliament's
intention is that the limit should be applied strictly. The number of cases in which it would be
appropriate to exercise discretion under the Commissioners for Her Majestys Revenue and
Customs powers of care and management (provided in the Taxes Management Act 1970) is
correspondingly limited.
Every such case has to be considered on its own merits, and in the light of the factors relevant to
the circumstances in which the claim was made late. However, there would be a presumption in
favour of admitting an election under Section 113(2) ICTA 1988 which is made as soon as is
reasonably possible in all the circumstances, but after the statutory time limit has expired, if the
reason for the late election being late was one of the following: -
some relevant and uncorrected error on the part of HM Revenue and Customs has had the
effect of misleading the partners or their agent about whether the requirements of the
legislation had been met; or
at a crucial time, one of the required signatories was not available for unforeseeable
reasons (e.g. because of serious illness); or the agent of a signatory was similarly not
available and there was no one else who could reasonably be expected to stand in the
agent's shoes: or
-
there was some other difficulty about obtaining all the required signatures to the election
within the time limit, and HM Revenue and Customs had, before the time limit expired,
both been clearly notified that each of the signatories had individually decided to make an
election, and been given the reasons why the election could not be made within the time
limit.
The Commissioners for Her Majestys Revenue and Customs will not admit elections if they were
made after the expiry of the time limit because of oversight or negligence on the part of a partner
or his or her agent; or because one of the parties to the election temporarily refused to sign it; or
because there was a deliberate decision to delay the making of the election because its effect on
the taxation liabilities of the relevant parties was not clear by the time the time limit expired.
NB This Statement ceases to be relevant for tax years 1997-98 onwards but continues to apply,
where appropriate, for 1996-97 and earlier years.
SP1/93
Tax treatment of expenditure on films and certain similar assets Replaced by

SP1/98
SP2/93
Inheritance Tax: The use of substitute forms
Introduction
1.
This Statement explains the Commissioners for Her Majestys Revenue and Customs
approach towards the acceptance of facsimiles of inheritance tax forms as substitutes for
officially produced printed forms.
Legislative context
2.
Section 257(1) IHTA 1984 says that all accounts and other documents required for the
purposes of the Act shall be in such form and shall contain such particulars as the Board may
prescribe. The Commissioners for Her Majestys Revenue and Customs are satisfied that an
accurate facsimile of an official Account or other required document will satisfy the requirements
of the Section.
What will be considered an accurate facsimile?
3.
For any substitute inheritance tax form to be acceptable, it must show clearly to the
taxpayer the information which the Commissioners for Her Majestys Revenue and Customs have
determined shall be before him or her when he or she signs the declaration that the form is correct
and complete to the best of his or her knowledge. In other words, the facsimile must accurately
reproduce the words and layout of the official form. It need not, however, be colour printed.
4.
The facsimile must also be readily recognisable as an inheritance tax form when it is
received by Her Majestys Revenue and Customs Capital Taxes, and the entries must be
distinguishable from the background text. Where a facsimile is submitted instead of a previously
supplied official form it is important that it bears the same reference as appeared on the official
form. It is equally important that if no official form was supplied the taxpayer's reference should
be inserted on the facsimile.
5.
Advances in printing technology now mean that accurate facsimile forms can be
produced. The Commissioners for Her Majestys Revenue and Customs will accept such forms if
approval by the Capital Taxes Offices of their wording and design has been obtained before they
are used. Any substitute which is produced with approval will need to bear an agreed unique
imprint so that its source can be readily identified at all times.
Applications for approval

6.
Applications for approval should be made to:
In England, Wales and Northern Ireland
The Customer Service Manager
Capital Taxes Office
Ferrers
House
PO Box 38
Castle Meadow Road
N
OTTINGHAM
NG2
1BB
or
DX 701201 Nottingham 4
or in Scotland
The Customer Service Manager
Mulberry
House
16 Picardy Place
EDINBURGH
EH1
3NB
or
DX ED305 Edin 1.
All applications will be considered as quickly as possible.
Further information available
7.
A set of guidelines giving further details on the production of substitute forms is available
on application to the appropriate office at the above address.
SP3/93
Groups of companies: Arrangements
Introduction
1.
This statement supersedes Statement of Practice SP5/80. Some features of the earlier
statement have been omitted or revised but this does not indicate a more restrictive approach on
the part of HM Revenue and Customs.
2.
This statement gives general guidance on how HM Revenue and Customs interpret
arrangements in the following provisions of ICTA 1988:
Section 240(11)(a) - surrender of Advance Corporation Tax to a subsidiary company;
Section 247(1A)(b) - group income elections in certain consortium cases;
Section 410(1) and (2) - group and consortium reliefs; and option arrangements in
Paragraph 5B(1) of Schedule 18 - group and consortium reliefs.
Extra-Statutory Concession C10

3.
Certain types of arrangements or option arrangements relating to groups and consortia
which fall within the above legislation are in practice excluded from its scope by ESC C10, as
revised January 1993.
General
4.
This Statement of Practice gives general guidance in conjunction with ESC C10.
Comprehensive guidance cannot be given about what constitutes arrangements or option
arrangements, nor about precisely when they come into existence. Particular cases depend on
the particular relevant facts.
5.
As regards option arrangements the Commissioners for Her Majestys Revenue and
Customs view is that if an agreement provides for the creation of specified option rights
exercisable at some future time option arrangements come into existence when the agreement
was entered into.
Disposal of shares or securities in a company
6.
Where a holder of shares or securities in a company is preparing to dispose of them,
straightforward negotiations for the disposal will not give rise to the existence of arrangements
before the point at which an offer is accepted subject to contract or on a similar conditional basis.
Equally, unless there are exceptional features, an offer made to the public at large of shares or a
business will not at that stage bring arrangements into existence.
7.
If a disposal requires the approval of shareholders, operations leading towards disposal
will not give rise to the existence of arrangements before that approval is given or until the
directors become aware that it will be given.
8.
If following negotiations with potential purchasers a holder of shares or securities
concentrates on a particular potential purchaser this will not of itself be regarded as bringing
arrangements into existence. But arrangements might exist if there were an understanding
between the parties in the character of an option. For example, an offer, whether formally made
or not, might be allowed to remain open for an appreciable period so that the potential purchaser
was allowed to choose the moment to create a bargain.
Company reconstructions
9.
The approval of shareholders for a company reconstruction may be required under
company law or to comply with the rules of a stock exchange. Arrangements will not come into
existence before approval is given or until the directors become aware that it will be given.
Enforceability
10.
Arrangements, though not option arrangements, may exist between parties even
though they are not enforceable.
SP4/93
Deceased persons' estates: Discretionary interests in residue
Section 650(3), (4), (6), 655(1), 662 Income Tax (Trading and Other Income) Act 2005 provide
for discretionary payments out of the income of the residue of an estate of a deceased person,
whether made directly by the personal representatives, or indirectly through a trustee or other
person, to be treated as the income of the recipient for the year in which they are paid.
HMRC will apply Section 650(3), (4), (6), 655(1), 662 ITTOIA 2005 whenever such
discretionary payments are made, whether they are payments out of income of the residue as it
arises or out of income arising to the personal representatives in earlier years, which has been
retained pending the exercise of their discretion.
Where payments are made out of income of the residue of United Kingdom estates (as defined in
sections 651(1), (2), (3) ITTOIA2005 they are treated for 1993/94 and later years as received
after deduction of tax at the applicable rate (as defined in sections 663,679(2), (3) ITTOIA 2005).
Recipients who are not liable to income tax on the payments, including charities, are entitled to
claim repayment of this tax except where the basic amount is paid from sums within section 680
ITTOIA 2005.
Where payments are made indirectly through trustees, the trustees may be liable to tax at the rate
applicable to trusts on the payments under Section 686, ICTA 1988. Beneficiaries may be treated
as receiving the payments after deduction of tax at the rate applicable to trusts. This tax may be
repaid or further tax charged, depending on the beneficiary's marginal rate. The trustees are not
chargeable to income tax at the rate applicable to trusts, where a trust is established for charitable
purposes only.
With effect from 16 March 1993 HMRC will apply sections 650 (3), (4), (6), 655(1), 662 Income
Tax (Trading and Other Income) Act 2005 in this way to all open cases whether this results in
repayment of tax or an assessment to income tax at the higher rate. Claims for repayment of tax
may also be made for years from 1986/87 onwards, including supplementary claims where an
earlier claim was refused under previous practice.
For all payments made before 6 April 2005, the relevant provisions of Part XVI ICTA1988 apply,
and after 6 April 2005, where a company is the beneficiary of a deceased estate, the provisions of
Part XVI continue to apply for discretionary payments to the company out of the income of the
residue.
SP5/93
1.
United Kingdom/Czechoslovakia Double Taxation Convention

The Convention, the full title of which is as follows:
Convention between the Government of the United Kingdom of Great Britain and Northern
Ireland and the Government of the Czech and Slovak Federal Republic for the avoidance of
double taxation with respect to taxes on income and capital gains;
was signed in London on 5 November 1990 and entered into force on 20 December 1991. It took
effect:
(a)
(b)
in the United Kingdom;

(i)
in respect of income tax and capital gains tax for the year of assessment
beginning on 6 April 1992 and subsequent years of assessment; and
(ii)
in respect of corporation tax for the financial year beginning on 1 April 1992 and
for subsequent financial years; and
in Czechoslovakia, from 1 January 1992.
2.
Following the dissolution of the Czech and Slovak Federal Republic and the recognition
of the Czech Republic and the Slovak Republic by the United Kingdom as sovereign,
independent states, the Commissioners for Her Majestys Revenue and Customs have been
advised that the Czech Republic and the Slovak Republic have committed themselves to continue
to honour all the international obligations of the former Federal Republic and that the provisions
of the United Kingdom/Czechoslovakia Double Taxation Convention will be treated as remaining
in force between the United Kingdom and, respectively, the Czech Republic and the Slovak
Republic.
SP6/93
United Kingdom/Yugoslavia Double Taxation Convention Superseded by

SP3/04
SP7/93
Insurance companies: Transfers of long term business
SP8/93
Stamp Duty: New buildings
This Statement sets out the practice the Commissioners for Her Majestys Revenue and Customs
will apply in relation to the stamp duty chargeable in certain circumstances on the conveyance or
lease of a new or partly constructed building. It affects transactions where, at the date of the
contract for sale or lease of a building plot, building work has not commenced or has been only
partially completed on that site but where that work has started or has been completed at the time
the conveyance or lease is executed.
This Statement reflects the advice the Commissioners for Her Majestys Revenue and Customs
have received on this subject in the light of the decision in the case of Prudential Assurance
Company Limited v IRC [1993] 1 WLR 211). This Statement does not apply to the common
situation where the parties have entered into a contract for the sale of a new house and that
contract is implemented by a conveyance of the whole property. This Statement replaces the
Statements of Practice issued in 1957 and 1987 (SP10/87) on this subject which are now
withdrawn.
The Commissioners for Her Majestys Revenue and Customs are advised that, whilst each case
will clearly depend on its own facts, the law is as follows:
1.
Two transactions/two contracts
Where the purchaser or lessee is entitled under the terms of a contract to a conveyance or lease of
land alone in consideration of the purchase price or rent of the site and a second genuine contract
for building works is entered into as a separate transaction, the ad valorem duty on the
conveyance or lease will be determined by the amount of the purchase price or rent which the
purchaser or lessee is obliged to pay under the terms of the first contract. In these circumstances
it does not matter whether any building work has commenced at the date of the conveyance or
lease. The consideration chargeable to ad valorem duty will still be only that passing for the land.
2.
One transactions/two contracts
Where there is one transaction between the parties but this is implemented by two contracts, one
for the sale or lease of the building plot and one for the building works themselves, the amount of
ad valorem duty charged on the instrument will depend on the amount of the consideration, which
in turn will depend on whether those contracts can be shown to be genuinely independent of each
other.
i.
If the two contracts are so interlocked that they cannot be said to be genuinely capable of
independent completion (and in particular where if default occurs on either contract, the
other is then not enforceable) ad valorem duty will be charged on the total consideration
for the land and buildings, whether completed or not, as if the parties had entered into
only one contract.
ii.
If the two contracts are shown to be genuinely independent of each other, ad valorem
duty will be charged by reference to the consideration paid or payable for the land and
any building works on that land at the date of execution of the instrument. It follows that,
where the instrument is executed after the building works are completed, ad valorem duty
will be charged on the consideration for the land and the completed building(s).
3.
Sham or artificial transactions
This Statement does not apply to cases where the transaction concerned, or any part of it, involves
a sham or artificial transaction.
Contracts already entered into
Where unconditional contracts have been entered into before or within 28 days of the date of this
Statement and the duty payable on the resulting conveyance or lease would have been less under
the earlier Statements of Practice, the Stamp Office will accept duty in the lesser amount. In such
cases the instrument should be submitted together with all the evidence to support the claim that
unconditional contracts were entered into within this transitional period.
Procedure for submitting documents
Where a person accepts that a conveyance or lease of a building plot is chargeable on the total
price paid or payable for the land and the completed building, it should be submitted for stamping
in the usual way together with a covering letter giving the aggregate price and a payment for the
duty appropriate to that price.
Where the total price does not exceed the amount up to which the instrument is liable to nil duty
(currently 60,000) and a certificate of value is included in the instrument, a conveyance may be
sent direct to the Land Registry in England and Wales or, in Scotland, to the Keeper of the
Registers of Scotland. A lease will need to be stamped in respect of the rent.
Where the total price exceeds the threshold at which duty becomes payable but the taxpayer takes
the view that duty is payable on some smaller sum, the instrument should be submitted to the
Stamp Office. This applies even where the taxpayer believes that the amount potentially
chargeable to ad valorem duty is below the threshold and a certificate of value is included in the
instrument. The instrument should be accompanied by a copy of the agreement(s) for sale etc and
a letter stating the amount which the taxpayer regards as chargeable consideration, identifying
separately any amount attributable to building work. Details of any contractual arrangements not
covered by the agreement(s) should also be given in the covering letter.
SP9/93
Corporation Tax Pay and File: Corporation Tax returns
SP10/93
Corporation Tax Pay and File: Special arrangement for groups of companies
SP11/93
Corporation Tax Pay and File: Claims to capital allowances and group relief
made outside the normal time limit
SP12/93
Double taxation: Dividend income: Tax credit relief
1.
Section 790 ICTA 1988 sets out the basis under which relief (unilateral relief) may be
given for foreign tax paid in the absence of a double taxation convention. Section 790(5)(c)
provides that tax credit relief shall not be available for overseas tax on a dividend paid by a
company resident in a territory outside the United Kingdom unless:
i.
the overseas tax is directly charged on the dividend, whether by charge to tax, deduction
of tax at source or otherwise, and the whole of it represents tax which neither the
company nor the recipient would have borne if the dividend had not been paid; or
ii.
the dividend is paid to a company within Section 790(6); or
iii.
Section 802 ICTA 1988 applies (UK insurance companies trading overseas).
2.
Section 790(6) ICTA 1988 provides, among other things, that where a dividend is paid by
a company resident in a territory outside the United Kingdom to a company resident in the United
Kingdom which either directly or indirectly controls, or is a subsidiary of a company which
directly or indirectly controls, not less than 10% of the voting power in the company paying the
dividend, any tax in respect of its profits paid under the law of the territory outside the United
Kingdom by the company paying the dividend shall be taken into account in considering whether
any, and if so what, credit is to be allowed in respect of the dividend.
3.
There are similar provisions in a number of double taxation conventions, in which case
tax credit relief against United Kingdom tax on the dividends concerned is available under those
conventions and not under Section 790. Typically these conventions provide that where a
company which is a resident of the other country pays a dividend to a company resident in the
United Kingdom which controls directly or indirectly at least 10% of the voting power in the
company paying the dividend, the credit for foreign tax shall take into account the tax of the other
country payable by the company paying the dividend in respect of the profits out of which the
dividend is paid.
4.
A number of countries outside the United Kingdom operate a company tax deducted
system whereby, when a dividend is paid, tax is accounted for at the standard rate of tax on
company profits. In the case of Guernsey, for example, where a company pays a dividend out of
profits that will be or have been charged to tax in Guernsey, the company is entitled to deduct tax
which it must remit to the tax authorities. That tax is a payment on account of the tax charged or
chargeable on the profits and gains of the company; and where the amount of tax charged or
chargeable on the company's profits and gains is less than the amount of tax deducted from the
dividend and remitted to the tax authority, the appropriate repayment is made to the company.
The tax deducted and accounted for by the company on making the dividend payments is not tax
that is additional to the tax on the company's profits and gains.
5.
It has been the practice of HM Revenue and Customs, when calculating the tax credit
relief due under Section 790 ICTA 1988 to a United Kingdom company against United Kingdom
tax on a dividend from a company resident in Guernsey, to allow credit at the rate of company
tax deducted or at the rate of tax paid by the Guernsey company on its profits (the actual
underlying rate), whichever is the greater. A similar practice has operated in respect of dividends
received from companies resident in Jersey and, in cases where there is a double taxation
convention with a provision along the lines of paragraph 3 above, in respect of dividends received
from companies resident in Belize, the Gambia, Malaysia, Malta and Singapore.
6.
The matter has been under review and, following further consideration, HM Revenue and
Customs have decided that, as regards dividends declared on or after today, the correct way to
give effect to the relief allowable as described in paragraphs 2 and 3 above is, subject to the usual
rules governing tax credit relief, to allow relief for the amount of the tax actually paid by the
overseas company on the particular profits out of which the dividend is paid. Where those profits
are not taxed in the other country, no tax credit relief will be available. The amount of overseas
tax available for credit relief will be determined not by reference to what is shown on the
dividend voucher but by reference to the tax paid in the other country in respect of its profits by
the company paying the dividend. This will be ascertained in the usual way by examination of
the overseas company's accounts and tax assessments.
SP13/93
Compulsory acquisition of freehold or extension of lease by tenant
1.
Section 247, TCGA 1992 allows roll-over relief in certain circumstances where a
landlord disposes of land to an authority exercising or having compulsory powers and acquires
replacement land. Authority is defined in Section 243(5) TCGA 1992 to mean a person or body
of persons with compulsory purchase powers.
2.
In HM Revenue and Customs view, relief under Section 247 may be claimed by a
landlord - subject to the general conditions of the Section - where a tenant exercises the following
rights to acquire an interest in the tenanted property from the landlord:
the right to acquire the freehold reversion or an extension of the lease under the Leasehold
Reform Act 1967 or the Leasehold Reform, Housing & Urban Development Act 1993, or
the right to buy or to acquire the freehold or an extension of the lease under the Housing Acts
1985 to 1996, or the right to purchase tenanted property under the Housing (Scotland) Act
1987.
SP14/93
Valuation of oil disposed of otherwise than at arm's length: Paragraph 2,

Schedule 3, Oil Taxation Act 1975
SP15/93
Business tax computations rounded to nearest 1,000
1.
HM Revenue and Customs are prepared to accept computations of business profits for tax
purposes in figures rounded to the nearest 1,000 from single businesses or companies with an
annual turnover of not less than 5 million, where rounding at least to that extent has been used in
preparing their accounts. (The turnover of members of a group will not be aggregated for
applying this 5 million threshold.) Where turnover fluctuates either side of the threshold,
rounding can be used for a period of account if the turnover for either that year or the
immediately previous year is above the limit. (Turnover comprises gross receipts including
investment and estate income, as well as trading receipts.)
2.
HM Revenue and Customs will only accept rounding in any particular case if the basis
adopted is satisfactory. Rounded computations from such businesses must be accompanied by a
certificate made by the person preparing the computations which:
-
states the basis on which the rounding has been done;
confirms that this basis is unbiased, that it has been applied consistently and that it has
been used in a manner which, in all the circumstances, produces a fair result for tax
purposes; and
if the rounding was done by computer, states the program or software used.
In subsequent years if there have been no changes in the basis or in the software, the certificate
need only confirm that the rounding has been done on the same basis as before.
3.
HM Revenue and Customs are prepared to accept rounded figures only in relation to the
computation of the profits of the business, including in the case of companies, non-Case I items.
They cannot accept rounded figures in relation to the computation of tax payable or of any other
figure of tax.
4.
Nor can they accept rounded figures, in relation to any other aspect of the tax
computations, where rounding would impede the proper application of the relevant legislation or
where it would normally be necessary to go back to the underlying records to do the computation,
and thus there would be no reduction in the compliance burden in allowing the use of round sums.
Rounding is not therefore acceptable in:
-
computations of chargeable gains (since precise dates on which expenditure is incurred

are needed for indexation allowance purposes); rounding can however be accepted in
relation to the incidental costs of acquisition and disposal;
computations of tax credit relief: while individual items of foreign income (including
profits of overseas branches and, for the purpose of calculating underlying tax rates,
dividends paid by overseas companies and the profits of those companies) may be
rounded, computations of credit relief must continue to distinguish the individual items of
income and to show the exact amounts of foreign tax for which credit is claimed so that
the rules for limiting the credit can be properly applied;
-
computations required for purposes of the Accrued Income Scheme (Section 710-728,
ICTA 1988);
aspects of capital allowances computations where precise figures are required, for
example by the statute or where rounding might work unfairly because more than one
taxpayer is involved and different bases could be used by each. One case where the
statute requires the use of precise figures is the expensive car provisions in Sections 3436 CAA 1990. However in any capital allowances apportionment case it would be open
to the taxpayer to demonstrate to the Inspector that, taking all the circumstances into
account, including those of any other party, the use of rounded figures did not lead to a
result that was materially different from the statutory position. For example, in the case
of the industrial builders one-quarter rule (section 18(7) CAA 1990), the Inspector would
want to be satisfied that the use of rounding alone did not reduce the non-qualifying
expenditure to one-quarter or less of the total expenditure (and thereby enable the whole
of the expenditure to attract allowances);
the application of the statutory amount in Section 748(i)(d) ICTA 1988 in relation to a
controlled foreign company.
5.
Exceptionally other circumstances may arise where rounding would not satisfy the tests
in paragraph 4. In those circumstances the Inspector may insist that roundings are not used.
6.
These arrangements will continue into Pay and File. Subject to the exceptions provided
in the two previous paragraphs, rounded figures from the accounts may be used in the
computation of trading profits and losses, each category of income, management expenses and
charges. Where appropriate, these figures will of course require adjustment to the received or
paid basis. Group relief or relief for losses from other periods should be on the actual sums
surrendered or brought forward (or carried back). No rounding should take place in the return
form itself (for example, in the allocation of profits to financial years) or in any arithmetic that
precedes such entries (for example, a computation of marginal small companies relief).
7.
Where arrangements on the use of rounding have already been agreed locally with
Inspectors these may continue to operate in the short term, but must come to an end for all
periods ending after 31 May 1995.
SP1/94
Non-statutory lump sum redundancy payments
1.
Section 309 (1) & (3) ITEPA 2003 provide that statutory redundancy payments shall be
exempt from income tax as employment income, with the exception of any liability under Section
401 of that Act.
2.
Lump sum payments made under a non-statutory scheme, in addition to, or instead of
statutory redundancy pay, will also be liable to income tax only under Section 401 ITEPA 2003,
provided they are genuinely made solely on account of redundancy as defined in the Employment
Rights Act 1996. This will be so whether the scheme is a standing one which forms part of the
terms on which the employees give their services or whether it is an ad hoc scheme devised to
meet a specific situation such as the imminent closure of a particular factory.
3.
However, payments made under a non-statutory scheme which are not genuinely made to
compensate for loss of employment through redundancy may be liable to tax in full. In particular,
payments which are, in reality, a form of terminal bonus will be chargeable to income tax as
earnings under Section 62 ITEPA 2003. Payments made for meeting production targets or doing
extra work in the period leading up to redundancy are examples of such terminal bonuses.
Payments conditional on continued service in the employment for a time will also represent
terminal bonuses if calculated by reference to any additional period served following issue of the
redundancy notice.
4.
HM Revenue and Customs is concerned to distinguish between payments under nonstatutory schemes which are genuinely made to compensate for loss of employment through
redundancy and payments which are made as a reward for services in the employment or more
generally for having acted as or having been an employee. As arrangements for redundancy can
often be complex and provide for a variety of payments, it follows that each scheme must be
considered on its own facts. HM Revenue and Customs practice, in these circumstances, is to
allow employers to submit proposed schemes to their Inspectors of Taxes for advance clearance.
5.
An employer or any other person operating a redundancy scheme, who wishes to be
satisfied that lump sum payments under a scheme will be accepted as liable to tax only under
Section 401 ITEPA 2003 should submit the full facts to the Inspector for consideration.
Applications for clearance should be made in writing and should be accompanied by the scheme
document together with the text of any intended letter to employees which explains its terms.
SP2/94
Enterprise Investment Scheme and Venture Capital Trust Scheme: Location of

activity Superseded by SP7/98
SP3/94
Business Expansion Scheme, Enterprise Investment Scheme, Capital Gains Tax

Reinvestment Relief and Venture Capital Trust Scheme: Loans to Investors
SP4/94
Enhanced stock dividends received by trustees of interest in possession trusts
1.
This Statement of Practice sets out HM Revenue and Customs views on the tax
treatment of enhanced stock dividends received by trustees of trusts in which there is an interest
in possession - that is, trusts where one or more beneficiaries have a right to the whole of the
income of the trust as it arises. Paragraphs 19-20 deal with the position of Scottish trusts.
2.
A company may offer its shareholders the option of taking additional shares rather than a
cash dividend. Such issues of shares are described in the statute as stock dividends, although they
are also commonly known as scrip dividends. Where the number of shares issued is deliberately
set so that their market value exceeds the cash alternative, the issue is known as an enhanced
stock dividend (or enhanced scrip dividend).
3.
On the principles derived from CIR v Blott (8 TC 101), an issue of non-redeemable
shares is not a distribution for the purposes of Section 209, ICTA 1988. This means that the
shares are received without any sort of tax credit. However, Section 409 ITTOIA 2005 treats
certain recipients of stock dividends within Section 410 ITTOIA 2005 as having received on the
due date of issue an amount of income equal to the equivalent of the share capital grossed up by
reference to the dividend ordinary rate. The cash equivalent of share capital is defined as the
amount of the cash dividend alternative unless the difference between the share capitals market
value equals or exceeds 15% of that market value. Where market value applies this is determined-
in the case of listed share capital, on the date of first dealing

in the case of other share capital, on the earliest date on which the company is required to
issue it.
4.
Section 409 ITTOIA 2005 can apply to an enhanced stock dividend received by trustees
of an interest in possession trust (the trustees) only where the beneficiary with an interest in
possession (the beneficiary) is beneficially entitled to it so that Section 249(4) applies (see
paragraph 8 below).
5.
Where the trustees take an enhanced stock dividend they must consider whether, as a
matter of trust law, it should be regarded as income or capital, taking account of
-
all the relevant facts;
any specific provision in the trust deed.
6.
HM Revenue and Customs can offer no guidance about the application of trust law in any
particular case. However, HM Revenue and Customs will accept whichever of the three
approaches described in this Statement of Practice the trustees conclude that they should adopt,
provided that their conclusion is supportable on the facts of their particular case.
7.
The tax treatment of enhanced stock dividends received by the trustees follows from the
trust law position. This Statement of Practice sets out the tax consequences if an enhanced stock
dividend
-
is regarded as income; or
is regarded as capital; or
is regarded as capital but the trustees make a payment to the beneficiary in accordance
with Re Malam, Malam v Hitchens (1894) 3 CH 578.
I
Enhanced stock dividend regarded as income
8.
If the enhanced stock dividend is regarded as income the beneficiary is beneficially
entitled to the shares comprised in the dividend and Section -410(2) ITTOIA 2005 applies. The
beneficiary is treated as having received income of an amount which, when reduced by an amount
equal to income tax at the Schedule F ordinary rate, is equal to the appropriate amount in cash.
No repayment of this tax can be made. (Section 414(2) ITTOIA 2005). The beneficiary has no
further income tax to pay if he is a basic rate taxpayer. A higher rate taxpayer has an extra
liability equal to the difference between the Schedule F ordinary rate and the Schedule F upper
rate on the income that he is treated as having received.
9.
For capital gains tax (CGT) purposes, Section 142, TCGA 1992 applies. The issue is not
a reorganisation. The beneficiary is treated as having acquired the shares for the appropriate
amount in cash. Under Section 60, TCGA 1992 any formal transfer by the trustees to the
beneficiary is disregarded. If they sell the stock dividend on his behalf, it is treated as a sale by
the beneficiary.
II
Enhanced stock dividend regarded as capital
10.
If the enhanced stock dividend is regarded as capital there is no income tax liability as
Section 410(2) ITTOIA 2005 does not apply.
11.
For CGT purposes, the issue is a reorganisation within Section 126, TCGA 1992. The
consequences are as follows:
-
the newly issued shares are pooled with the shares in respect of which they were issued
(the original shares) to form the new holding;
the new holding and the original shares are treated as the same asset acquired when the
original shares were acquired (Section 127 TCGA).
12.
The trustees are not regarded as having made any payment for the shares. Because the
reorganisation rules apply, the date of acquisition is the date on which the original shares were
acquired.
III
13.
Enhanced stock dividend regarded as capital but with an adjusting payment

to the beneficiary with an interest in possession
The trustees may decide- that where
they have elected to take an enhanced stock dividend in preference to a cash dividend that
would have belonged to the beneficiary; and
the enhanced stock dividend is regarded as capital under trust law
the beneficiary is entitled to some compensation from the trustees for the cash dividend forgone.
14.
In these circumstances the tax position of the trustees is as set out in section II above.
The payment they make to the beneficiary is an annual payment and tax must be deducted from it
at the basic rate in accordance with Section 349(1), ICTA 1988. No income tax is treated as
having been paid in respect of the enhanced stock dividend, whether by virtue of a tax credit or
otherwise, so the trustees have to account to HM Revenue and Customs for the whole of the basic
rate tax deducted from the payment.
15.
The beneficiary is treated as receiving income taxable under Chapter 7 Part 5 of ITTOIA
2005 on which income tax at the basic rate has been paid.
16.
This treatment applies whether the payment is made
out of the proceeds of the disposal of shares comprised in the enhanced stock dividend;
out of other capital of the trust;
in the form of a proportion of shares comprised in the enhanced stock dividend. (Section
410 (2) ITTOIA 2005 does not apply in these circumstances because the beneficiary is
not beneficially entitled to the stock dividend).
17.
Whatever form the payment takes, the trustees are treated as having made an annual
payment and the beneficiary as having received a net sum after deduction of income tax at the
basic rate.
18.
For CGT purposes, the treatment described in paragraphs 11-12 above applies. Where
the trustees make the payment to the beneficiary in the form of shares, the transfer constitutes a
part-disposal of the new holding.
Scottish interest in possession trusts
19.
The same income tax treatment applies to Scottish trusts in which a beneficiary has a
right to income. Although under Scots law the rights of the income beneficiary are different from
those of a beneficiary with an interest in possession in an English trust, for income tax purposes
the beneficiary of a Scottish trust is treated as having the same rights by virtue of Section 118, FA
1993.
20.
(This paragraph reflects the changes in FA 1998). For CGT purposes, where the
enhanced stock dividend is dealt with as described in Section 1 above (enhanced stock dividend
regarded as income), the position of a Scottish trust is different from that of an English trust.
Under Scots law the beneficiary is not absolutely entitled to the enhanced stock dividend.
However, since Section 410(2) ITTOIA 2005 applies to the stock dividend (by virtue of Section
118, FA 1993), the trustees are treated as having given the appropriate amount in cash (see
paragraph 8 above) as consideration for the new holding by virtue of Section 141, TCGA 1992.
This is not a reorganisation. If the enhanced stock dividend is transferred to the beneficiary the
trustees make a disposal to the beneficiary, which by reason of the share identification rules in
Section 106A, TCGA 1992, would normally be a disposal of the shares acquired as a stock
dividend.
Associated companies for small companies' relief and Corporation Tax starting
rate: Holding companies
SP5/94
Under section 13(4), ICTA 1988, a company which does not carry on any trade or business in an
accounting period is disregarded in calculating the profits limits for the small companies' relief of
any other company with which it is associated.
A holding company which does not carry on a trade, but which holds the shares in one or more
companies which are its 51 per cent subsidiaries, may or may not be carrying on a business in
respect of that holding. HM Revenue and Customs view is that a company is not carrying on
such a business in an accounting period if, throughout that period, all of the following apply:
it has no assets other than shares in companies which are its 51 per cent subsidiaries; and
it is not entitled to a deduction, as charges or management expenses, in respect of any

outgoings; and
it has no income or gains other than dividends which it has distributed in full to its
shareholders and which are, or could be, franked investment income received by that
company (section 832(1) and (4A)); and
the 51 per cent subsidiaries are 51% subsidiaries under section 247(8), (8A) and (9A).
SP6/94
Capital allowances: Notification of expenditure on machinery and plant made

outside the normal time limit (See also Inland Revenue Tax Bulletin, Issue 35,
June 1998, Page 551)
1.
Section 118(3) and (4) Finance Act 1994 introduced time limits for notifying qualifying
expenditure on machinery and plant. The Commissioners for Her Majestys Revenue and
Customs have power under Section 118(5) to extend these limits in exceptional circumstances.
This Statement explains the general criteria which the Commissioners for Her Majestys Revenue
and Customs will apply in considering applications for extended time limits.
The notification rules
2.
For corporation tax cases, and also for income tax cases for years of assessment until
1995/96, the relevant conditions for notifying qualifying expenditure are fulfilled where:
for chargeable periods ending on or after 30 November 1993, notice of expenditure is given to
the Inspector, in such form as the Commissioners for Her Majestys Revenue and Customs
may require, not later than two years after the end of that period;
for chargeable periods ending before 30 November 1993:
(a)
the expenditure was included in a computation which -
(i)
was required to be made for any tax purpose;
(ii)
was given before that date to the Inspector, and
(iii)
was not contained in a document prepared primarily for a purpose which

was not a tax purpose; or
(b)
notice of the expenditure is given to the Inspector, in such form as the

Commissioners for Her Majestys Revenue and Customs may require, not later
than three years after the end of that period or;
(c)
if the chargeable period ends on or after 1 December 1990, notice of the

expenditure is given before 3 May 1994.
3.
For income tax cases for 1996-97 and any earlier years dealt with under self assessment
the time limit is 31 January following the first anniversary of the end of the year of assessment in
which the period of account ends.
4.
In the event that the above time limits have not been met, the capital allowances due on
the past expenditure will not usually be lost. These will normally be claimable in the first period
for which the time limit has not expired. No relief will be available for assets which have been
sold prior to notification.
Form of notification required by the Commissioners for Her Majestys Revenue and
Customs
5.
In view of the great variety of circumstances, the Commissioners for Her Majestys
Revenue and Customs do not propose to specify in detail the form notifications should take.
Generally, the requirement to notify the Inspector will be satisfied where the expenditure is
included in a computation prepared for any tax purpose (provided the time limits set out earlier
are met). However, it will be advisable to give enough information in the computations to identify
the asset for which notification is given, as well as the amount of the expenditure. This does not
mean that it will be necessary to list each and every item where large numbers of similar assets
are purchased.
6.
Where the expenditure is included within the calculation of taxable trading profit (i.e. as
revenue expenditure) but is subsequently recategorised as being expenditure on machinery and
plant, the original tax computation will be regarded as notice for the purposes of the new rules.
7.
Inclusion of expenditure in a document prepared primarily other than for tax purposes
(e.g. annual accounts of a business, valuation reports, quantity surveyors' reports etc) will not
satisfy the requirement.
The Commissioners for Her Majestys Revenue and Customs policy on extending time
limits
8.
The time limits allowed for giving written notification of qualifying expenditure on
machinery and plant described above should generally be adequate and the Commissioners for
Her Majestys Revenue and Customs will not make routine use of its powers to extend the
notification period outside of these limits. But there may be exceptional circumstances in which
notification cannot be made within the time specified. Applications to allow further time in
accordance with the power referred to at paragraph 1 above will be considered under the
following criteria.
9.
In general terms the Commissioners for Her Majestys Revenue and Customs policy will
be to extend the notification time limit only where there is good reason, arising out of
circumstances beyond the taxpayer's and his agent's control, why notification could not be given
within the statutory time limits.
10.
Sometimes a large construction project involving expenditure on a variety of assets,
including machinery and plant, extends over several years and it is impossible to complete the
final allocation of expenditure between different classes of asset when the normal time limit
expires. In such cases, the Commissioners for Her Majestys Revenue and Customs will accept a
refinement of the allocation of the overall expenditure between machinery and plant and other
assets after the time limit has passed provided:
reasonable estimates have been made of the expenditure attributable to machinery and
plant within the time limit; and
there is no undue delay in finalising the details.
11.
The application for extension and notification of the expenditure involved must be made
within a reasonable period (normally not more than three months) after the expiry of the
circumstances giving rise to the late notification.
12.
What constitute acceptable reasons for late notification will depend upon the particular
circumstances of each individual case. Such circumstances do not include the following:
oversight or negligence on the part of the taxpayer or his agent;
delay, whether due to pressure of work, the complexity of the facts or to other causes
except where the circumstances come within paragraph 9 above;
the taxpayer was absent or ill, unless:

-
the absence or illness arose at a critical time and prevented the giving of notification
within the normal time limit, and
there was good reason why notification was not given before the time of the absence
or illness, and
in the case of absence, there was a good reason why the taxpayer was unavailable,
and
there was no other person who could have given notification on the taxpayer's behalf
within the normal time limit.
Procedure
13.
The application to extend the notification period outside the statutory time limits should
be sent to the Inspector dealing with the taxpayer and must include an explanation as to why
notification could not have been given within the statutory time limit.
Section 43A, TMA 1970
14.
There is a general provision in Section 43A, TMA 1970 which may extend the time limit
for giving a notice where a tax liability arises under an assessment which is made late. The
Section 43A time limit is one year from the end of the chargeable period in which the assessment
is made.
15.
It should be noted that:
Section 43A does not apply where the assessment is made to recover tax lost to the Crown
because of fraudulent or negligent conduct;
a notice given within the Section 43A time limit cannot reduce the tax due beyond the
amount due under the late assessment.
SP7/94
Investment trusts investing in authorised unit trusts Superseded by SP3/97
SP8/94
Allowable expenditure: Expenses incurred by personal representatives and

Corporate trustees Superseded by SP2/04
SP9/94
Application of foreign exchange and financial instruments legislation to

partnerships which include companies
SP1/95
Interest payable in the UK
SP2/95
Payment of tax credits to non-resident companies
SP3/95
Definition of Financial Trader for the purposes of S177 (1), FA 1994 Superseded
by SP4/02
SP4/95
Long term insurance business: Computations of profit for tax purposes
1.
This statement sets out the approach that HM Revenue and Customs adopts to the
computation of the trading profit of companies and friendly societies carrying on long term
insurance business when those insurers draw up their accounts in accordance with company law
implementing 1 the European Communitys Insurance Accounts Directive [the IAD]. It applies to
any computation made in accordance with the statutory provisions applicable to Case I of
Schedule D. It is not concerned with the measurement of income, capital gains or expenses in the
so-called I minus E computation.
2.
The normal starting point for a computation of trading profits for tax purposes is the
balance of profit or loss disclosed by a set of accounts drawn up in accordance with the ordinary
principles of commercial accounting. For periods of account beginning after 6th April 1999, there
is an additional requirement that the profits must be computed on an accounting basis which gives
a true and fair view, subject to any adjustment required or authorised by law section 42 FA
1998. Section 42 is amended by section 103 FA 2002 to clarify that the true and fair view must
be one that is shown by the use of UK generally accepted accounting practice. Before the
adoption of the IAD, the absence of a figure of profit or loss in the accounts of companies
carrying on long term insurance business made a different approach necessary, and the
convention of using the actuarial surplus as a substitute for the commercial profit has been firmly
established for many years.
3.
We have received legal advice to the effect that, in relation to life assurance and life
annuity business, this convention is implicit in the special statutory rules relating to life assurance
business, and in particular in Section 83 FA 1989. Accordingly, when it is necessary for any
purpose to compute
the profits from life assurance business in accordance with Case I rules, or
the Case VI profits of pension business, ISA business, overseas life assurance business,
or life reinsurance business in accordance with Case I principles,
The IAD was implemented in UK law by the Companies Act 1985 (Insurance Companies Accounts)
Regulations 1993 (SI 1993/3246), the Insurance Accounts Directive (Miscellaneous Insurance Undertakings)
Regulations 1993 (SI 1993/3245) and the Friendly Societies (Accounts & Related Provisions) Regulations 1994
(SI 1994/1983)
we shall continue to base the computation on that part of the total actuarial surplus for the period
that relates to the business in question, although we recognise that in many cases this surplus will
not be apparent from the face of the regulatory return and will have to be constructed from the
various elements that make it up. In general the treatment of particular items in the published
accounts in the IAD format will have no direct bearing on their treatment for tax purposes.
4.
Different considerations apply, however, to the other classes of long term business. Here,
our legal advice is that once a figure of profit is available from a set of accounts drawn up in
accordance with an accepted accounting method that follows the ordinary principles of
commercial accounting then, subject to any adjustment required or authorised by law, that figure
must be used as the starting point for the Case I computation. This will be so whether or not a
separate profit and loss account is prepared for this part of the business.
5.
This paragraph explains our view of the way in which the tax computations for long term
business other than life assurance should be derived from the accounting profit described in
paragraph 4 above. It is based on the proposition (which HM Revenue and Customs believes to
be correct) that accounts drawn up in accordance with Schedule 9A to the Companies Act 1985
and the Statement of Recommended Practice. Accounting for Insurance Business issued by the
Association of British Insurers in November 2003 fulfil the requirements of section 42 Finance
Act 1998.
Normally an insurance company carries on a single trade, so strictly there should be a

single computation for the whole of the companys business other than life assurance
business. There will be no objection in practice to companies preparing separate
computations for, say, pre-1938 capital redemption business, permanent health insurance,
pension fund management, and any general insurance business which the company may
conduct; but the results of these separate computations must then be combined, if
necessary with the result of any general insurance business, to determine the overall
figure of profit or loss from insurance business other than life assurance business.
Where it is necessary to make a division of the profit of the whole long term business the
division should, so far as possible, be made on a factual basis so that, for example,
premiums referable to permanent health insurance are allocated to that business. Where
this is not possible, a reasonable method of apportionment should be adopted. But the
total amount of the investment return from the assets of the long term business fund to be
attributed to business other than life assurance business should be determined in
accordance with the statutory rules in Section 432A ICTA 1988.
Gains and losses from loan relationships, financial instruments (for periods beginning
before 1 October 2002) and derivative contracts (for periods beginning on or after that
date) should be included in accordance with the relevant accounting method. Until July
2001 HM Revenue and Customs took the view that, in relation to other investments, any
profit on the sale of which would fall to be included in the companys trading receipts,
only realised gains should be brought into account. On 1 August 2001 HM Revenue and
Customs Press Release Tax and Accounting Change of Basis, together with draft
clauses published on 9 August 2001, made it clear that where such investments are
accounted for using a mark to market basis in which the unrealised profits and losses are
taken into account in the companys technical or non-technical account, no adjustment is
authorised by law to remove those unrealised gains and losses from the Case I profit
figure. The legislation contained in those draft clauses was enacted as sections 65 and 66
FA 2002.
Section 65 FA 2002 provides that the previous basis would continue to be sanctioned for
all periods of account up to the one in which 1 August 2001 falls. But companies may
use mark to market for tax purposes if they wish. Whichever basis is used, the
appropriate part of the investment gains from all assets backing the long-term business
should be included, regardless of whether these are credited in the technical or nontechnical part of the profit and loss account.
Section 66 FA 2002 permits an insurance company to elect to retain the old basis for assets
held on 1 January 2002. Where a company carries on both PHI business and general
insurance business, the election may be made only in respect of general business assets.
Where this is the case, PHI assets will be accounted for tax purposes on a mark to market
basis, whenever they were acquired.
The deferral of acquisition costs that is required by the Directive (as implemented in the
United Kingdom) should be followed in the profit computation.
Where, unusually, permanent health insurance is written on a with-profits basis no
deduction is available for bonuses, following the case of Last v London Assurance (2 TC
100). Nor is any deduction available for provisions for future bonuses.
Movements in reserves held within the long term funds that are properly regarded as
reserves rather than provisions should be excluded from the tax computation, whether or
not the movements are dealt with through the fund for future appropriations in the
balance sheet. In the Revenue view contingency, closed fund, resilience and similar
reserves which may be included in the statutory liabilities for solvency purposes should
normally be regarded as reserves rather than provisions. It will be a question of fact in
each case as to what extent such reserves relate to long term business other than life
assurance.
6. Where companies write the type of business known as deposit administration it will be
necessary to determine whether this falls to be treated as life assurance business or as the type
of pension fund management that is deemed to be (long term) insurance business by inclusion
of relevant contracts in the definition of contracts of -insurance in paragraph 11.1 of the
FSAs Interim Prudential sourcebook: Insurers. Following the Privy Council decision in
Colonial Life Insurance Co (Trinidad) Ltd v Board of Inland Revenue ([1991] Simons Tax
Cases 503) it seems likely that many deposit administration contracts will properly be
classified as contracts for life annuities, so that they should be included in life assurance
business. (Contracts of this type will also fall to be included in pension business where they
are made with the trustees or administrators of approved pension schemes, provided that the
other statutory conditions are met.) But where it is agreed that a deposit administration
contract, or any other contract, merely provides for the management of the funds of a pension
scheme any method which a company has agreed with its Inspector for identifying the profit
derived from the business need not be disturbed, so long as it continues to give a reasonable
result.
7. The practice set out in this statement will be subject to review in the light of accounting
developments. It should not be read as carrying any implications for the way in which the
profits of a life office might be measured if the Government decides to introduce legislation
designed to move away from the present I minus E basis of life assurance taxation.
SP5/95
Taxation of receipts of insurance and personal pension scheme commissions (See

also Inland Revenue Tax Bulletin, Issue 16, April 1995) Superseded by SP4/97
SP6/95
Legal entitlement and administrative practices
Where an assessment has been made and this shows a repayment due to the taxpayer, repayment
is invariably made of the full amount. In Self Assessment where any amount is repayable it will
be repaid in full on request. Where the end of year check applied to Schedule E taxpayers who
have not had a tax return for the year in question shows an overpayment of 10 or less, the
repayment is not made automatically.
As regards payment of tax assessed, where a payment to the Accounts Offices exceeds the
amount due, and the discrepancy is not noted before the payment has been processed, the excess
is not repaid routinely by the computer system unless it exceeds 0.99, or where clerical
intervention is required, unless it exceeds 9.99.
For Inheritance Tax (and Capital Transfer Tax), assessments that lead to repayments of sums
overpaid are not initiated automatically by the Capital Taxes Offices if the amount involved is
25 or less.
The aim of these tolerances is to minimise work which is highly cost-effective; they cannot
operate to deny repayment to a taxpayer who claims it.
SP7/95
Venture Capital Trusts: Value of gross assets Superseded by SP5/98
SP8/95
Venture Capital Trusts: Default terms in loan agreements
1.
Section 842AA(12)(a), ICTA 1988 provides that a loan made by a venture capital trust to
a company will qualify as a security for the purposes of section 842AA (and in the provisions of
section 842 as they apply for the purposes of section 842AA) if certain conditions are met. In
particular, the terms of the loan (whether secured or not) must not allow any person to require it
to be repaid, or any stock or security relating to that loan to be re-purchased or redeemed, within
the period of five years from the making of the loan or, as the case may be, the issue of the stock
or security.
2.
Provided that the loan is made on normal commercial terms, HM Revenue and Customs
will not regard a standard event of default clause in the loan agreement as a provision, which
would disqualify that loan from being a security within the meaning of section 842AA(12)(a).
The purpose of such a clause is to afford protection to the lender by enabling redemption to be
enforced in circumstances where the borrower defaults. Such a provision would not be regarded
as being standard, however, if it entitled the lender, or a third party, to exercise any action, which
would cause the borrower to default.
SP1/96
Notification of chargeability to income tax and capital gains tax for tax years
1995-96 onwards See Enquiry Manual EM 4551
SP2/96
Pooled cars: Incidental private use
Introduction
1.
This Statement explains The Commissioners for Her Majestys Revenue and Customs
approach to the question whether any private use by an employee of a car made available by his
or her employer is merely incidental to his or her business use of the car. The same approach is
taken to vans.
Legislation
2.
No tax charge arises on a car made available by reason of an employment (a company
car) if it is a pooled car. Section167 (3) ITEPA 2003- sets out the conditions which must all be
satisfied for a car to qualify as a pooled car. Section 169 ITEPA2003 applies the same conditions
for pooled vans.
3.
The fourth of the five conditions is that any private use of the car or van by any employee
to whom it is available is merely incidental to his or her other (i.e. business) use of the car or van
in the tax year in question (Section 167 (3) (d) ITEPA and 168(3)(d).
Board's interpretation
4.
The Commissioners for Her Majestys Revenue and Customs have been advised that the
expression merely incidental to requires consideration of whether:
a. the private use of the car is independent of the employee's business use of the car (in
which case it is not merely incidental to it) or
b. the private use follows from the business use (in which case it is).
5.
This is a qualitative test which means it is necessary to look at the nature of private use,
over the year, by each employee who uses the car.
Journeys starting from home
6.
A simple example of the test is where an employee takes a car home in order to make an
early start on a business journey the following morning. Where that business journey could not
reasonably be undertaken the next day starting from the normal place of work then the journey
from work to home, although private, is merely incidental to the business use of the car.
Use while away from home on business
7.
Another example is an employee who is staying away from home overnight on a business
trip. She uses the car to go to a nearby restaurant in the evening. This use, while it may not be
necessary, can be regarded as merely incidental to the necessary business journey and overnight
stay.
Amount of private use
8.
In practice HM Revenue and Customs find that private use of a car which they accept is a
pooled car is usually small in comparison with its business use. But this does not mean a
proportion of purely private use can always be allowed. For example, use of a car for an annual
holiday would not be merely incidental to the business use of the car, even if that use was only
small in comparison with the employees business travel in the car in the year in question.
Cars with drivers
9.
Particular questions arise where a car and driver are available to employees.
10.
First, the car and driver may be used to take employees between home and work in order
for the employee to work in the car on confidential papers. Travel between home and work is
usually private. Working in the car during the journey does not change that. But HM Revenue
and Customs practice has hitherto been to accept that all such journeys, while private, could be
merely incidental to the business use of the car without regard to the frequency or length of such
journeys or the employees other use of the car.
11.
HM Revenue and Customs now take the view that the fact an employee is carrying
confidential papers on which he or she may be working is only one of the factors to be
considered, along with others, when deciding whether a journey is private or business; and, if
private, whether or not that private use is merely incidental to its business use. It may be relevant
where, for example, papers have to be delivered to a client or are needed for a meeting at the
employee's home. It may also be relevant where the private use is otherwise close to the limits of
what would be accepted as merely incidental use. But carrying such papers and working in the car
neither changes a private journey into a business journey nor guarantees its use is merely
incidental to the employee's other, business use of the car.
12.
Second, a person employed as a chauffeur to drive a pooled car may be obliged to take
the car to his home for retention overnight. The chauffeur's use of the car for this purpose does
not of itself disqualify the car from treatment as a pooled car. This has been HM Revenue and
Customs practice since 1976 and will continue to be the practice. This is on the basis that such
use is necessary in the performance of the duties of a chauffeur who is required to take a car
home in order to collect or deliver passengers from or to various locations.
Commencement
13.
This Statement of Practice will be applies in this form for 2002/03 and subsequent years
of assessment. It originally applied from 1996-97, when it referred to the previous legislation.
SP3/96
Sections 225-226 ITEPA 2003: Termination payments made in settlement of

employment claims
1.
Section 225-226 ITEPA 2003 imposes a charge as earnings from employment on
payments made to individuals for undertakings, given in connection with an employment, which
restrict their conduct or activities.
2.
A financial settlement relating to the termination of an employment may contain terms
whereby the employee agrees to accept the termination package in full and final settlement of his
or her claims relating to the employment, and/or may expressly provide that the employee should
not commence or, if already commenced, should discontinue legal proceedings in respect of those
claims. These may relate to claims at common law arising from the contract of employment or to
claims arising under employment protection or other legislation. The settlement, therefore, seeks
to avoid legal dispute or proceedings, for example before a court or an industrial tribunal, in
connection with those rights. The termination settlement may also reaffirm undertakings about
the individual's conduct or activity after termination which formed part of the terms on which the
employment was taken up.
3.
HM Revenue and Customs will accept that no chargeable value will be attributed under
Section 225(1) (b) ITEPA 2003 to such undertakings by an employee or former employee.
4.
But this does not affect the application of Section 225-226 to sums that are attributable to
other restrictive undertakings which individuals give in relation to an employment, whether these
undertakings are contained in a job termination settlement or otherwise.
SP4/96
Income tax: Interest paid in the ordinary course of a bank's business
Introduction
1.
The Taxes Acts generally require that when yearly interest is paid by a company income
tax must be deducted on payment. However, this is modified by Section 349(3)(b) ICTA when
yearly interest is paid by a bank in the ordinary course of business. This Statement of Practice sets
out how HM Revenue and Customs applies the test of in the ordinary course of business for the
purposes of that section.
2.
Section 349(3)(b) was amended by Paragraph 3(b) Schedule 37 FA 1996 and now applies
to interest paid by a bank in the ordinary course of its business.
Meaning of bank
3.
Bank for the purposes of Section 349(3)(b) has the meaning given by Section 840A
ICTA.
Interpretation of in the ordinary course of its business
3.
HM Revenue and Customs will accept that yearly interest is paid in the ordinary course
of a bank's business unless that interest falls within one or both of the two circumstances set out
immediately below.
(i)
Yearly interest will not be regarded as paid in the ordinary course of business where the
borrowing relates to the capital structure of the bank. A borrowing will be regarded as relating to
the capital structure of the bank if it conforms to any of the definitions of tier 1, 2 or 3 capital
adopted by the Bank of England, whether or not the borrowing actually counts towards tier 1, 2 or
3 capital for regulatory purposes.
Where, however, a borrowing within the tier 3 definition arose at a time prior to 1 January 1996
(the date when tier 3 capital was introduced for regulatory purposes) and was in the ordinary
course of business at the time it arose, yearly interest on that borrowing will continue to be
regarded as within Section 349(3)(b).
(ii)
Yearly interest will not be regarded as paid in the ordinary course of business where the
characteristics of the transaction giving rise to the interest are primarily attributable to an
intention to avoid UK tax.
Application
5.
This Statement supersedes SP12/91 in relation to yearly interest paid on or after 29 April
1996.
6.
Whether or not interest is within the scope of this Statement of Practice depends both on
the date of the transaction giving rise to the interest and on whether the bank was also a bank
under the pre FA 1996 rules, that is, whether it was recognised by HM Revenue and Customs
prior to 29 April 1996 as a bank for the purposes of Section 349(3)(b).
6.1
Transactions entered into on or after 29 April 1996.
This Statement of Practice applies to all yearly interest paid by the bank on or after 29 April
1996.
6.2
Transactions entered into before 29 April 1996.
Where the paying bank was recognised by HM Revenue and Customs prior to 29 April 1996
as a bank for the purposes of Section 349(3)(b), this Statement of Practice applies to all yearly
interest paid by the bank on or after 29 April 1996. This means that such banks (the majority) will
not need to consider whether interest arises on an advance, or whether the bank remains a bank
carrying on a bona fide banking business in the United Kingdom under the pre-FA 1996 rules at
the time of payment of the interest.
Where the paying bank was not recognised by HM Revenue and Customs prior to 29 April
1996 as a bank for the purposes of Section 349(3)(b), the bank must continue to deduct income
tax from yearly interest paid on or after 29 April 1996 on advances, as it did from payments made
before that date. All other interest paid by the bank, however, on or after 29 April 1996 will be
governed by this Statement of Practice.
SP5/96
Introduction
1.
PAYE Settlement Agreements (PSAs) - formerly known as Annual Voluntary
Settlements (AVSs) - are arrangements under which employers can settle in a single payment the
income tax liability on largely, minor benefits in kind and expenses payments given to their
employees.
2.
PSAs are potentially available to all employers. They are intended to provide flexibility
for those employers who use them because items covered by a PSA do not have to be included on
Forms P9D or P11 D at the end of the year. Nor do employees have to include them on their tax
return, if they receive one. But they are not intended to provide a general alternative to the
obligation on an employer to operate PAYE under ITEPA 2003/S 684 or to make a return after
the end of the year in relation to benefits in kind and expenses payments. This means that PSAs
will not apply to:
-
cash payments of wages, salaries or bonuses including those paid to casual employees
major benefits provided regularly for the sole use of individual employees - for example,
a company car, car fuel, provided accommodation, beneficial loans
round sum allowances.
3.
However, the key intention of PSAs is flexibility. It is intended that Inspectors will
regard PSAs as a useful way of reducing burdens for employers and Revenue alike.
4.
ITEPA 2003 /PART II Chapter 5 and The Income Tax (Pay As You Earn) Regulations SI
2003/2682 Part 6 contains rules governing PSAs.
Scope of items which may be covered by an PSA
5.
Regulation 106 describes the -earnings which can be covered by a PSA. This provides for
the inclusion of expenses payments and benefits which are minor'; or, if not minor, are either
payable on an irregular basis or in circumstances where it is impracticable to apply PAYE or
apportion the value of particular benefits which have been shared by a number of employees.
6.
These terms have deliberately not been defined. The regulations require the employer and
the Inspector to agree where payments are of an amount, or are paid in circumstances, which
satisfy one or other of the terms. In discussion with the employer, the Inspector will be expected
to make a reasonable judgement - based on the natural meaning of the words and taking account
of the overall objective of the arrangements - about what may be included in a PSA.
7.
Some examples are given below of items which may be suitable for inclusion in a PSA. It
is not an exhaustive list. And it will not always be appropriate for an item listed below to be
included in a particular PSA. In addition, some items might satisfy more than one term. The
following paragraphs indicate some of the factors which an Inspector may take into account.
Interpretation of minor
8.
An expenses payment or benefit in kind can be included in a PSA if it is minor as
regards the sums paid or the type of benefit provided - Regulation 106(3)(a). In agreeing with
employers what may be included in a particular PSA, Inspectors will take account of the natural
meaning of the term minor. The key question is whether on any objective judgement the item in
question is minor in value. The nature of the item and the circumstances in which it is paid will
normally also need to be taken into account. For example, a gift paid as part of a scheme to
reward long service which does not satisfy ITEPA 2003/S 323. In deciding what constitutes
minor, Inspectors will not be influenced by, for example, the comparable earnings of the
particular employees concerned or the size of the employer.
9.
Some examples of what may constitute a 'minor item may help:

Long service awards outside ITEPA 2003/S 323
Incentive awards
Reimbursement of late night taxi fares home outside ESC A66
Personal incidental expenses in excess of the statutory daily limit
Present for an employee in hospital
Staff entertainment - for example, a ticket for Wimbledon
Use of a company van
Use of a pool car where the conditions for tax exemption are not satisfied
Subscriptions to gyms, sports clubs etc

Telephone bills
Gift vouchers and small gifts
10.
If it is not possible to accept that an item is minor, it may still be appropriate for
inclusion in a PSA because the Inspector will then consider whether it is either paid on an
irregular basis; or whether it is impracticable to apply PAYE to it or identify the amount to be
included on form P11D. The following paragraphs indicate some of the factors Inspectors will
take into account when deciding if the circumstances satisfy either test.
Interpretation of irregular
11.
Regulation 106 (3)(b) provides that an item may be included in a PSA if it is paid
irregularly to an employee. Whether an item is paid on an irregular basis will depend on the
facts of each case. The Inspector will take into account, for example, the nature of the item, the
normal frequency of its payment and how often it was paid or given to the individual employee in
question. The exclusion of an item given to some employees because it was received regularly by
them, would not necessarily mean that the same items received, irregularly by other employees
would be excluded from a PSA. In considering if an item is received irregularly, Inspectors will
primarily consider the frequency at which an item is provided during the year for which the PSA
applies. But in appropriate cases, for example the use of the employers holiday accommodation,
the period taken into account may be longer. Items provided to the same employee every year are
unlikely to satisfy the irregular test.
12.
Relocation expenses where the amounts concerned exceed the 8000 tax exempt
threshold (ITEPA 2003/S 271) are an important example of a range of benefits in kind or
expenses which may fail the minor test, but will normally qualify for inclusion in a PSA on
grounds of irregularity.
13.
Other examples may include:

Occasional attendance at an overseas conference where not all the expenses qualify for
relief under ITEPA 2003 Part 5
Expenses of a spouse occasionally accompanying an employee abroad
Occasional use of a company holiday flat
One-off gifts which are not minor
Interpretation of 'impracticable
14.
The key question is whether it is impracticable for the employer to operate PAYE on a
payment; or to identify precisely how much of a shared benefit should be attributable to each
individual employee and included on the Form P9D or P11D. The employer will be expected to
demonstrate that it would not be possible to do so without a disproportionate amount of effort or
record keeping taking account of the value of the item concerned, the number of employees
involved and the nature of the items involved.
15.
Examples of what might be impracticable may include:

Free chiropody care
Hairdressing services
Shared use of the firm's bus to work
Christmas Parties and similar entertainment provided by the employer which do not
already qualify for relief
The cost of shared taxi fares home which do not satisfy ESC A66
Shared cars
16.
The flow chart at Annex A summarises the tests of eligibility for inclusion in a PSA.
Overlap with Taxed Award Schemes

17.
Currently, employers operating formal incentive award schemes can pay the tax on behalf
of their employees by entering into a Taxed Award Scheme (TAS) with HM Revenue and
Customs. A general information pack on Taxed Award Schemes is available from The Incentive
Award Unit, Chapel Wharf Area, Trinity Bridge House, 2 Dearmans Place, Salford M3 5BH. Tel:
0161 261 3269 Most awards under these schemes will be suitable for inclusion in a PSA if
employers wish to use a PSA instead of TAS. A third party who provides awards to the
employees of another and who wishes to pay the employees' tax bill cannot use a PSA. A TAS
should be used instead.
Calculation of tax payable
18.
Regulation 108 provides the basis on which the tax payable by the employer may be
computed. In practice, this provides for the tax to be grossed up in a similar way to that already
adopted by Inspectors for agreeing amounts due under the previous, informal arrangements for
AVSs. In calculating the tax payable, the Inspector and the employer will take into account:
-
the amount of any expenses payments and the value of any benefits in kind provided
which are to be included
the number of employees concerned receiving the payments or benefits
the rates of tax which should be used in grossing up the tax due.
19.
The tax due should be grossed up taking into account the effective marginal rates of tax
of the individual employees covered by the agreement. So, for example, where an agreement
relates to a group of employees some of whom are basic rate taxpayers and some are higher rate
taxpayers, the tax due will need to be grossed up separately for the two groups of employees and
the results aggregated to give the total tax due. In appropriate cases, the Inspector and the
employer may agree that the amount of tax payable under a PSA in relation to a large number of
employees can be calculated by reference to a sample of the employees concerned. An example
of how to calculate the tax payable under a PSA is attached at Annex B.
Record keeping
20.
Once a PSA is agreed the employer no longer has to:
-
operate PAYE on agreed items or include the items on the P35 or P14
include the expenses and benefits concerned on Forms P9D or P11 D.
21.
The employer will still need to retain suitable records of what had been provided or paid.
In general, it will be sufficient to retain records for three years. Where items are easily
attributable to individual employees, the same records otherwise required for the purposes of
completing Forms P9D and P11 D should be retained. Details of cash payments to individual
employees should also be retained. But where it is impracticable to allocate a benefit or payment
between employees, a record of the individuals concerned will not be needed. Instead the
employer should keep sufficient information about:
-
the overall cost of providing the benefits concerned (for example the total cost of
providing a party which a number of employees attended)
the number of employees concerned, and
an indication of their marginal tax rates.
What employers should consider telling their employees

22.
Employees should not include items covered by a PSA in their tax return, if they receive
one.
23.
Employees who receive tax returns may ask the employer to clarify the position in
relation to benefits in kind or expenses payments they have received which are not included on
the P11 D information given to them by their employer. So employers may find it best to tell
employees about them at the same time as they issue the P11 D information to their employees.
And if the PSA is a regular arrangement, employers might find it best to tell employees when
they first take up their employment or when employees first receive an item included in the PSA.
This may reduce the number of possible queries from employees who are completing their own
tax returns.
24.
However, there is no statutory requirement for employers to tell their employees about a
PSA and HM Revenue and Customs will not be liable to disclose details of agreements they have
made with employers to their employees. Nor will it be possible for HM Revenue and Customs to
check that an employee who has completed a tax return may have included such items in error.
Adjustments to the scope of a PSA
25.
The Inspector will not normally need to adjust a PSA during the year. But employers may
ask the Inspector to widen the scope of a PSA which applies for a particular year by:
-
during the year, adding items on which PAYE would otherwise be due - but only ceasing
to apply PAYE once the Inspector has agreed the extension to the PSA
during the year, adding items which would otherwise be included on Form P9D or P11D
after the end of the year, but before 6 July following the end of the year, finalising the
PSA by adding items which would otherwise need to be included on Form P9D or P11D.
26.
Many employers will want to carry forward their PSA to the following year. Inspectors
will invite employers before the beginning of the year to renew their PSA. The PSA will only
need to be altered if the employer wishes to make an adjustment to what had previously been
agreed or it was justified because there had been a change in the circumstances on which the
original PSA had been based.
Payment of tax
27.
Regulation 109 provides for the payment of tax under a PSA. The employer - not the
employee - will always be accountable for tax payable in respect of items included in a PSA
ITEPA 2003/PART II Chapter 5 and Regulation 105).
28.
The precise amount of tax does not need to be agreed by 6 July when the scope of the
PSA has to be finalised. Normally, the tax due will be agreed between the employer and the
Inspector after 6 July, but in time to ensure that payment is made by the due and payable date of
19 October following the end of the tax year to which the PSA applies. There is nothing to
preclude the employer from paying the tax in full before the due date (where it can be established
in advance) or making instalment payments during the year. Those who wish to do so should
contact the Inspector accordingly.
Withdrawal of PSA by the Inspector
29.
Where the Inspector establishes that an employer has operated outside the agreed terms
of a PSA he may cancel or adjust the agreement. Employers will then be expected to operate
PAYE as appropriate on payments made after the date of cancellation or termination. Similarly,
all benefits and expenses provided after that date will need to be returned on Form P9D or P11D
at the end of the year.

30.
Inspectors may cancel a PSA where there has been a serious or persistent failure to
account for the tax under the agreement; or more generally where there has been a failure under
PAYE or in relation to the completion of Forms P9D or P11 D. An Inspector would not normally
cancel an agreement because, for example, the employer had made a minor error as to the
calculation of the tax payable under a PSA, or in relation to the sums on which tax should be
computed.
31.
Following a withdrawal, the agreement of a PSA for future years will be at the discretion
of the Inspector. Each case will be looked at on its own merits. But there would be nothing in
principle to prevent an Inspector agreeing a PSA for the tax year following a cancellation where
he was satisfied that the failure would not re-occur.
Rights of appeal
32.
There is no statutory right of appeal against the refusal of the Inspector to agree a PSA or
the cancellation of a PSA. But if the employer believed that the Inspector had acted unreasonably,
after review under HM Revenue and Customs internal complaints procedures, the matter could
be considered by the Adjudicator for HM Revenue and Customs. Details of the complaints
procedures for taxpayers are available in HM Revenue and Customs leaflet COP1 Putting things
right. How to complain.
33.
There is a statutory right of appeal against a determination under Regulation 110 of the
amount of tax payable under a PSA. Under Schedule 3 Taxes Management Act 1970 (as amended
by paragraph 10, Schedule 22, Finance Act 1996) the employer can elect to have the appeal heard
where the place of business is located. In practice, this could be where the company head office is
located or where the trade is carried on.
Treatment of NICs under a PSA
From 6.4.99 class 1B NICs is due when a PSA is entered into. - Information about Class 1B
NICs can be found on the HMRC Internet site.
ANNEX A to SP5/96
FLOW CHART FOR DECIDING WHICH ITEMS CAN BE INCLUDED IN A PSA
1. Are the items wages, salaries or bonuses?
YES
NO
2. Are the items major, regular expenses or

benefits1?
YES
NO
3. Are the items minor expenses or

benefits2?
If the answer to a ll of
questions 3 to 5 is NO then
4. Are the items irregular2?
5. Is it impracticable to operate PAYE, or

apportion items betwe en employees 2?
If the answer to any of questions 3 to 5 is

YES then
The items can be covered in a PSA
The items cannot be covere d in a

PSA
Notes
Major benefits such as sole-use co mpany cars, car fuel and beneficial loans are excluded from
the scope of PSAs.
2. The ter ms minor, irregular and Impracticable to operate PAYE or apportion items
between employees are explained in the text of this Statement of Practice
1.
ANNEX B to SP5/96
CALCULATING THE TAX PAYABLE UNDER A PSA
EXAMPLE
Smith and Jones Ltd has a work-force of 1,000 em ployees, all of whom ar e provided with
benefits in k ind d uring the tax year 1996- 97 valued at 50 per head. So me 800 of t heir
employees pay tax at the basic rate, the remaining 200 at the higher rate. The tax payable under a
PAYE settl ement agree ment (for 1996/97, and
covering t he whole work-force) would b e
calculated as follows:
Value of benefits provided to basic rate employees (800 x 50)
40,000
Tax due @ 24% on 40,000
9,600
Grossed up tax
9,600 x 100 =
100-24
Value of benefits provided to higher rate employees (200 x 50)

Tax due @ 40% on 10,000
Grossed up tax
+
19,
12,631.58
10,000
4,000
4,000 x=
100
100-40
Total tax payable by Smith and Jones Ltd under the PSA
6,666.67
12,631.58
6,666.67
298.25
Alternatively, the value of the benefits could be grossed up, and ta x calculated on that figure in
the normal way, with identical results:
Value of benefits provided to basic rate employees (800 x 50)
100-2
Grossed up value of benefits
x 100
40,000=
40,000
52,63 1.58
Tax due @ 24% on 52,631.58
12,631.58
Value of benefits provided to higher rate employees (200 x 50)
10,000
Grossed up value of benefits
16,666.67
10,000 x 100 =
100-40
Tax due @ 40% on 16,666.67
6,666.67
Total tax payable by Smith and Jones Ltd under the PSA
12,631.58
+6,666.67
19,298.25
SP1/97
The Electronic Lodgement Service
INTRODUCTION
1.
Schedule 3A Taxes Management Act 1970 (TMA) provides the legislative ground for the
new Electronic Lodgement Service (ELS). It enables taxpayers to fulfil their obligation to deliver
certain tax returns by arranging for an approved 'filer' to transmit the relevant information to HM
Revenue and Customs electronically.
2.
Using an approved software package the filer enters the information which is transmitted
in a secure manner over public networks through the Secure Messaging Gateway (SMG) to HM
Revenue and Customs Gateway. This validates the information and, if accepted, logs its receipt
and updates the Self Assessment system. An acknowledgement message accepting or rejecting
the return is then sent back to the filer. The whole cycle should not take any longer than 24 hours.
3.
This Statement of Practice describes how the Revenue will operate ELS and the more
detailed requirements of the service.
LEGISLATION
4.
The main elements of Schedule 3A are - the returns and documents which may be sent via ELS
- approval of electronic filers
- the method and content of transmission
- the hard copy of the information transmitted
- HM Revenue and Customs powers and the taxpayer's rights in relation to the
information transmitted electronically
- the use of the information in proceedings
THE RETURNS AND DOCUMENTS WHICH MAY BE SENT VIA ELS
5.
ELS will be available initially only for returns by individuals under Section 8 TMA,
partnerships under Section 12AA, and trustees under Section 8A, due under self assessment from
6 April 1997. Other returns and amendments to self assessment returns will not, at this stage, be
accepted by ELS. HM Revenue and Customs will be considering the extension of the service to
other returns and forms in the future.
6.
The ELS legislation acknowledges, implicitly, that supporting documents may be sent
separately (for example by post), subject to meeting the relevant time limit (paragraph 3(3) of
Schedule 3A of TMA). Although advised that in strictness statutory time-limits for filing a return
apply equally to any documents intended to accompany it, HM Revenue and Customs will accept
that any documents submitted within one month of the return accompany it for the purpose of
making a disclosure within section 29 TMA if the return indicates that such documents have
been, or are to be, submitted. Where documents have been sent outside that time limit, HM
Revenue and Customs will consider sympathetically any request for them to be treated as
supporting the return in question for that purpose.
7.
ELS will accommodate all the information which may be given on the SA tax return,
including any further details in the white space areas provided on the return for additional
information. The service will be able to cope with substantial amounts of additional data should
that be considered appropriate by the taxpayer or his adviser. However, in the majority of cases,
the information from the core return and supplementary pages, together with limited details in the
`white space', should facilitate adequate disclosure of the taxpayer's affairs.
APPROVAL OF ELECTRONIC FILERS
8.
Any person who is authorised to send information to HM Revenue and Customs via ELS
is described here as a `filer'. Those who wish to transmit information in this way, whether on their
own or another's behalf, must be approved in writing by HM Revenue and Customs. Application
forms for approval are available from HM Revenue and Customs ELS Business Support Team at
Accounts Office Shipley, West Yorkshire, BD98 8AA (telephone: 01274 539301/539325).
9.
Applications for approval will be refused only where there is clear evidence that the
applicant has been involved in the evasion of tax. The application will automatically be refused in
any case where a conviction in relation to a tax offence or a penalty under Section 99 TMA has
been imposed within three years of the application. Where in other cases, refusal is considered,
HM Revenue and Customs will have regard to all relevant facts. Particularly crucial will be any
facts suggesting the likely misuse of the ELS system in any way by the applicant.
10.
Notices of refusal or withdrawal of approval will be given in writing and will include the
grounds underlying HM Revenue and Customs decision. Any person refused approval, or who
has had their approval withdrawn, has a right of appeal against this decision to the Special
Commissioners.
11.
The statute requires approval to be considered in relation to any person wishing to make
transmissions by ELS. However, subject to their right to request applications by those persons in
a business wishing to use ELS, HM Revenue and Customs are prepared to approve an application
by an individual on behalf of the particular business concerned, whether it be a large sole
practice, a partnership or a company. An application on this basis must include details of all those
within the business who have a responsibility for the ELS link, i.e. those persons who have a clear
role in determining the office procedures under which ELS will be operated. This ultimately is
something for each particular organisation to decide, but HM Revenue and Customs will give
advice where necessary.
12.
Any changes in those who have been or should be named in an application must be
notified at yearly intervals. HM Revenue and Customs will issue a request once each year for
confirmation of such changes. Provided applications are updated in this way it will not be
necessary for any concern to seek a fresh approval following each change.
13.
Where an application on behalf of a business cannot be approved because of concerns
relating to certain persons named in the application, HM Revenue and Customs may nevertheless
grant approval provided an undertaking is given by the applicant that those persons who would
not gain approval in their own right, are not permitted to make, or authorise, electronic
transmissions via ELS link. Similarly, where a person newly joining the organisation would not
gain approval in his or her own right, HM Revenue and Customs may seek confirmation that he
or she will not be permitted to make, or authorise, electronic transmissions via ELS link.
14.
HM Revenue and Customs anticipate receiving applications for approval not only from
advisers who wish to file their own clients' returns, but also from persons who intend simply to
offer the facility of electronic filing. Such applications will be examined to ensure there is a
sufficient degree of contact between the taxpayer and the filer. This contact is important where a
return is rejected and HM Revenue and Customs must be satisfied that the filer's processes ensure
that the taxpayer is notified promptly of any messages from the Revenue, including any rejection
of the information sent.
15.
Any approval of a person will apply to the business or practice which that person
represents, regardless of the number of locations from which it is operated.
THE METHOD AND CONTENT OF TRANSMISSION
16.
Those persons transmitting information electronically must use approved software. HM
Revenue and Customs will arrange with the software suppliers to ensure that the systems are
compatible. Part of this process will allow the software products to carry an indication (a
kitemark) that they are approved for ELS use by HM Revenue and Customs.
17.
Approval will be granted following successful testing between HM Revenue and
Customs and the software house. In addition to assuring all parties that the software performs to
specification HM Revenue and Customs will require proof that the software package produces
acceptable hard copy transcripts containing the taxpayer declaration and authority.
18.
The technical specifications for the software are - Return check sum this will be an algorithmic value calculated from the numeric values
on the return. The requirement is that the sending tax return application calculates the
value, using an Inland Revenue published standard. HM Revenue and Customs will
recalculate the value on receipt and compare the result with that received from the filer.
The return check sum field will be mandatory within the EDIFACT message.
(EDIFACT is the international messaging standard for defining the data format and
structure of electronic data interchange.)
- Unique Electronic Tax Return Identification Number - this will be a number created by
the tax return software, by reference to a Revenue published standard. The standard
will include date, time and form and taxpayer reference fields as a minimum. The
number will be mandatory within the EDIFACT message and will be incorporated, as a
further check, in the Revenue acknowledgement message.
- The software applications must result in an electronic return being sent to a defined
EDIFACT standard. The return and acknowledgement/rejection messages will be to a
defined message type including structure, content and (EDIFACT) code.
- This information will be incorporated in an ELS EDIFACT Guide which will provide
an overview, sample messages, addressing and batching strategy, data communications
overview, forms definition, change control, list of ELS forms and security requirements
and measures.
- The above EDIFACT Guide will, as stated, include a section confirming and providing
details that the required communications protocol must be X.400 (1984 or 1988)
conformant.
- The sending applications must be capable of receiving and processing return
acceptance or rejection messages.
19.
Having prepared a taxpayer's return using an approved software package, the filer must
print out a standard hard copy of the information, containing the authentication which the
taxpayer must sign before the information is transmitted. This authentication, which replaces the
taxpayer's signature on a paper return, effectively represents his authority for the filer to transmit
the information. The authentication must be an integral part of the hard copy transcript of the
return data to be transmitted.
20.
A mandatory part of the electronic return is the filer's confirmation that the hard copy was
made and authenticated before the information was transmitted. It will also be necessary for the
date on which the taxpayer signed the authority to transmit to be included in the transmission.
Where this date is not supplied the return will not be accepted and an appropriate rejection
message will be sent to the filer.
21.
HM Revenue and Customs approved software ensures that the hard copy which the
taxpayer endorses as complete and correct contains the information that is transmitted to HM
Revenue and Customs. This will, in part, be achieved by each transmission of a new or corrected
return bearing the unique identification number, which is a requirement of HM Revenue and
Customs approval of the software. This code will be part of the transmission to HM Revenue and
Customs and part of the acknowledgement message.

THE HARD COPY OF THE INFORMATION TRANSMITTED
22.
Paragraph 8(1) of Schedule 3A TMA provides that a hard copy of the information
transmitted is made within the terms of the statute if it is made under arrangements designed to
ensure that the information contained in the hard copy is the information in fact transmitted.
These arrangements refer to the working practices adopted in relation to electronic filing by filers.
23.
As a minimum HM Revenue and Customs expect that safeguards are put in place to
ensure or enable the following - the authorisation of the manner in which all electronic transmissions via ELS are made
only by those who have been specifically approved, or included in a list of partners in
an approved partnership;
- the physical security of the computer system;
- the prevention of earlier or later versions of the return to that authorised by the taxpayer
being sent in error;
- only authorised staff have access to computer systems and taxpayer files;
- access to any integrated or separate communications applications for ELS;
- security of back up or archiving data.
HM REVENUE AND CUSTOMS' POWERS AND THE TAXPAYER'S RIGHTS IN
RELATION TO THE INFORMATION TRANSMITTED ELECTRONICALLY
24.
The legislation provides that HM Revenue and Customs shall be able to exercise their
powers in respect of the information received electronically, and the taxpayer shall be able to
make claims to 'error or mistake' relief or to amend a return on the basis of the information
transmitted. Furthermore, anyone who has their return filed electronically will not be prevented
from exercising any right to which they would have been entitled had the return been submitted in
paper form.
THE USE OF THE INFORMATION IN PROCEEDINGS
25.
When a tax return is sent to HM Revenue and Customs in paper form there can be no
dispute over what the taxpayer actually approved to be submitted. With the transmission of
information in electronic form, bearing no signature, this may not be the case. The signed hard
copy of the information is the taxpayer's evidence of the details he authorised to be sent. It is an
important document, which the taxpayer is strongly advised to keep, or to have his accountant
keep, for the same period that any underlying records need to be retained.
26.
In the event of any proceedings in relation to a tax return which was delivered via ELS,
the taxpayer will have an opportunity to show that he authenticated a valid hard copy which will
then stand as evidence of the information transmitted. Otherwise it will be open to HM Revenue
and Customs to produce their own hard copy of the information which was received. It is
expected that these two versions will be identical, but it is clearly in the taxpayer's best interests
that his own authenticated hard copy is retained, should there be a need to produce it in
proceedings.
MISCELLANEOUS
Availability of network
27.
It is expected that the ELS network will be available to filers generally for 24 hours per
day. Any unavailability of the system (e.g. to allow for maintenance), whether or not scheduled,
will be notified by the SMG provider to filers. The availability of the network will be subject to a
Service Agreement between HM Revenue and Customs and the SMG provider.
Acknowledgements
28.
Any return received at the SMG should result in an acceptance or rejection message
being available for collection by the agent within the next working day. The exact details will
depend on the Service Agreement between HM Revenue and Customs and SMG provider as well
as the computer technologies used.
29.
A filer will get a non delivery report as part of the process where, in exceptional
circumstances, the file has not been successfully transmitted to the SMG (for HM Revenue and
Customs). The absence of this message indicates that the package has been received, but not
opened, at the SMG. Filers will also be able to optionally request a delivery report confirming
that the file containing the return or returns has been received but not yet processed.
Date of Receipt
30.
The legislation provides that the obligation to deliver a return is not fulfilled until four
conditions are met. The first three are the approval of the filer, the approval of the
transmission process and the authentication of a hard copy. The fourth condition is that the
information transmitted to HM Revenue and Customs is accepted. That is notified to the filer
when HM Revenue and Customs issue an acceptance signal in respect of the information.
31.
It follows that until HM Revenue and Customs have issued this acceptance of the
information, the filing obligation is not fulfilled. For this reason, taxpayers and filers are strongly
advised to ensure that the transmission is made at least 24 hours before the end of the day on
which the time limit for submitting the return expires.
32.
However, it is a feature of the system that the date on which the electronic return is
lodged with the SMG is recorded. Provided this date is no later than the end of the period by
which the return may be delivered, and that the information is not rejected for any reason, a
penalty for late submission will not normally be sought, even though the acceptance signal may
be transmitted after the due date. As this inevitably involves a certain degree of risk, taxpayers
and filers should not rely on this practice to file returns via ELS on the due date.
33.
Where a return is rejected the same rules will apply to the date of its resubmission and
final acceptance.
Rejections
34.
Where returns are rejected by the ELS system a suitable message will be sent back to the
filer. This will detail why the processing of the return has not been possible. The filer can then
correct the return and resubmit the information electronically. Where the information changes in
any way the resubmission will require a fresh authorisation by the taxpayer.
35.
It should be noted that this resubmission does not include the transmission of an amended
return (i.e. one altered other than in response to a rejection message) following a previously
accepted one. Amended returns must be submitted on paper.
SP2/97
Authorised unit trusts, approved investment trusts, and open-ended investment

companies: Monthly savings schemes (superseded by SP2/99)
SP3/97
Investment trusts investing in authorised unit trusts or open-ended investment

companies
Introduction
1.
This Statement of Practice sets out HM Revenue and Customs views on the tax
implications of investment by investment trusts in authorised unit trusts (AUTs) or open-ended
investment companies (OEICs) incorporated in the United Kingdom.
2.
For the purposes of the Tax Acts, each sub-fund of an AUT which is an umbrella scheme
is regarded as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT.
Similarly, each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its
own right, and the umbrella company itself is not regarded as an OEIC.
3.
Where a sub-fund of an umbrella scheme is treated as an AUT for tax purposes,
references in this Statement to the units of that AUT are to be regarded as references to the rights
or interests (however described) of those persons who for the time being have rights in the subfund in question. Similarly, where a sub-fund of an umbrella company is treated as an OEIC for
tax purposes, references in this Statement to the shares of that OEIC are to be regarded as
references to the shares in issue of the umbrella company which for the time being confer rights
in the sub-fund in question.
Approval of investment trusts
4.
A company has to satisfy the various tests set out in section 842 of the Income and
Corporation Taxes Act 1988 for a particular accounting period if it is to be approved by HM
Revenue and Customs as an investment trust for that accounting period. HM Revenue and
Customs accept that units in AUTs and shares in OEICs are to be treated as shares in companies
for the purposes of those tests.
5.
In the majority of cases, no further point arises, since companies seeking approval as
investment trusts do not generally have substantial investments in AUTs or OEICs. However,
where there is substantial investment of this sort, the test in section 842(1)(b) may be relevant.
This is because this test restricts the size of an investment trust's holding in any one company,
except in the case of a company that:
is itself an approved investment trust; or
would qualify as an investment trust but for the public listing test in section 842(1)(c).
6.
HM Revenue and Customs consider that for the purposes of section 842(1)(b), an AUT or
OEIC can, provided it meets one condition, be regarded as a company which would qualify as an
investment trust but for the listing test. As a result there is no restriction on the size of the
company's investment in that AUT or OEIC.
7.
The condition to be met reflects the test in section 842(1)(a). It is that, for the period of
time in the investing company's accounting period during which it held investments in an AUT or
OEIC, the income of the AUT or OEIC concerned consisted wholly or mainly of eligible
investment income.
8.
For these purposes, eligible investment income is income deriving from shares or
securities, or eligible rental income within the meaning of section 508A of the Income and
Corporation Taxes Act 1988.
9.
HM Revenue and Customs consider that this condition will always be satisfied where the
AUT concerned is:
a securities fund for the purposes of the Regulations for AUTs which have been made
by the Financial Services Authority (FSA) under the Financial Services Act 1986; or
a sub-fund of an authorised umbrella scheme which, according to the terms of the
scheme, would be a securities fund if it were itself the subject of an authorisation order.
10.
Similarly, HM Revenue and Customs consider that the condition will always be satisfied
where the OEIC concerned is:
a securities company for the purposes of the corresponding FSA Regulations for OEICs
incorporated in the United Kingdom; or
a sub-fund of an umbrella company which, according to the company's instrument of
incorporation, would be a securities company if it were itself the subject of an
authorisation order.
11.
Where the AUT or OEIC concerned does not fall within the categories described in
paragraph 9 or 10 above, the question as to whether the relevant income consisted wholly or
mainly of eligible investment income (and so whether that AUT or OEIC could count as the
equivalent of an investment trust for the purposes of Section 842(1)(b)) will be tested by
reference to the facts.
12.
HM Revenue and Customs consider that this test has to be applied for each accounting
period in which the company investing in an AUT or OEIC continues to be so invested. And, for
the purpose of this test, income is regarded as consisting wholly or mainly of eligible investment
income if at least 70 per cent of it is eligible investment income.
SP4/97
Taxation of commission, cashbacks and discounts
Introduction
1.
This Statement sets out the views of the Commissioners for Her Majestys Revenue and
Customs of the correct treatment for tax purposes of commission, cashbacks and discounts. The
passing on to customers by intermediaries or agents of the whole or part of commission and the
payment of cashbacks or the granting of discounts by the providers of goods or services has
become increasingly common. These arrangements have given rise to considerable uncertainty
about the tax consequences for both customers and intermediaries which previous Statements of
Practice were unable to resolve. This Statement sets out HM Revenue and Customs practice in
applying the law to these arrangements and in particular it confirms that most customers are not
liable to tax on commission, cashbacks and discounts.
2.
Sections A and B (paragraphs 3-10) set out both the different types of receipt and
arrangements covered by the Statement and when these receipts are not liable to tax.
Section C is concerned with the liability to tax under the different cases of Schedule D. It sets out
the circumstances in which commission, cashbacks and similar inducements will be taken into
account as receipts
in computing taxable profits from a trade or profession under Case I or II of Schedule D
(paragraphs 11-15);
in computing other taxable annual profits under Case VI (paragraph 19).
It also provides guidance on the deductibility of commission etc. passed on to the customer
in computing profits under Case I or II (paragraph 17);
and
in computing profits under Case VI (paragraph 21).
The rest of the Statement is concerned with the tax treatment of persons receiving or becoming
entitled to commission or a cashback under
the Income Tax (Employments and Pensions) Act 2003 (ITEPA), covered in section D
(paragraphs 23-32). (The deductibility of commission passed on to the customer and the
operation of PAYE are dealt with in paragraphs 33 and 34 respectively);
Capital Gains Tax, covered in section E (paragraph 35);
and
Life insurance and personal pensions, covered in section F (paragraphs 36-41).
A. Scope
3. This Statement covers
Commission (meaning a sum paid by the providers of goods, investments or services to agents
or intermediaries as reward for the introduction of business). Sometimes, commission is
passed on to the customer or to some other person by the agent or intermediary, or the
customer may receive commission direct from the provider of the goods or services if that
provider would normally pay commission to an agent or intermediary.
Cashbacks (meaning lump sums received by a customer as an inducement for entering into a
transaction for the purchase of goods, investments or services and received as a direct
consequence of having entered into that transaction (for example a mortgage)). The payer
may be either the provider of the goods, investments or services or another party with an
interest in ensuring that the transaction takes place.
Discounts (meaning that the purchaser's obligation is to pay less than the full purchase price of
goods, services or investments, other than as a result of any entitlement to commission or a
cashback).
4.
It deals with liabilities to income or corporation tax under the rules of Schedule D
ITEPA, capital gains tax or the chargeable events legislation (that is, the rules for taxing gains on
certain insurances) and with tax relief in respect of contributions to personal pension schemes.
5.
It is not practicable to cover in this Statement every situation that may arise. There will
be individual cases which do not fall squarely within its terms where the taxation consequences
may be different. For example, where inducements or rewards offered to customers take the form
of a series of payments (and are not simply capital sums calculated in advance but paid in
instalments) they may be taxable as income in the recipients' hands. It is beyond the scope of the
Statement to give a view on all such cases. They will have to be dealt with on an individual basis
and the taxation consequences in each case will depend on the precise nature of the arrangements
entered into.
B.
General
6. The Statement covers the main circumstances in which commission or a cashback is likely to
be passed between the parties to a transaction. It deals with arrangements where
commission or a cash-back is
- received
- netted-off (meaning that the purchaser's entitlement to commission or a cash-back is set off
against the obligation to pay the full purchase price for goods or services so that only the net
amount is paid), or
- invested or applied in some way for the benefit of the purchaser

or where
a discounted purchase price is paid, or
extra value is added to the goods, investments or services obtained for the purchase price
where there is no entitlement to commission or a cash-back. An example is the allocation of
bonus units in an investment or of a different class of unit where the purchase price remains
unchanged. However, where the added value represents a return on the investment, the tax
treatment may differ from that dealt with in this statement.
7.
In general, ordinary retail customers purchasing goods, investments or services at arm's
length will not be liable to income or capital gains tax in respect of any commission, discounts or
cashbacks received by them. For example, an ordinary retail customer who, when purchasing a
car, negotiates to receive part of the commission earned on the sale by the salesperson will not be
liable to income or capital gains tax in respect of that commission.
8.
The Statement outlines some circumstances in which receipts are treated as tax-free, or in
which payments qualify for tax relief. However, the legal analysis, and consequent tax treatment,
will not necessarily follow that outlined in the Statement where the receipts or payments in
question form part of a scheme of tax avoidance. Similarly, the treatment outlined in the
Statement may not apply where the recipient of a commission, cashback or other benefit is party
to an arrangement under which the purchase price for goods, investments or services has been
increased.
9.
The tax treatment of the person receiving or becoming entitled to the commission or
cashback will be considered separately from the treatment of the person paying the commission
or cashback.
10.
Unless otherwise indicated, all statutory references are to the Income and Corporation
Taxes Act 1988.
C.
Schedule D
Cases I and II - receipts
11.
Where the provision of the services remunerated by commission etc. is on a sufficiently
commercial, regular and organised basis to amount to a trade or profession, commission and
similar sums to which the trader or professional person becomes entitled will be receipts from
that source. A self-employed insurance or travel agent would normally be in that position.
12.
The fact that some or all of the commission etc. received by a trader or professional
person in the circumstances described in paragraph 11 is passed on to customers does not cause it
to cease to be a receipt of that business. See paragraph 17 below regarding the corresponding
deduction.
13.
Furthermore, commission etc., which would have been taxable if it had actually been
received by a trader or professional person, does not necessarily cease to be taxable merely
because it goes directly to the customer without first being received by the trader. For example,
commission may be passed on by way of a reduction in regular insurance or pension policy
premiums or by the allocation of extra value (e.g. units) to the policy by the insurance company.
In those circumstances, the commission remains a taxable business receipt so long as the trader or
professional person had an enforceable legal right to receive that commission which he
subsequently forgoes in favour of the customer (but as indicated at paragraph 17 below a
deduction may be available in respect of the amount forgone).
14.
Where the trader or professional person neither receives the commission etc. nor has any
such entitlement to it, there will be no taxable receipt in respect of that commission. Thus
commission or a cashback payable to a trader or professional person within the first bullet of
paragraph 6 is a taxable business receipt but a discount or added value within the last two bullets
of paragraph 6 above will not be a taxable receipt.
15.
Commission etc. receivable as an incident in the carrying on of any other business
taxable under Cases I and II of Schedule D should be taken into account in computing the profits
of the business. For example, the following items should be taken into account in computing the
profits of the business:
insurance commission to which an accountant becomes entitled in the course of the
profession;
commission received in respect of business insurance contracts taken out by, say, a grocer (for
example, if the premium paid has been reduced by the commission, by deducting only the net
sum);
a cashback received on a car purchased for business purposes (normally by reducing the cost
of the car for the purposes of capital allowances).
16.
In strict law commission earned for business introduced in the course of a trade or
profession remains a taxable business receipt even where it is derived from a private transaction
funded by the trader or professional person. For example, a travel agent may obtain commission
for booking a package holiday for himself and his family with a tour operator whose holidays he
sells to the public. But, by concession, there may be excluded from taxable profits so much of
any such commission as does not exceed the maximum amount the trader or professional person
could reasonably have been expected to pass on to an arm's length customer buying the same
services or product.
Case I and II - deductions
17.
Commission etc. passed on to a customer, or otherwise forgone in the circumstances
described in paragraph 13 above, as an inducement to enter into a transaction is deductible if it is
laid out wholly and exclusively for the purpose of the trade or profession. The statutory test is
very likely to be satisfied if the customer required the commission to be passed on as a condition
of entering into the transaction or if the transaction was one between independent parties acting at
arm's length.
Presentation of information in tax return and/or accounts
18. This paragraph applies to commission etc. which is passed on other than by a separate
payment and is to be regarded as a taxable receipt as described in paragraph 13 above. In these
circumstances, the calculation of the gross commission received and the amount passed on may
not be a straightforward matter. Subject to the conditions described below, the commission
applied in this way may be excluded from both commission income and commission expenses in
the intermediary's tax return. Those conditions are that either the customer required the
commission to be passed on as a condition of entering into the transaction or the transaction was
one between independent parties acting at arm's length (see paragraph 17 above).
Case VI - receipts
19.
Commission etc. may sometimes be received by a person as consideration for introducing
a customer to a supplier of goods or services, other than in circumstances where the commission
would be taxable as income under Case I or II of Schedule D (see paragraph 11 above) or as
employment income (see paragraph 25 below). Subject to paragraph 20 below, if the commission
arises under an enforceable contract, it should be brought into account as a taxable receipt in
calculating the profit from the transaction under Case VI of Schedule D.

20. A sum, however described, which is received by an ordinary retail customer as consideration
for the purchase by the customer of goods or services should not be regarded as a taxable receipt
in computing profits under Case VI. This is the case whether the payer is the provider of the
goods or services or another party with an economic interest in ensuring the transaction takes
place.
Case VI - deductions
21.
Where, in the circumstances described in paragraph 19 above, some or all of the
commission etc. in question is passed on to the customer, a deduction is due where the customer
requires the commission to be passed on as a condition of entering into the transaction or where
for some other reason the payment is necessary to earn the commission.
Building society distributions
22.
Cashbacks received from building societies are not regarded as distributions in respect of
investments for the purposes of the Income Tax (Building Societies) (Dividends and Interest)
Regulations 1990 SI 1990 No 2231. Building societies are not therefore required to deduct tax
from mortgage cashbacks by virtue of those Regulations.
D.
Employment Income
23.
The word employee means office holder or an employee. The word earnings defined in
section 62 ITEPA includes such things as salaries, fees, wages and profits.
24.
It is a question of fact whether a sum within the scope of this Statement is received in the
capacity of employee/office holder or in some other capacity such as the purchaser of a policy,
goods or services. This part of the Statement covers only liability arising on earnings from
employment and liability under the benefits code 63 ITEPA. In some circumstances liability to
tax as employment income may arise under other provisions, such as the legislation dealing with
termination and change payments. Those provisions should be considered even where there is no
liability under the provisions considered here.
Commission arising from, and discounts in connection with, goods, investments or services
sold to third parties
25.
Employees who receive, or are entitled to receive, commission (as earnings) from their
employment in respect of goods, investments or services sold to third parties are assessable under
section 62 ITEPA on the full amount of that commission. This is so whether or not the
commission is passed on by them to the customer and whether the commission is paid by the
employer or anyone else.
26.
Where an employee consents or directs that commission which is due from his or her
employment should be either paid to the customer or anyone else, or invested for his or her
own benefit or the benefit of the customer or anyone else, that employee is assessable under
section 62 ITEPA on that commission (but see paragraph 33 for circumstances where a deduction
will be admissible).
27. Where the purchaser pays a discounted price, there is no tax liability on the employee if
the purchaser is not a member of the employee's family or household and
neither the employee nor any member of his or her family or household receives anything
(money or benefits) in consequence.
If the purchaser is a member of the employee's family or household, the provision of goods or
services at a discount may constitute a taxable benefit for the employee. However, where the
discounted price paid covers the cost of those goods or services to the provider, there will be no
taxable benefit.
In all cases the cost of providing goods or services is a question of fact. But where the sale is of
an insurance policy there will be no taxable benefit if the discount is no greater than the sum of
the commission that would otherwise have been paid by the insurer on selling the policy to the
third party, and
the anticipated profit on the policy.
Commission and discounts in respect of an employee's purchase of goods, investments or
services from the employer
28.
Paragraphs 29 and 30 below are concerned with cases of commission arising from
employment. Where a commission is available to an employee on the same basis as it is available
to members of the general public, it will not arise from the employment. Paragraph 31 is
concerned with tax charges under the benefits legislation. Where the commission or the net or
discounted amount referred to within that paragraph is available on the same basis to members of
the general public, no benefit will result.
29.
Employees who receive commission (from employment) in respect of their own purchase
of goods, investments or services from the employer are liable to tax under section 62 ITEPA on
the full amount of that commission. Where such a commission is placed at the employee's
disposal but the employee requests, permits or is required to accept that the commission is applied
in some way for his or her benefit, the commission remains liable to tax.
30.
Where an employee does not receive and is not entitled to receive, or to have applied for
his or her benefit, a cash commission, but does receive from employment a right which has a
monetary value, a liability will arise on that value because that right counts as earnings within
section 62 ITEPA. An example is the case where an additional amount is invested in an
employee's investment and that investment can be disposed of or otherwise turned to account.
31.
Where an employee who is not in lower paid employment (see section 217 ITEPA)
receives a commission from, or pays a net or discounted amount to, the employer in respect of his
or her purchase of goods, investments or services, the employee will be liable to tax on the
benefit that has been provided. The charge to tax upon a net or discounted amount is calculated
following the principles described in paragraph 27 above. The charge upon a commission, not
otherwise chargeable to tax, is calculated by reference to the cost of its provision and will
typically be the amount paid.
Services etc. provided by persons other than the employer in return for commission, or for a net
or discounted purchase price, may give rise to a charge calculated in the same way if the benefit
is provided by reason of the employment.
Cashbacks
32.
Where an employee receives a cashback from his or her employer or a third party on the
same basis as is available to members of the general public, no amount is chargeable to tax as
employment income if the cashback is received under a contract with the employer or third party
disassociated from the contract of employment, and the employee gives fair value for the
cashback under that contract or by entering into some other contract with the employer or third
party. The cashback will then be neither earnings from employment (within section 62 ITEPA)
nor a benefit (within section 201 ITEPA).
However, if in such circumstances the cashback is provided gratuitously and is received from the
employee's employer, liability under the benefits code must be considered.

Deductions
33.
Where commission etc. within the scope of this Statement is taxable employment income,
a claim for deduction in respect of commission shared with, passed on to, or invested for the
benefit of, some other party will be admissible if the employee is obliged to expend the sum
wholly, exclusively and necessarily in performing the duties of the office or employment. Such
an obligation is likely to exist when the transaction falls within the normal framework of the
employer's business and is a transaction between independent parties acting at arm's length.
PAYE
34.
PAYE applies where commission etc. is paid to an employee or on his or her behalf if it
is taxable as employment income. This includes amounts relating to commission invested on
behalf of the employee if the amount of the commission is taxable. Where commission or other
taxable income is provided in the form of readily convertible - assets rather than cash, PAYE
applies under section 696 ITEPA.
E.
Capital Gains Tax
35.
A cashback does not derive from a chargeable asset for capital gains tax purposes. No
chargeable gain therefore arises on receipt of the payment. (A cashback does not include a cash
payment by a building society to members etc. on take-over by, or conversion to, a bank; or by
other mutual organisations such as insurance companies or friendly societies on demutualisation.)
F.
Life Insurance and Personal Pensions
Qualifying life insurance policies
36.
Where commission etc. in respect of a policy holder's own qualifying life insurance
policy is received, netted off or invested, that policy will not be disqualified as a result of
entitlement to that commission if the contract under which commission arises is separate from the
contract of insurance. In practice, the Revenue will not seek to read two contracts as one in a way
that would lead to the loss of qualifying policy status.
37.
Where a policyholder pays a discounted premium in respect of his or her own policy, the
premium payable under the policy will be the discounted premium. It is this amount that must be
used for the purposes of establishing whether the relevant qualifying rules are met.
Calculation of chargeable event gains in respect of life insurance policies, capital
redemption policies and life annuity contracts
38.
Chargeable event gains are computed by reference to the premiums or lump sum
consideration paid. The amount paid will be interpreted as follows:
where a policy holder pays a gross premium and receives commission etc. in respect of that
policy, the chargeable event gain is calculated using the gross amount paid without taking the
commission received into account;
where an amount of commission etc. is received or due under an enforceable legal right and
subsequently invested in the policy, that amount is included as a premium paid when
calculating the chargeable event gain;
where a policy holder nets off commission from an insurer in respect of his or her own policy
from the gross amount of premium payable and the commission is not taxable as income on
the policy holder, the chargeable event gain is calculated using the net amount paid to the
insurer;
where a policy holder pays a discounted premium, the chargeable event gain is calculated
using the discounted amount of premium paid;

where extra value is added to the policy by the insurer (for example by allocation of bonus
units), the premium for the purpose of calculating the chargeable event gain is the amount paid
by the policy holder without taking the extra value into account.
Tax relief in respect of personal pension contributions
39.
Tax relief for contributions to personal pension schemes is due in respect of a
contribution paid by an individual. The amount of the contribution will be interpreted as follows
where the contract under which the commission arises is separate from the personal pension
scheme contract:
where a contributor pays a gross contribution and receives commission in respect of that
contribution, tax relief is given on the gross amount paid without taking the commission
received into account;
where an amount of commission is received by, or is due under an enforceable legal right to,
the contributor and subsequently invested in the personal pension that gave rise to the
commission, tax relief is given on that amount;
where a contributor deducts commission in respect of his or her own pension contribution
from the gross amount payable, relief is due on the net amount paid;
where a contributor pays discounted contributions, tax relief is due on the discounted amount
paid;
where extra value is added to the policy by the insurer (for example by allocation of bonus
units), relief is due on the amount paid by the contributor without taking the extra value into
account.
40.
If commission were to be rebated to the contributor under the same contract as the
personal pension contract, this would be an unapprovable benefit (since it would involve leakage
of the pension fund to the member) which would jeopardise the tax-approved status of the
arrangement.
41.
The consequences of paying commission on transfers between tax-approved pension
schemes may be different from those outlined if such payment is effectively a benefit not
authorised by the rules of the pension scheme. Alternatively, the misrepresentation as an annual
premium of any premium applied to new pensions business so that a higher rate of rebated
commission is generated will call into question the bona fides of the pension arrangement and
jeopardise its approval from inception.
SP1/98
Tax treatment of expenditure on films
SP2/98
SP3/98
Stamp Duty: Group relief
1.
Section 42 Finance Act 1930 gives relief from stamp duty for transfers of property
between members of the same group of companies. Section 151 Finance Act 1995 similarly
gives relief from duty on the grant of a lease between members of the same group.
2.
Section 27(3) Finance Act 1967 and Section 151(3) Finance Act 1995 are designed to
prevent the use of group relief to avoid stamp duty when property, or an economic interest in it,
passes out of the group.
3.
This statement sets out the Stamp Offices current general practice in order to assist
practitioners in determining whether claims to relief might qualify. The treatment of a particular
case will of course depend on the precise facts. This statement is for general guidance only; and
the facts of a particular transaction may, exceptionally, place it outside the guidelines. It applies
also to the equivalent Northern Ireland legislation.
General
4.
Broadly, Section 27(3) and the corresponding provisions in Section 151, provide that
relief is not to be given if the transfer was made in pursuance of, or in connection with, an
arrangement under which
a.
all or part of the consideration for the transfer was to be provided or received,
directly or indirectly, by a person outside the group; or
b.
the interest being transferred was previously transferred by a person outside the
group; or
c.
the transferor and transferee were no longer to be part of the same group.
5.
The person claiming the relief when the relevant instrument is adjudicated has the onus of
satisfying the Stamp Office that the intra-group transaction is not carried out in pursuance of, or
in connection with, an arrangement of a kind which disqualifies the transaction from relief:
Escoigne Properties Ltd v IRC [1958] AC 549, 564.
Arrangement
6.
In this context, arrangement means the plan or scheme in pursuance of which the things
identified in the subparagraphs of Ss27 (3) and 151(3) have been or are to be done: Shop and
Store Developments Ltd v IRC [1967] 1 AC 472, 493-494. The arrangement need not be based
in contract. It is sufficient if the intra-group transaction is made in connection with that plan or
scheme. The intra-group transaction may be the first bi-lateral step by which legal rights and
obligations are created in pursuance of the arrangement. If there is an expectation that a
disqualifying event will happen in accordance with the arrangement and no likelihood in practice
that it will not, relief will be refused.
7. The
words in connection with are very broad. In Escoigne, there was a gap of four years
between the two steps in issue.
Provision or receipt of consideration by a person outside the group: section 27(3)(a); section
151(3)(a) and (4)
8.
Section 27(3)(a) denies relief where the instrument was executed in pursuance of or in
connection with an arrangement under which any of the consideration is to be provided or
received, directly or indirectly, by a person outside the group. It also denies relief if the
arrangement is one under which the transferor or transferee (or a member of the same group as
either of them) is to be enabled to provide any of the consideration, or is to part with it, in
consequence of a transaction involving a payment or other disposition by a person outside the
group. Section 151 lays down similar rules for leases.
9.
In some cases, the question arises whether loan finance for the purchase or lease will
disqualify an intra-group transaction from relief. It is necessary to look at all the facts of the
individual case, but the Stamp Office will interpret the provisions in the light of their general
purpose of denying relief where the intra-group transaction is a means of saving stamp duty when
the property, or an interest in it, moves out of the group. Accordingly, the Stamp Office are likely
to be satisfied that relief is due if the intra-group transaction is not to be followed by a sale of the
property transferred, or an underlease, to a person outside the group. If the intra-group
transaction is to be followed by a sale or underlease to a person outside the group, but the
claimant can demonstrate that stamp duty will be paid in respect of that transaction in
approximately the same amount as would have been payable if the intra-group transferor or lessor
had itself sold the property or granted the underlease, the Stamp Office are likely to be satisfied
that the intra-group transaction and the transfer or lease out are independent for stamp duty
purposes and grant the relief sought.
10.
A transaction is not disqualified merely because the transferee within the group obtains a
specific loan for the purchase of the asset; or the loan is secured on the asset; or arrangements are
made to replace or novate an existing charge on the property transferred. It will be necessary to
consider the facts as a whole, especially if the loan finance is not straightforward finance on
ordinary commercial terms.
11.
Intra-group transactions will be very carefully scrutinised, and relief may be refused,
where, for example, the intra-group transaction involves or is to be followed by:
12.
the creation or transfer of loan stock or equity capital;
a capital reorganisation of the transferee;
a guarantee by a third party not associated with the group;
the creation of a new charge or financial arrangement whereby title to the

property is, or may be, vested in the lender otherwise than in satisfaction of all or
part of the debt; or
the assignment of the freehold reversion or the intra-group lease to a person

outside the group.
Similarly transactions will be very carefully scrutinised where
all or part of the consideration for the transaction is to remain outstanding or is

represented by intra-group debt, (as the aim and effect may be to reduce the value
of the transferee company on a possible future sale outside the group); or
the existing shareholders of the transferee include shareholders outside the group
and the transaction is to be followed by the declaration of a dividend in specie, or
by the liquidation of the transferee.
13.
Further assurances by way of statutory declaration - the document in which the claim is
made to the Stamp Office - will be required in any case in which the property transferred or
vested intra-group is the only, or only substantial, asset of the transferee. Information to that
effect should be provided in the statutory declaration submitted with the documents.
14.
Where group member A has granted a lease to a person outside the group, and
subsequently grants an underlease to its fellow group member B, so that the rent already payable
by the lessee becomes payable to B rather than A, relief is likely to be given for the intra-group
underlease, provided there are no other factors which suggest that relief should be denied.
Property previously conveyed by a person outside the group: section 27(3)(b)
15.
Section 27(3)(b) was intended to prevent the avoidance of duty on the transfer of property
into a group by means of a sub-sale, so as to take advantage of section 58(4) of the Stamp Act
1891. For example, suppose the property is sold to a group member by a vendor outside the
group, but the sale rests in contract without a transfer of the legal title. The group member then
sells the property to another member of its own group, and directs the vendor to transfer the legal
title to that other member. In accordance with section 58(4) the transfer completing the sale and
the sub-sale is chargeable to duty only in relation to the sub-sale (thus relieving the effect of
section 4 of the Stamp Act). However, section 27(3)(b) would deny group relief for that transfer.
16.
The Stamp Office will continue to apply section 27(3)(b) to schemes of this type and to
any other scheme where an attempt has been made to avoid the duty payable on the acquisition by
the group. However, where an outside vendor sells a property to a member of the group, the sale
is completed by a transfer and stamp duty is paid on that transfer, the Stamp Office will normally
regard any subsequent intra-group transfer as independent, and grant relief for the transfer within
the purchasers group.
Dissociation or demerger of transferee: section 27(3)(c): section 151(3)(b)
17.
Before the introduction of section 27(3), almost all the avoidance devices encountered in
this area involved the transfer of property to a subsidiary, often created solely as a vehicle for that
property, followed by the transfer of the shares in the subsidiary out of the group. Compared with
a transfer of the property out of the group, a substantial amount of duty could be avoided even
where the subsidiary paid for the property from its own resources. If the consideration for the
intra-group transaction remained outstanding or was represented by debt, duty could be reduced
further by reducing the value of the shares - hence section 27(3)(a).
18.
Section 27(3)(c) was introduced to counter this avoidance in relation to conveyances and
transfers on sale. Section 151(3)(b) deals with leases on similar lines.
19.
In cases of this kind, the Stamp Office will need to be satisfied that the intra-group
transfer or lease is not a step in pursuance of an arrangement to demerge the transferee. The
existence of such an arrangement may be apparent from company documents, correspondence
and other dealings between members of the group and professional advisers, or from discussions
or negotiations with the potential purchasers, underwriters or minority shareholders.
20.
In practice, the Stamp Office will apply these provisions so as to preclude group relief if
there is evidence of a plan or scheme to dispose of the subsidiary and there is no practical
likelihood that the scheme will not be carried through. It will not be regarded as sufficient for the
claimant to contend that such an arrangement which is less than contractual may possibly be
frustrated by unforeseen events or unlikely occurrences. Even a contract may be frustrated.
21.
As the liability of the relevant instrument must, as a matter of general principle, be
determined as at the date of the instrument, the question whether an arrangement of the relevant
kind exists must also be determined at that time, although the Stamp Office may have regard to
what is said and done thereafter to establish the true position (Wm Cory and Son Ltd v. IRC
[1965] AC1088). For the purposes of stamp duty, it is therefore the existence of the scheme or
plan to which these provisions direct attention, not the ultimate outcome of steps which may be
taken to implement that scheme. Accordingly, statements of practice in relation to other taxes
have no application in this context.
SP4/98
Application of loan relationships, foreign exchange and financial instruments

legislation to partnerships which include companies
Withdrawn for company accounting periods beginning on or after 1 October 2002

General
1.
This Statement of Practice supersedes an earlier statement (SP9/94). That statement dealt
with the application of the foreign exchange and financial instruments legislation to partnerships
of which at least one partner was a company within the charge to corporation tax. It did not deal
with the effect of the loan relationship legislation introduced by Finance Act 1996. That
legislation made a major reform to the corporation tax treatment of government and corporate
debt. SP9/94 will continue to be relevant for accounting periods ending on or before 31 March
1996. This SP should be applied to later accounting periods beginning on or before 30 September
2002. For a company accounting period beginning on or after 1 October 2002, this
Statement is superseded by specific legislation. See Schedule 9 paragraphs 19 &20,
sections 87 and 87A Finance Act 1996 (loan relationships and foreign exchange) and
Schedule 26 paragraphs 49 and 50 Finance Act 2002 (derivative contracts).
2.
This revised Statement of Practice describes HM Revenue and Customs view of how the
rules for partnerships apply where profits, losses and other amounts arise to the partnership from
loan relationships (corporate and government debt), exchange differences and financial
instruments and to transactions between a partnership and its members in these areas.
Statutory framework
3.
Section 8(2) Income and Corporation Taxes Act 1988 (ICTA) provides that a company
is chargeable on profits arising to it under any partnership.
4.
Section 114 ICTA 1988 gives the rules for computing profits and losses of a trade or
business where one or more of the partnership members is a company. The profits and losses of
the partnership are computed, for the purposes of corporation tax, as if the partnership were a
company, separate from any company which is a partner. The trade or business carried on is also
treated as separate from any trade etc. which the company member carries on its own account.
5.
These basic rules therefore apply to the computation of profits and losses under
the loan relationships legislation in Chapter II of Part IV Finance Act 1996
the foreign exchange gains and losses (Forex) legislation in Chapter II of Part II
Finance Act 1993 and
the financial instruments (FI) legislation in Chapter II of Part II Finance Act 1994.
Some modifications and consequential adaptations, described in this Statement of Practice, are
needed to address particular situations.
6.
The effect of section 114 ICTA 1988 is to treat the partnership for tax purposes as itself
a party to loan relationships for the purposes of Chapter II of Part IV Finance Act
1996
as entitled to assets and subject to liabilities for the purposes of the Forex legislation
and
entitled to rights, or subject to duties, under interest rate, currency or debt contracts or
options for the purposes of the FI legislation
whatever the position under the general law relating to the partnership.
7.
Section 172 FA 1994 provides a special rule for partnerships, one or more of whose
members is a qualifying company for the purposes of the legislation in that Act on financial
instruments. A qualifying company for that purpose is any company but it does not include the
trustees of an authorised unit trust (even though they are treated as if they were a company for
other purposes), nor does it include an open-ended investment company (OEIC). It does
include an approved investment trust company in relation to interest rate and debt contracts but
not in relation to currency contracts. Where a partnership includes both at least one qualifying
company and at least one company which is not a qualifying company, section 172(4) operates to
require two separate corporation tax computations for the purposes of section 114(1). Otherwise
it does no more than reinforce the requirements of section 114.
8.
Although there is a similar definition in section 153 FA 1993 (exchange differences) of
qualifying company (although for the Forex legislation an investment trust company is never a
qualifying company), there is no specific rule equivalent to section 172 FA 1994. The practice of
HM Revenue and Customs in the rare cases where a non-qualifying company is a member of a
partnership will be to follow section 172 FA 1994 as if it applied to exchange differences.
9.
There is no concept of qualifying company in Chapter II of Part IV Finance Act 1996
(loan relationships). However the trustees of an authorised unit trust and an OEIC, although
treated as companies for many purposes of the Tax Acts, are treated for the purposes of the loan
relationships legislation as if they were subject to income tax rules (paragraph 2(2) Schedule 10
FA 1996 and Part II Open-ended Investment Companies (Tax) Regulations 1997). It follows that
where the trustees of an authorised unit trust are, or an OEIC is, a member of a partnership, they
will not be treated as companies to whom credits and debits under the loan relationships
legislation can be attributed under section 114.
Computation of partnership profits and losses
10.
In any case where one or more companies is a member of a partnership, and they are not
all excluded from the application of the relevant legislation by paragraphs 7 to 9 above,
partnerships should prepare computations of profits and losses from any trade or business under
section 114 ICTA 1988 on the basis that the foreign exchange gains and losses, financial
instruments and loan relationships legislation apply to the partnership as if it were a company.
This computation will be used to determine the shares of profits and losses appropriate to
members subject to corporation tax and who are neither investment trusts (except in relation to
interest rate and debt contracts), OEICs nor the trustees of authorised unit trusts
11.
Where any member of the partnership is an investment trust, an OEIC or the trustees of
an authorised unit trust, another computation should be prepared on the basis that corporation tax
rules ignoring the Forex and FI legislation apply (except where an investment trust is a party to
interest rate or debt contracts), and in the case of an authorised unit trust or OEIC, that the rules in
Schedule 13 FA 1996 rather than the rest of Chapter II of Part IV Finance Act 1996, apply. This
computation will be used to determine the shares of profits and losses appropriate to those
members.
12.
Where there are members of the partnership who are neither companies, nor the trustees
of an authorised unit trust, a computation of profits and losses for the purposes of income tax,
made under section 111 ICTA 1988 will also be required.
13.
Profits and losses (including interest) on loan relationships are treated by Chapter II Part
IV FA 1996 as credits and debits. The debits and credits for the partnership should be computed
following the rules in that Chapter. In particular The authorised accounting method used should be that used in the partnership
accounts, with an authorised accruals method being used if the partnership accounts
do not conform with either authorised method - section 86 FA 1996
A claim under section 91 FA 1996 to set off income tax in the period of receipt rather
than accrual may be made
The special rules for convertible, asset linked and index-linked gilt-edged securities
may apply - sections 92 to 94 FA 1996
Exchange differences are left out of account - paragraph 4 Schedule 9 FA 1996
The bad debt rules in paragraph 5 Schedule 9 FA 1996 apply
The anti-avoidance rules on imported losses (paragraph 10 Schedule 9 FA 1996),
transactions not at arms length (paragraph 11) and loan relationships for unallowable
purposes (paragraph 13) will apply.
but
The rules in paragraph 12 Schedule 9 FA 1996 about continuity of treatment where
loan relationships are transferred between members of a group of companies will not
apply where a loan relationship is transferred to or by a partnership.
A change in partnership profit sharing ratios, including a case where a company joins
or leaves a partnership does not of itself give rise to a related transaction in a loan
relationship to which the partnership is a party.
14.
Trading profits and losses deriving from exchange differences -section 128 FA 1993 and non-trading profits or losses treated by section 129 and 130 FA 1993 as non-trading debits or
credits under the loan relationships legislation should also be computed as set out in paragraph 10
above. In particular Valuations of assets and liabilities should be made in accordance with the accounting
methods used by the partnership - section 159 FA 1993.
The main benefit and arms length rules in sections 135 to 138 FA 1993 will apply by
reference to the circumstances of the partnership.
Section 140 to 143 FA 1993 (deferral of certain gains) may apply. In computing the
amount which may be deferred, the whole of the profits and of various types of exchange
gains and losses of the partnership, as computed for the purposes of corporation tax, will
be taken into account.
15.
Trading profits and losses on financial instruments -section 159 FA 1994 - and nontrading profits or losses treated by section 160 FA 1994 as non-trading debits or credits under the
loan relationships legislation should also be computed as set out in paragraph 10 above. In
particular Valuations of assets and liabilities should be made in accordance with the accounting
methods used by the partnership - sections 156 and 157 FA 1994.
The transfer of value, arms length and transactions with non-resident rules in sections
165 to 168 FA 1994 will apply.
Share of partnership profits and losses for corporation tax purposes
16.
The resulting partnership trading profit or loss, excess of non-trading credits over debits
assessable under Case III or non-trading deficit, should then be apportioned to the partners
according to the partnership agreement. The partners receive a share of the overall result, they do
not receive an allocation of individual debits and credits. The partnership itself is not assessable
to corporation tax and cannot, for example, carry forward non-trading deficits.
17.
Each corporate member of the partnership will be assessed and charged to Corporation
Tax on its share of any trading profit or loss (which will include all loan relationship, foreign
exchange and financial instruments trading profits and losses) as if its share derived from a trade
it carried on alone, and which is separate from any trade it carries on its own account.
18.
The corporate members of the partnership should incorporate their allocation of any Case
III profit or non-trading deficit into their own Case III or non-trading deficit computation. It will
not form a separate pot. The company will be able to claim under section 83 FA 1996 if the
result of combining the two amounts is a net non-trading deficit. It should not claim separately
for its allocation of a partnership non-trading deficit.
19.
For example a company has a non-trading deficit on its own activities of 10,000. It has
a share in a partnership Case III profit of 5,000. The company is treated as having an overall
deficit of 5,000. It cannot surrender as group relief the amount of 10,000 under section 83(2)
FA 1996 and submit to a charge to tax on the 5,000. Similarly if the 5,000 Case III income
arose on its own account, and its share of a partnership deficit was 10,000 it could not surrender
the deficit of 10,000.
Differing accounting periods
20.
A partnership may draw up its accounts to a different date from that adopted by the
corporate members of the partnership. The profits or losses deriving from the corporation tax
computations under section 114(1) ICTA 1988 should be allocated as necessary (normally on a
time basis) between the relevant accounting periods of the company members themselves.
Interaction with capital gains tax
21.
For companies which are within the charge to Corporation Tax and, for the purposes of
the foreign exchange or financial instruments legislation, are qualifying companies, certain assets
(e.g. foreign currency, certain debts and some interest rate and currency contracts and options) no
longer give rise to chargeable gains following Finance Acts 1993, 1994 and 1996. However,
these assets may still give rise to chargeable gains in the hands of persons (including individuals)
who are not subject to Corporation Tax. These assets may also, in certain circumstances, give
rise to chargeable gains in the hands of some insurance companies. Section 59 TCGA 1992
(treatment of partnership assets) and Statement of Practice D12 will continue to apply to the
disposal of shares in partnership assets to which members of the partnership who are not
companies subject to corporation tax are entitled. In certain circumstances qualifying companies
will also be treated as having chargeable gains and losses on liabilities where corresponding
matched assets are disposed of - see paragraph 31 onwards below.
Connected persons and section 87 FA 1996
22.
Section 832 ICTA defines a company as excluding a partnership. Section 114 ICTA
1988 however provides that where at least one of the partners is a company, the profits of any
trade, profession or business carried on by the partnership shall be computed for the purposes of
Corporation Tax as if the partnership were a company. HM Revenue and Customs takes the view
that this statutory fiction does not extend to making a partnership a company for the purposes of
section 87(3) FA 1996 (accounting method for connected parties). It also takes the view that a
partnership is neither a participator nor an associate of a participator within the meaning of
section 417 ICTA 1988. A partnership is not therefore connected for the purposes of section 87
Finance Act 1996 with any of its members which provide loans to the partnership. Companies
making loans to connected parties are usually denied bad debt relief by paragraph 6 Schedule 9
FA 1996. But when a loan is made from a corporate member of a partnership to the partnership
(or vice versa) it follows from HM Revenue and Customs view on section 87 Finance Act 1996
that bad debt relief may be available depending on the circumstances of the debtor. It also
follows that where a partnership releases a company member from repaying a debt, or vice versa,
the relevant party must recognise a credit equal to the amount released.
23. Exam
ple: Two independent and unconnected companies, A, and B, go into partnership to
develop a new product. The partnership, X, is initially funded by loan capital of 50,000,
interest free, from each of the two companies. The profit/loss share is 50:50, between the two
partners. Company A then injects a further 500,000 into the partnership to fund the production
process. This is a five year loan which carries interest of 5% per annum. The business does not
do quite as well as expected and eventually the production facility and business is sold to another
party for 200,000. This entire amount is paid to Company A in full satisfaction of its debt of
500,000. What are the debits and credits?
24.
HM Revenue and Customs would treat the partnership as a separate person to compute
profits and losses. The partnership will accrue interest of 25,000 per year which is an allowable
debit in its Case I computation. The overall Case I profit or loss for each accounting period is
allocated 50:50 to the partners. On the sale of the business the partnership would have a
300,000 credit for the Case I computation when it satisfied its debt of 500,000 with a payment
of 200,000. A and B release the remaining debt of 50,000 each, resulting in a further 100,000
credit for the partnership.
25.
Company A would accrue interest of 25,000 per year which is a credit in its Case III
computation. In the period the business was sold Company A would bring in 50% of the trading
profit of the partnership (including the credits of 300,000 and 100,000). Company A would be
entitled to bad debt relief for 300,000 on the loan of 500,000 and of 50,000 on the other loan.
This would be given as a debit in its Case III computation.
26.
In the period the business was sold Company B would bring in 50% of the trading profit
of the partnership (including the credits of 300,000 and 100,000). Company B would be
entitled to relief of 50,000 as a debit in its Case III computation.
Interest paid or received under deduction of income tax
27.
Yearly interest paid by or on behalf of a partnership in which a company is a member
should, subject to section 349(3), be paid under deduction of tax - section 349(2)(b) ICTA 1988.
28.
Where a partnership of which a company is member receives interest under deduction of
tax, HM Revenue and Customs practice will be to accept that the income tax suffered should be
apportioned amongst the company partners in the same proportion as the interest under the loan
relationship is apportioned.
Local currency elections
29.
Section 92 FA 1993 lays down a general rule that the profits of a trade are to be
expressed in sterling. This codified the existing law that still applies to all other computations of
income and profits. However, sections 93 to 95 FA 1993 allow companies to elect (via
regulations) for trading profits of certain companies to be computed by translating a figure of
profit calculated in a currency other than sterling, without requiring a translation of qualifying
assets and liabilities denominated in that currency. In Statement of Practice 9/94 HM Revenue
and Customs took the view that unless a partnership consisted wholly of qualifying companies it
could not make this local currency election. The revised Inland Revenue view is that because
section 114 Taxes Act 1988 (partnerships involving companies) provides for computations to be
prepared as if a partnership were a company, then where at least one of the partners is a
qualifying company it is open to that partnership to make a local currency election. Any election
must satisfy the conditions in the Local Currency Elections Regulations (SI 1994 No 3230)
applied to the partnership as if it were a company. All partners who are, at the time of the
election, subject to United Kingdom corporation tax should sign any election. Without all the
signatures, HM Revenue and Customs will treat the election as not effective. In cases where an
effective election is made that election will be regarded as irrevocable and will not cease to be
valid on subsequent partnership changes.
Deferral
30.
Under section 139 to 143 FA 1993 qualifying companies may claim to defer a proportion
of unrealised exchange gains. This facility will also be available to qualifying partnerships and
the practice of HM Revenue and Customs will be to consider claims to deferral made by the
partnership (rather than individual company members) based on the computation prepared under
section 114(1) ICTA 1988. In any accounting period the amount of any exchange gain to be
deferred will be the proportion of that gain which is appropriate to qualifying corporate members
of the partnership. In other words each of the corporate partners which is a qualifying company
will be able to exclude from its share of exchange gains and losses the appropriate part of the
deferred gain. The same approach will be taken to amounts treated as accruing by virtue of
section 140(4) FA 1993 in the period to which the gains have been deferred.
31.
It follows that a company member of a partnership cannot make a deferral claim in
respect of a gain attributed to it under section 114 if the partnership has not itself made a claim.
But it can make a claim in respect of its own gains arising otherwise than through the partnership,
whether or not a partnership claim has been made for the partnership gains, and no account will
be taken of partnership gains or losses in establishing the amount of the companys own gains
that may be deferred
32.
The complex rules for companies which are members of groups set out in paragraph 4 of
the Exchange Gains & Losses (Deferral of Gains and Losses) Regulations (SI 1994/3228) will not
however apply to partnerships. The treatment of the partnership as a company by section 114 of
the Taxes Act does not extend to deeming the partnership as such to be a member of a group.
Matching
33.
Under regulations 4-11 of The Exchange Gains and Losses (Alternative Method of
Calculation of Gain or Loss) Regulations 1994 qualifying companies can elect to reduce to nil
exchange differences on liabilities which match certain assets (shares in associated or subsidiary
companies, net investments in branches outside the UK and ships or aircraft). HM Revenue and
Customs has revised the view expressed in Statement of Practice 9/94 which limited the range of
assets for which a partnership may make a matching election. It will now accept that partnerships
which have eligible liabilities as described in regulation 5(4) or (5) can make a matching election
for the full range of eligible assets described in regulation 5(6) SI 1994 No 3227. Where an
election is made, HM Revenue and Customs will not treat it as effective unless it is signed by all
partners subject to United Kingdom corporation tax.
34.
It follows that since a partnership is treated as if it were a company for the purposes of
computing exchange gains and losses, and in particular for computing what gains and losses in
liabilities may be deferred under the matching rules, a company cannot make a claim to match its
own liability (one which is not its share of a partnership liability) with an asset held by the
partnership, whether or not the partnership has made an election to match the asset.
35.
Under regulation 7 of the Alternative Method regulations, disposal of a matched asset
triggers the calculation of the aggregate exchange gains and losses on the corresponding liability
which have not been taken into account for tax purposes because they have been reduced to nil
by regulation 5(2).
36.
The net exchange gain or loss thus found is treated as a chargeable gain or allowable loss
accruing at the same time as the asset was disposed of. If the matched asset was however a ship
or aircraft, the net gain or loss is treated as an exchange gain or loss.
37.
In cases where there has been no change in the partnership, or in any partners asset share
ratio, between the date the matching election for the asset has effect and the date the asset is
disposed of, any chargeable gain or allowable loss produced by regulation 7 will accrue to the
partners in accordance with section 59 TCGA 1992 and Statement of Practice D12 in the same
way as the chargeable gain or allowable loss on the matched asset will accrue.
38.
If the regulation 7 gain or loss is an exchange gain or loss then it will be allocated to the
partners in the manner described in paragraph 15 onwards.
39.
There may be cases however where a corporate partner in a partnership which has made
a matching election leaves the partnership or reduces its asset share ratio before the matched asset
is disposed of by the partnership. Where this happens, the partner is treated as disposing of the
whole or part of his share in the matched asset - Statement of Practice D12 Paragraph 4 and the
appropriate calculation of excluded exchange gain or loss should be made under regulation 7. A
proportionate part of the gain or loss will then be allocated to the partner leaving or reducing its
asset share. On a subsequent actual disposal of the asset by the partnership an appropriate
adjustment should be made to the regulation 7 calculation.
40.
It is a condition of HM Revenue and Customs accepting a matching election at
partnership level that each partner which is a qualifying company for the purposes of the Forex
legislation at the time the matching election has effect should also undertake to return any
regulation 7 gain accruing to it in accordance with this statement if it has left the partnership or
reduced its asset share ratio.
Anti-avoidance rules
41.
As mentioned in paragraphs 13 to 15 above, the practice of HM Revenue and Customs
will be to apply the rules in sections 165 to 168 FA 1994, sections 135 to 138 FA 1993 and
Chapter II Part IV FA 1996 to the partnership as though it were a qualifying company. But it will
also apply these rules where appropriate to individual partnership members.
SP5/98
Venture Capital Trusts and the Enterprise Investment Scheme: Value of gross
assets Supersedes SP7/95
SP6/98
Enterprise Investment Scheme, Venture Capital Trusts, Capital Gains Tax

Reinvestment Relief and Business Expansion Scheme: Loans to Investors Supersedes SP3/94
Introduction
1. The rules for the Enterprise Investment Scheme, Venture Capital Trusts, the Business
Expansion Scheme, and capital gains tax reinvestment relief each make provision for the tax
relief in question to be withdrawn (or to be unavailable) in certain circumstances where a loan
is made to the investor or to an associate of the investor.
2. The circumstances in which these rules apply are where the loan would not have been made,
or would not have been made on the same terms, if the investor had not made the investment
in the shares for which the relief was to be claimed, or had not been proposing to make that
investment. This Statement explains HM Revenue and Customs understanding of the way in
which the provisions operate, and gives examples of instances where the rules have effect to
deny or withdraw relief and of instances where they do not.
Application
3. The way in which these rules are applied in any particular case will depend on the precise facts
and circumstances. However, in looking to see whether a given loan falls within the scope of
the legislation, HM Revenue and Customs primary concern will be with the reason why the
lender made the loan rather than why the borrower applied for it. The rules do not necessarily
have effect to deny or withdraw relief just because a loan is used to finance the acquisition.
Moreover, if the lender learns that the purpose, or one of the purposes, of the loan application
is the financing of the acquisition, that does not necessarily mean that the rules have effect to
deny or withdraw relief. The test is whether the lender makes the loan on terms which are
influenced by the fact that the borrower, or an associate of the borrower, has acquired, or is
proposing to acquire, the shares.
4. The rules would not have effect to deny or withdraw relief where a person proposing to
acquire shares receives a loan from a bank, if the bank would have made a loan on the same
terms to a similar borrower who was intending to use it for a different purpose. But if, for
example, a loan is made on a specified security which consists of, or includes, the shares in
question, it would be one which would not otherwise have been made on the same terms. In
such a case, the loan would be linked with the shares, and the investor would not qualify for
relief in respect of them. This would apply only where the shares, or any rights associated with
them, are specified as all or part of the security. It would not apply, for example, in any case
where the lender had recourse against the borrowers assets generally.
5. In considering the terms of any particular loan, HM Revenue and Customs will have regard to
such features as the qualifying conditions which must be satisfied by the borrower, the
existence of incentives or benefits offered to the borrower, the time allowed for repayment, the
amount of repayment and interest charged, the timing of interest payments, and the nature of
the security pledged.
Note
6. The Business Expansion Scheme came to an end for new investment at the end of 1993, and
CGT reinvestment relief is not available for shares acquired after 5 April 1998.
SP7/98
Enterprise Investment Scheme, Venture Capital Trusts and Capital Gains Tax
Reinvestment Relief: Location of activity Supersedes SP2/94
SP8/98
SP1/99
Self assessment enquiries and capital gains tax valuations
Self assessment enquiries: section 9A and section 12AC Taxes Management Act 1970: enquiries
remaining open after expiry of the period within which a notice of enquiry may be issued solely
because of an unagreed valuation for Capital Gains Tax purposes. The following Statement of
Practice applies where, in the case of an enquiry into a return made under section 8, 8A or 12AA
Taxes Management Act 1970,
an officer of the Commissioners for Her Majestys Revenue and Customs has given notice
under section 9A(1) or 12AC(1) Taxes Management Act 1970 of his intention to enquire into
that return, and
the enquiry remains open after the expiry of the period within which that notice had to be
issued (enquiry period), and
the enquiry remains open solely because of an unagreed valuation for CGT purposes.
In such circumstances HM Revenue and Customs will not, as a matter of practice, raise further
enquiries into matters unrelated to the valuation or the Capital Gains Tax computation unless the
circumstances are such that, had the enquiry already been completed, an officer of the
Commissioners for Her Majestys Revenue and Customs could have made a discovery within the
meaning of Section 29 TMA 1970. This practice applies only to valuations for Capital Gains Tax
purposes in respect of individuals, partnerships and trusts.
This practice does not alter or fetter HM Revenue and Customs right to ask further questions or
make additional enquiries on matters in connection with, or consequential to, the obtaining of the
valuation which were not raised when the valuation was first referred to Shares Valuation
Division or the Valuation Office Agency.
SP2/99
Monthly savings in investment funds Supersedes SP2/97
Introduction
1.
This Statement of Practice explains where HM Revenue and Customs will accept
simplified capital gains tax computations from individuals who have disposed of shares or units
in investment funds which they acquired through monthly savings schemes before 6 April 1999.
The investment funds concerned are authorised unit trusts (AUTs), approved investment trusts
(AITs), and open-ended investment companies (OEICs) incorporated in the United Kingdom.
For capital gains tax purposes, each sub-fund of an AUT which is an umbrella scheme is regarded
as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT. Similarly,
each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its own right,
and the umbrella company itself is not regarded as an OEIC.
2.
Where taxpayers ask for the practice to apply, the number of calculations needed to
determine their capital gains tax liabilities for the units or shares they acquired through their
savings scheme which qualify for indexation allowance will be substantially reduced. This
Statement does not affect the rights of taxpayers who wish to submit computations made on the
normal statutory basis.
3.
Although the Statement covers a wide variety of circumstances, its basic approach is
simple. It applies where an investor saves a fixed sum each month and makes no withdrawals, or
only relatively small withdrawals. In these cases, the total of an investors monthly investments
in the fund during its accounting year will be added to the total of any distributions or other
allocations of income which are reinvested in the fund on his or her behalf in the accounting year.
Any small withdrawals made in that accounting year will be deducted. The resulting figure will
be treated for capital gains tax purposes as if it had formed a single investment made on the date
on which the seventh monthly investment is made. Suppose, for example, an investor in an AUT
saves 50 on the seventh of each month, that no distributions or other income allocations are
reinvested in the fund on his or her behalf, and that the AUT has an accounting year ending on 31
December. Capital gains tax computations will be made as if the taxpayer had made a single
investment of 600 on 7 July. As a result, only one computation will be needed for the
investments in the fund in that year, instead of twelve.
Who can ask for this practice to apply?
4.
Individuals who entered before 6 April 1998 into a monthly savings scheme to invest
regular monthly sums in an AUT, AIT or OEIC, and dispose of investments on or after 6 April
1988. The practice can be applied in respect of monthly sums invested during those accounting
years of the fund concerned which ended before 6 April 1999. The practice cannot be applied in
respect of monthly sums invested during accounting years which end on or after 6 April 1999,
and the capital gains tax computations for investments made in those periods must be calculated
on the normal statutory basis.
5.
The appendix at the end of this Statement provides an example of a capital gains tax
computation where the disposal in question is made by an investor some years after 6 April 1999
of income units in an AUT which were acquired through a savings scheme that began before 6
April 1998. The example illustrates how the practice is used for the period for which it is
applicable, and how the computations are made for the period for which the practice does not
apply.
How should the taxpayer make the request?

6.
Taxpayers must write to their Tax Offices not later than twelve months after 31 January
following the end of the first tax year in which they dispose of units or shares acquired via
monthly savings schemes, and
the resulting gains, together with any other gains made in the year, exceed the
capital gains annual exempt amount for that year, or
the disposal proceeds together with the proceeds of their other disposals exceed
twice the annual exempt amount, or
their other disposals in the year give rise to net losses.
7.
Where a taxpayer has monthly savings schemes in more than one AUT, AIT or OEIC,
applications for this practice to apply should be made separately for each trust or company.
Where a taxpayer has more than one monthly savings scheme in the same AUT, AIT or OEIC,
the application will cover all those schemes, and this practice will apply as if they formed a single
scheme.
8.
Some savings schemes allow an investor to make a single monthly payment which is split
between different trusts or companies. If so, the Statement will apply as if there were separate
savings schemes for each trust or company concerned. Thus, an investor who saves 200 a
month, with 100 allocated to XYZ Growth Unit Trust and 100 to XYZ Income Unit Trust, will
be treated as having two separate schemes for 100 a month each.
9.
Some savings schemes allow investors to vary the fund in which their monthly
contributions are invested. An investor who changes the fund in which his or her contributions
are invested will be regarded for these purposes as having ceased contributing under one savings
scheme and having started a new scheme. This treatment also applies in cases where investors
switch their contributions between different sub-funds of an umbrella AUT or OEIC.
What will the simplified computation apply to?
10.
The rules described below will apply in calculating the gain on the disposal of units or
shares in the year of assessment to which the application relates. Where the disposal is a partdisposal, the rules will also apply in determining gains on later disposals of units or shares
acquired via the savings scheme, subject to the taxpayer's right to revert to the statutory basis. A
taxpayer who has exercised his or her right to revert to the statutory basis for a particular savings
scheme may not benefit for a second time from the simplified rules for that scheme.
11.
Some taxpayers may have units or shares in a monthly savings scheme for a particular
AUT, AIT or OEIC and other units or shares in the same AUT, AIT or OEIC which are acquired
by, for example, separate lump sum investment. The practice described in this Statement will
apply only to the units or shares held in the monthly savings scheme. Any gain on units or shares
acquired in other ways will be computed according to normal capital gains rules as if those units
or shares formed a holding separate from those acquired through the monthly savings scheme.
The approach of the simplified computations
12.
The general approach treats all investments and withdrawals made in a year during the
lifetime of the savings plan as though they were made in a single month of that year.
13.
The year will correspond to the accounting year of the fund. This may not always be
exactly twelve months, because for some funds the date to which accounts are drawn up varies
slightly from year to year. For example, the accounting date may be set as the second Thursday
in November (irrespective of the day of the month on which it falls). Apart from such small
variations, special rules will apply when the accounting date is changed. These are described
later.
14.
In the straightforward case where an investor makes regular monthly contributions
throughout the accounting year, investments and withdrawals will be treated as made on the day
on which the seventh monthly investment in the accounting year is due. The calendar month in
which that day falls is referred to in this Statement as the seventh month.
15.
Where distributions are automatically reinvested to acquire further shares or units, or
where the investor uses the savings scheme to acquire accumulation units in an AUT or
accumulation shares in an OEIC, the distribution or allocation of income will be treated as
invested on the day on which it is credited to the trust or company on the investors behalf. No
adjustment will be made for equalisation. The day on which the investment is treated as made for
the final distribution in the accounting year of the trust or company will be determined as follows:
in cases where distributions are automatically reinvested in the trust or

company to acquire further units or shares on the investors behalf, the final
distribution for an accounting year will be credited after the end of that
accounting year. This means that final distributions for an accounting year will
be regarded for these purposes as reinvested in the following accounting year.
in the case of accumulation units or shares, on the other hand, the final
allocation of income in respect of an accounting period becomes part of the
capital property of the AUT or OEIC concerned with effect from the end of the
accounting year in question.
Example 1
a) An accounting year starts on 1 January 1996.
b) The taxpayer subscribes 100 a month throughout the accounting year in income
units in an AUT, on the sixth of each month.
c) The final distribution for the accounting year ending on 31 December 1995 is 25,
the interim distribution for the new accounting year is 27, and the final distribution
for the new accounting year is 30. The distributions are automatically reinvested in
the AUT to acquire further units on the taxpayers behalf.
In calculating the indexation allowance, the taxpayer will be treated as having made a single
investment of 1,252 on 6 July 1996.
Example 2
a) An accounting year starts on 1 January 1996.
b) The taxpayer subscribes 100 a month in accumulation shares in an OEIC throughout
the accounting year, on the sixth of each month.
c) The final distribution for the accounting year ending on 31 December 1995 is 25,
the interim distribution for the new accounting year is 27, and the final distribution
for the new accounting year is 30.
In calculating the indexation allowance, the taxpayer will be treated as having made a single
investment of 1,257 on 6 July 1996.
Example 3
a) An accounting year starts on 20 January 1995 and ends on 19 January 1996.
b) The taxpayer subscribes 100 a month throughout the accounting year in shares in an
AIT, on the sixth of each month.
c) The final distribution for the accounting year ending on 19 January 1995 and the
interim distribution for the new accounting year are 50 in aggregate and are
automatically reinvested in the AIT to acquire further shares on the taxpayers behalf.
The first monthly contribution in the new accounting year is made on 6 February 1995, and the
seventh on 6 August 1995. In calculating the indexation allowance, the taxpayer will be treated
as having made a single investment of 1,250 on 6 August 1995.
Pre-1982 holdings
16.
When calculating capital gains tax and indexation on the statutory basis, pre-1982
holdings (acquisitions made on or before 31 March 1982) are treated as a separate pool from the
post-1982 pool (acquisitions between 1 April 1982 and 5 April 1998). This will also apply for the
purposes of the special treatment provided by the practice described in this Statement. Indexation
will be calculated for two separate pools and any withdrawals will be treated as disposals of units
or shares from the post-1982 pool first, and when that is exhausted, from the pre-1982 pool. This
is in accordance with the existing LIFO (last-in, first-out) rules. The practice will not apply to the
pre-1982 holding. Where an accounting year straddles 31 March 1982, the practice will apply as
if regular saving began in April 1982, in accordance with paragraph 17 below. It will not apply to
investments and withdrawals up to 31 March 1982.
First year of investment
17.
Where an investor begins regular saving part-way through an accounting year, his or her
investments and any withdrawals in that period will be treated as made on the date of the last
monthly contribution in the accounting year.
Final year of monthly saving
18.
In the accounting period in which regular monthly saving stops, investments will be
treated as made on the date of the last regular contribution or, if earlier, in the seventh month.
One-off extra savings
19.
An investor may sometimes make extra payments into his or her savings scheme in
addition to the regular monthly commitment. If, in any month, the extra payment is not more
than twice the regular monthly commitment, it will be treated in the same way as the regular
monthly savings (and so, in the normal case, as if it were made in the seventh month). If the extra
payment exceeds twice the monthly commitment, it will be treated as made in the calendar month
in which it is actually made.
20.
In some AITs, arrangements for one-off savings are kept separate from the monthly
savings schemes. Where that happens, the practice will not apply to shares acquired by one-off
savings.
Increases in monthly savings level
21.
Some investors may increase their monthly savings commitments. If the increase occurs
after the seventh month in an accounting year, the extra savings will be deemed to be made at the
beginning of the next accounting year, and indexation, where available, runs from the seventh
month for that following year.
Example 4
a) The accounting year coincides with the calendar year, so that the seventh month is
July.
b) From January to August 1990, the taxpayer saves 50 a month.
c) From September 1990, the taxpayer saves 100 a month.
d) The final distribution for 1989, which is automatically reinvested, is 50. There is no
interim distribution.
The taxpayer will be deemed to have made a single investment of 650 in July 1990. The extra
200 invested between September and December 1990 will be deemed to be invested in January
1991, and added to the investments made in 1991. Indexation will be given on this amount from
July 1991 until April 1998.
Withdrawals and part-disposals
22.
Savings schemes often allow taxpayers to make withdrawals. Where the withdrawals in
any accounting year do not exceed one quarter of the total amount of regular savings made in that
accounting year, the withdrawal or withdrawals will not be treated as involving a disposal, but the
amount invested in the accounting year will be reduced by the amount withdrawn.
23.
Where withdrawals in any accounting year exceed one quarter of the total amount of
regular savings made in the accounting year, the practice does not apply to savings made in that
year. However, provided the necessary conditions are satisfied, the practice applies to earlier and
later accounting years.
24.
Under some AIT savings schemes, an investor wishing to realise part of a holding has to
make his or her own arrangements to sell the shares because the scheme does not offer a facility
to dispose of shares. In such cases, the practice will apply to part-disposals of shares acquired via
the scheme in the same way as to withdrawals. If at the time of a disposal prior to 6 April 1998
the investor also has shares acquired outside the scheme, the disposal will be treated, so far as
possible, as being of those other shares. For disposals after 5 April 1998, the normal capital gains
tax rules apply to identify the shares which are disposed of.
Part disposals before 6 April 1988
25.
Where there was a part disposal before 6 April 1988 and the gain either was assessed or
would have been calculated on the statutory basis under paragraphs 23 or 27 of this Statement had
the practice applied at the time, the simplified rules will apply to investments and withdrawals
made from the start of the accounting year following the accounting year in which the last such
part disposal took place.
Short-term investors
26.
This practice does not apply where fewer than seven months' regular savings are made.
Missed months
27.
Some savings schemes allow taxpayers to miss a month of regular saving. This practice
will apply in the normal way to any accounting year in which the taxpayer misses only one
regular payment. If more than one payment is missed in an accounting year the practice will not
operate for investments and withdrawals in that accounting year. However, if the necessary
conditions are satisfied, it will apply for earlier and later accounting years.
Non-standard periods of account

28.
Sometimes an AUT, AIT or OEIC may draw up accounts for a period which is less than,
or greater than, a year. This will often apply for the first accounting period, and a non-standard
period of account will also arise if the accounting date is changed. In these circumstances, special
rules apply: a) if the period of account is less than seven months, investments and withdrawals will
be treated as made on the date of the last regular contribution in the period.
b) if the period is at least seven months but does not exceed twelve months, investments
and withdrawals will be treated as made in the seventh month (as defined in
paragraph 14 above).
c) if the period exceeds twelve months, it will be subdivided. The first twelve months
will be treated as if they formed an accounting year, and investments and
withdrawals in them will be treated as made in the seventh month. Investments and
withdrawals in the remainder of the period will be treated as made on the date of the
last regular contribution in the period.
These special rules will not apply where there is a change of accounting date in accordance with a
routine formula which merely reflects a variation of the kind referred to in paragraph 13.
Loss of approved investment trust status
29.
Investment trusts have to be approved each year by HM Revenue and Customs. This
practice will not apply for an accounting period for which approval is not obtained. But, provided
the necessary conditions are satisfied, it will apply for earlier or later periods for which approval
is given.
Interaction with years of assessment
30.
An accounting year is unlikely to coincide with a year of assessment. When a taxpayer
completes his or her return it may not yet be certain that all the conditions for the operation of this
practice will be satisfied for the accounting year straddling the end of the year of assessment
concerned. In such circumstances, the return should be completed on the assumptions that:
a) monthly savings will continue at the level applying at the end of the year of
assessment; and
b) there will be no withdrawals or one-off extra savings in that part of the straddling
accounting year which falls after the year of assessment.
31.
The treatment described in paragraph 22 above can be applied only if withdrawals in that
part of the straddling accounting year which falls within the year of assessment concerned do not
exceed total savings in that part of the straddling accounting year. If it turns out that the
conditions for the practice to apply are not, in fact, satisfied in the second part of the straddling
accounting year, the treatment of any investments and withdrawals made in the earlier part of the
straddling accounting year will not be disturbed.
Transfers or mergers of funds
32.
An investor may enter into a monthly savings scheme with an AUT, AIT or OEIC whose
business is later transferred to, or merged with, another trust or company. On the transfer or
merger the investors old units or shares will generally be cancelled, and replaced with units or
shares in the new trust or company. Where section 136 TCGA 1992 applies in such cases the
investor is treated for capital gains tax purposes as not disposing of his or her original units or
shares, or acquiring replacement units or shares in the new trust or company. Instead, the new
units or shares are treated as having been acquired at the same times, and for the same amounts,
as the original units or shares.
33.
If, where section 136 TCGA 1992 applies to the investors holding on the transfer or
merger, the investor continues to make the same regular monthly payments to the new fund, this
practice applies as though no transfer or merger had taken place. The new trust or company may,
however, have a different accounting date from the old trust or company. If so, the period from
the last accounting date of the old fund, to the next accounting date of the new fund, may - so far
as the investor is concerned - be treated simply as a non-standard period of account to which
paragraph 27 above applies in relation to the continuing contributions. If, on the other hand,
section 136 TCGA does not apply on the transfer or merger, the investor is treated as disposing of
his or her units or shares for capital gains tax purposes, and starting a new scheme with the new
trust or company at that time. In such cases paragraphs 18 and 17 of the Statement will apply
instead.
APPENDIX
Example
Mary enters into a monthly savings scheme in September 1995 in which she invests 100 a month
on the first of each month in income units in an AUT. No distributions or other income
allocations are reinvested in the fund on her behalf. The accounting year of the unit trust begins
on 1 July each year and ends on 30 June in the following year. She makes her last payment in
April 2002, and disposes of all her units on 25 May 2004, having made no withdrawals and no
additional investments in the fund in the meantime.
The tables below show the prices she paid for the units she purchased under the scheme, and the
number of units purchased.
Month
Price (p)
Units
Month
Price (p)
Units
Sep 1995
Oct
Nov
Dec
Jan 1996
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan 1997
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan 1998
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
38.22
38.71
39.30
39.98
38.26
37.01
37.95
39.43
40.62
40.87
41.79
42.65
43.08
42.81
42.92
44.05
46.43
47.11
47.34
48.93
49.62
47.33
46.87
46.69
48.31
50.15
51.41
52.60
52.88
53.17
53.10
54.63
53.96
53.85
54.29
55.62
55.81
56.78
57.18
57.73
261.64
258.33
254.45
250.13
261.37
270.20
263.50
253.61
246.18
244.68
239.29
234.47
232.13
233.59
232.99
227.01
215.38
212.27
211.24
204.37
201.53
211.28
213.36
214.18
207.00
199.40
194.51
190.11
189.11
188.08
188.32
183.05
185.32
185.70
184.20
179.79
179.18
176.12
174.89
173.22
Jan 1999
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan 2000
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan 2001
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan 2002
Feb
Mar
Apr
58.61
60.14
59.59
60.62
61.57
62.44
62.87
63.54
62.10
60.56
59.62
59.27
60.28
61.37
62.84
64.15
65.06
68.32
70.14
71.28
73.81
74.00
74.81
74.97
75.33
76.41
77.99
78.45
78.42
79.61
80.15
82.22
83.58
83.10
83.85
84.07
85.21
86.32
87.19
88.04
170.62
166.28
167.81
164.96
162.42
160.15
159.06
157.38
161.03
165.13
167.73
168.72
165.89
162.95
159.13
155.88
153.70
146.37
142.57
140.29
135.48
135.14
133.67
133.39
132.75
130.87
128.22
127.47
127.52
125.61
124.77
121.62
119.65
120.34
119.26
118.95
117.36
115.85
114.69
113.58
The total number of units Mary has acquired through the scheme was 14,319.44 at a total cost of
8,000, and when she sold them the price she obtained for each unit was 101 pence. The
consideration she received was, therefore, 14,462.63. We want to calculate the amount of the
gain of 6,462.63 which is chargeable.
Calculation
This is done in a number of steps.
The first step is to split the units acquired after 30 June 1998 - which is the last day of the final
accounting year for which the practice can be applied - into batches according to the number of
years taper relief for which they qualify. The gain, and the amount of it which is chargeable, is
then calculated in each case.
(a) The 1311.68 units acquired from 1 June 2001 to 1 April 2002 inclusive do not qualify for
taper relief, as they were not business assets and Mary had held them for less than three complete
years when she disposed of them.
The consideration received for these units was 1311.68 1.01 =
The cost of these units was
The chargeable gain is
1,324.80
1,100.00
224.80
(b) The 1613.74 units acquired from 1 June 2000 to 1 May 2001 inclusive were held by Mary for
three complete years before she disposed of them. They therefore qualify for three years taper
relief as non-business assets. This means that 95 per cent of the gain is chargeable.
The gain is
The tapered gain is
1,629.88
1,200.00
429.88
408.39
(c) The 1936.75 units acquired from 1 June 1999 to 1 May 2000 inclusive were held by Mary for
four complete years before she disposed of them. They therefore qualify for four years taper
The gain is
The tapered gain is
1,956.12
1,200.00
756.12
680.51
(d) The 1899.49 units acquired from 1 July 1998 to 1 May 1999 inclusive were held by Mary for
five complete years before she disposed of them. They therefore qualify for five years taper
The gain is
The tapered gain is
1,918.48
1,100.00
818.48
695.71
The second step is to apply the practice for those accounting years of the fund for which it can be
used. These are the periods ending on 30 June 1996, 30 June 1997, and 30 June 1998.
The rule given in paragraph 17 of the Statement provides that the units Mary acquired in the
accounting year of the fund which ended on 30 June 1996 are treated as though she acquired them
on the date she made her last contribution in that period, namely 1 June 1996. The seventh month
rule applies for the accounting years ending on 30 June 1997 and 30 June 1998.
So Mary is treated as acquiring:
2564.09 units on 1 June 1996 for 1,000,
2655.55 units on 1 January 1997 for 1,200, and
2338.14 units on 1 January 1998 for 1,200.
The third step is to calculate the gain on these 7557.78 units and how much of it is chargeable.
As these units were all acquired (or are treated as acquired) before 6 April 1998, they are pooled
together for capital gains tax purposes. They qualify for indexation allowance to April 1998, and
also for a years head start for taper relief purposes, as Mary is treated as holding all of them on
17 March 1998.
The unindexed gain is
7,633.36
3,400.00
4,233.36
The indexation allowance in respect of these units is
149.40
4,083.96
The indexed gain is
The number of complete years after 5 April 1998 for which these units are held is six years. The
effect of the one-year head start is that they qualify for seven years taper relief. The units are not
business assets for taper relief purposes. This means that 75 per cent of the gain is chargeable.
The tapered gain is
3,062.97
(HM Revenue and Customs Help Sheet IR 284: Shares and Capital Gains Tax gives details of
how to calculate the indexation allowance on a disposal of shares or units in a pool. You can
obtain a copy from HM Revenue and Customs Orderline by telephoning 0645 000404, writing to
PO Box 37, St Austell, Cornwall PL25 5YN, e-mailing saorderline.ir@gtnet.gov.uk, or faxing
0645 000604.)
The final step is to sum:
408
680
695
3,0
5,0
224.80
.39
.51
.71
62.97
72.38
So the amount of the gain which is chargeable is 5,072.38.

The amount of capital gains tax that Mary will actually have to pay for the year of assessment
2004-05, if any, will depend on a number of factors, including the value of the annual exempt
amount at that time, the aggregate amount of chargeable gains which accrue to her in that year,
the amount of any allowable losses that she has available to set against untapered gains, and the
amount of her taxable income. HM Revenue and Customs booklet CGT1: Capital Gains Tax: an
introduction, which is available from any Tax Enquiry Centre or Tax Office, provides further
details about the basic capital gains tax rules for individuals.
SP3/99
Advance Pricing Agreements (APAs) Superseded by SP2/10
SP1/00
Corporate Venturing Scheme; applications for advance clearance under Part X,

Schedule 15, FA 2000
The Corporate Venturing Scheme provides relief against corporation tax (investment relief) in
certain circumstances to companies investing in new shares of other companies. Where a
company hopes to use the scheme to attract investment, paragraph 89, Schedule 15, Finance Act
2000 enables it to apply to The Commissioners for Her Majestys Revenue and Customs for an
advance clearance notice. Such a notice provides confirmation that the Commissioners for Her
Majestys Revenue and Customs consider that the conditions for relief under the scheme, other
than those applying to the investor, will be met in relation to the proposed issue of shares at the
time the issue is made. In the case of those conditions which have to be met throughout a
qualification period, however, there can of course be no certainty until after the end of that period
that they will be met.
This Statement of Practice gives guidance to companies wishing to obtain advance clearance.
All references to paragraphs in this Statement are to paragraphs of Schedule 15, FA 2000.
PROCEDURE
Applications should be sent to:
The Small Company Enterprise Centre
Centre for Revenue Intelligence (CRI)
Ty Glas
Llanishen
Cardiff
CF14 5ZG
Under paragraph 91 the Commissioners for Her Majestys Revenue and Customs must respond to
an application within 30 days after receiving the application. The Commissioners for Her
Majestys Revenue and Customs may request further particulars, and if they do their response
must be given within 30 days after the last such request was complied with.
CONTENT OF APPLICATION - GENERAL
In order to consider applications the Commissioners for Her Majestys Revenue and Customs
need certain basic information and assurances. To assist companies in preparing their
applications, an outline of what is needed is given below. However, this is not necessarily an
exhaustive list in all cases, and each applicant must fully and accurately disclose all facts and
circumstances material for the decision of the Commissioners for Her Majestys Revenue and
Customs (paragraph 89). The application will be considered solely by reference to the material
provided by the company in its application or in response to a request for further particulars.
It will be helpful if applications follow the order set out below, each item being expanded as
necessary and any further information being added at the end. This will enable the
Commissioners for Her Majestys Revenue and Customs to come to a decision on the application
as soon as possible.
For the purposes of the scheme, an issue of shares consists of all the shares of the same class
which are issued by a company on the same day. An advance clearance notice can be given only
in respect of a single issue of shares. If it is expected that there will be more than one issue
within a short period of time, please say so. Any clearance will apply only to the issue or issues
in respect of which information has been given, so if an advance clearance notice is sought in
respect of more than one issue, relevant information must be provided in respect of each of them.
INFORMATION AND DOCUMENTS NEEDED
1. General
The name of the tax office dealing with the company making the application, and the tax
reference. If the company is newly formed and the tax office is not yet known, state the address
of the registered office.
If the company has previously made any application for an advance clearance notice it will be
helpful if the Commissioners for Her Majestys Revenue and Customs reference(s) can be
quoted.
2. Accounts and other documents
a. Copies of the latest available financial statements for the company, or in the case of a
group the financial statements for the group and for each group company.
b. A copy of any prospectus or memorandum or other document to be made available to
prospective investors or their advisers (or a draft of any such document).
c. A draft copy of any subscription agreement which is to be made with any investor.
3. Transactions subsequent to accounts
Particulars of any material changes or events which have occurred since the date of the latest
balance sheet, or which are expected to occur before the issue takes place.
4. The company
The following particulars are needed in relation to the company which is to issue the shares:
a. confirmation that the unquoted status requirement set out in paragraph 16 will be
satisfied;
b. confirmation that the independence requirement set out in paragraph 17 will be satisfied
when the shares are issued;
c. details of the expected ownership of its ordinary share capital following the issue of the
shares, with sufficient information to show that the individual owners requirement set
out at paragraph 18 will be satisfied at that time;
d. confirmation that the partnerships and joint ventures requirement set out in paragraph
19 will be satisfied when the shares are issued;
e. if, at the time the shares are issued, it will have any subsidiary or control any other
company:
the name of each such company, together with the name of its tax office and its tax
reference or, if there is no tax office, the address of its registered office, and
f.

other group companies, sufficient to show that all subsidiaries will be qualifying
subsidiaries as defined at paragraph 21;
sufficient information to establish whether the gross assets requirement set out in
paragraph 22 will be satisfied (see Statement of Practice SP2/00);
g. a description of each activity comprised in any trade carried on, or to be carried on, by
the company and, in the case of each subsidiary or controlled company mentioned at e.
above, each activity comprised in any trade carried on, or to be carried on, by that
subsidiary.
5. The share issue and the money raised
a.
Details of the total number of shares expected to be issued to investors seeking

investment relief (where known), the nominal value of such shares, the rights which they
will carry, and the price at which they are expected to be issued.
b.
Details of the activity or activities for which it is intended that the money raised by the
issue will be used.
c.
In the case of a company which will have subsidiaries at the time when the shares are
issued, the identity of the company or companies which will use that money.
d.
Confirmation that each trade or other activity for which the money will be used will be
carried on wholly or mainly in the United Kingdom (see Statement of Practice SP3/00).
UNDERTAKINGS NEEDED
a.
That the company intends that the money raised by the share issue will be used within
the time set out at paragraph 36.
b.
That the shares to be issued to corporate investors wishing to obtain investment relief
will not be issued unless they have been subscribed for wholly in cash and that cash has
actually been paid.
c.
That those shares will be issued for commercial purposes and not as part of a scheme or
arrangement which has as a main purpose the avoidance of tax.
d. That the issuing arrangements in respect of the shares will not include any arrangements
of the kind set out at paragraph 37.
INFORMAL EIS CLEARANCES
Where subscribers to the same issue of shares are expected to include individuals who may wish
to claim relief under the Enterprise Investment Scheme, any request for an informal clearance
under the EIS should be sent with the CVS application.
SP2/00

Venturing Scheme and Enterprise Management Incentives (supersedes SP5/98)
Value of Gross assets (superseded by SP2/06)
SP3/00
Enterprise Investment Scheme, Venture Capital Trusts, Corporate Venturing

Scheme, Enterprise Management Incentives and Capital Gains Tax
Reinvestment Relief
1.
Location of activity
The provisions for
the Enterprise Investment Scheme;

Venture Capital Trusts;
the Corporate Venturing Scheme;
Enterprise Management Incentives; and
Capital Gains Tax Reinvestment Relief (which is not available for investments made after
5 April 1998)
each include the requirement that a company's trade should, at a certain time or for a certain
period, be carried on wholly or mainly in the United Kingdom. This Statement explains the
way in which HM Revenue and Customs applies this condition in those contexts.
2.
The way in which the requirement is applied in any particular case will depend on the
relevant facts and circumstances. A company may at any given time carry on some of the
activities of the trade outside the United Kingdom and yet satisfy the requirement if the major
part of the trade, that is over half of the trading activity, taken as a whole, is at that time carried
on within the United Kingdom.
3.
In considering whether the requirement is satisfied, HM Revenue and Customs will take
into account the totality of the activities of the trade. For example, they will consider where the
capital assets of the trade are held, where any purchasing, processing, manufacturing and selling
is done, and where the companys employees and other agents are engaged in its trading
operations. For trades involving the provision of services, the location of the activities giving rise
to the services and the location where they are delivered will both be relevant.
4.
No one factor is in itself likely to be decisive in any particular case. In particular, HM
Revenue and Customs will not regard a company's activities as not being carried on in the United
Kingdom solely because
the goods or services which it manufactures or provides are exported or supplied to

overseas customers;
its raw materials are purchased from abroad; or
its raw materials or products are stored abroad.
5.
In the case of a trade consisting of ship chartering, the trade will be considered to satisfy
the requirement if all the charters are entered into in the United Kingdom and the provision of the
crews and the management of the ships while under charter take place mainly in the United
Kingdom. If these conditions are not met the test may still be satisfied, but this will depend on all
the facts and circumstances of the case.
6.
The corresponding requirements in certain of the schemes mentioned in relation to
research and development and to oil exploration are applied in a similar way.
SP4/00
Tonnage Tax
CONTENTS
Introduction
Paragraph
Allocation of Cases
Contacting HM Revenue and Customs
Clearance
Foreign company/group
15
Group Arrangements
17
The Tonnage Tax Election (Part II)
22
Qualifying Companies and Qualifying Ships (Part III)

Ships
Strategic and commercial management
Examples of strategic and commercial management
Temporary cessation
45
Seagoing
Excluded vessels
50
The 75% Limit (Part V)
32
32
33
42
Anti-avoidance (Part V)
55
Relevant Shipping Profits (Part VI)
61
63
86
92
96
106
Transfer Pricing
Finance costs
Capital Allowances (Part IX)
52
57
Core qualifying activities

57
Tugs
Vessels providing transport for services at sea
Merchant adventurers
66
Pooling on liner services
69
Secondary activities
72
Passengers
84
Gambling
Sale of luxury goods
89
Slot charters
Incidental activities
93
Distributions of overseas shipping companies
Exclusion of interest income etc
104
The Ring Fence (Part VII)
49
106
107
109
Transfer of ships within a tonnage tax group

Industrial buildings
111
109
Finance Leasing (Part X)
112
Offshore Activities (Part XI)
121
Groups, Mergers & Related Matters (Part XII)

Corporate Partnerships (Part XIII)
Exit Charges (Part XIV)
Finance Costs
ANNE
XE
126
128
131
Introduction
1.
This statement covers th e general operati on of th e tonnage tax regim e for shippin g
companies. Unless specif ically stated otherwise, any reference t o a paragrap h or part num ber
relates to Schedule 22, Finance Act 2000.
Allocation of Cases
2.
HM Revenue and Custo ms will b e allocating existing network cases to a nu mber of tax
offices specialising in tonnage tax. They are:
Liverpool Queensway (for the Northwest, London and Northern Ireland)

Hull 2 (for the rest of England and Wales)
Aberdeen St Nicholas (for Scotland)
3.
Cases dealt with by the Large Business Office will generally remain in situ, but one LBO
will specialise in tonnage tax groups:
4.
Liverpool LBO
Oil Taxation Office will continue to work oil industry cases that elect into tonnage tax.
Contacting HM Revenue and Customs

Existing shipping companies and their agents should initially contact their current tax
office. Transfers of companies/groups will be arranged in accordance with the previous
paragraphs.
5.
6.
Newly set up businesses, including overseas concerns, considering entering tonnage tax
should contact Liverpool Large Business Office. The Tonnage Tax Unit at Liverpool LBO will
also act as the technical head office for tonnage tax. It may be contacted at:
Liverpool Large Business Office, Regian House, James Street, Liverpool L75 1AE
Telephone: 0151 242 8025; Fax: 0151 242 8046; e-mail: John Hoggart@ir.gsi.gov.uk
7.
A training commitment forms a necessary condition of entering the tonnage tax regime.
However, HM Revenue and Customs does not administer the training commitment. Enquiries on
training should be addressed to the Department for Transport at:
Shipping Policy 2A, 2/26 Great Minster House, 76 Marsham Street, London SW1P 4DR
Telephone: 020 7944 5438/5421/5121/5280; Fax: 020 7944 2182;
e-mail:anne.broome@dft.gsi.gov.uk or peter.mcwilliams@dft.gsi.gov.uk or
stephen.eglesfield@dft.gsi.gov.uk or fahima.mahtab@gsi.gov.uk
Clearance
8.
A non-statutory and non-mandatory clearance procedure is available to enable any
company or group interested in tonnage tax to discuss its own circumstances with HM Revenue
and Customs in advance of making the initial election or before making its first corporation tax
return under the tonnage tax regime. Examples of companies that might find this procedure
useful include a company considering an initial tonnage tax election, or a company considering
starting up a new shipping business in the United Kingdom.
9.
The clearance procedure will generally only be available in advance of a company or
groups first election into tonnage tax. However, in exceptional circumstances, HM Revenue and
Customs may allow a further clearance application prior to a renewal election being made. For
instance, such further clearance may be sought after a major change in the structure of a group, or
a major change (temporary or permanent) in its activities, which might create a potential
exclusion from tonnage tax. Companies considering clearance are encouraged to contact HM
Revenue and Customs sooner rather than later.
10.
This particular clearance procedure is limited to tonnage tax issues only and does not
extend to the mechanics of any reorganisation that may be required to put the group or company
into the optimum position to make an election. Examples of issues that could be addressed are:
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
whether a particular ship is a qualifying ship;

whether the strategic and commercial management test is met;
whether an activity is a core or secondary qualifying activity;
how to deal with potentially non-qualifying secondary activities;
how a service at sea is to be split out from the associated transport;
whether dividends from an overseas subsidiary qualify as relevant shipping
income;
how the calculation of excess finance costs is to be made;
how to apply the 75% limit on time charters-in within a tonnage tax group;
how to record offshore activities and their treatment in the computation;
whether incidental income qualifies as relevant shipping income.
The clearance application must include all pertinent information to enable a decision to
11.
be made. This should include full details of the tonnage tax group structure (see paragraph 23(iii)
below) unless already provided as part of a tonnage tax election.
12.
Provided that all pertinent information is given to HM Revenue and Customs, the
treatment agreed will be binding on HM Revenue and Customs. This will hold until (and unless)
company circumstances change such that the original clearance is no longer in point. Reviews to
determine whether this is the case may form part of any enquiry into a tonnage tax company's tax
return.
This clearance facility is likely to be of most use to complex groups, perhaps with
13.
substantial non-qualifying activities, with unusual vessels or with offshore activities. However, all
interested companies are invited to make use of the facility. The clearance procedure will differ
from case to case according to the issues under discussion, but is likely to take the form of
correspondence alone or a combination of correspondence and meetings.
14.
Clearance applications should be sent initially to the company or group's usual tax district
HM Revenue and Customs will notify the company or group if the case is then transferred to a
specialist district (see paragraph 2 above). Adequate time should be allowed for HM Revenue
and Customs to respond to the application (and for correspondence and meetings) before the
expected date for making the election.
Foreign company/group considering commencing qualifying activities in the UK

15.
A foreign company or group considering commencing ship operations in the UK within
the tonnage tax regime may seek advice from Liverpool Large Business Office, which will deal
with the initial stages of the clearance application.
16.
One of the queries most likely to be raised by such a foreign company or group is
potential exit charges, should it subsequently cease operations in the UK. Where a branch or a
subsidiary company of a foreign ship operator has been set up in the UK and that branch or
company subsequently ceases operations in the UK there is unlikely to be a specific exit charge
from the tonnage tax regime. There may however be a potential liability to tax on pre-migration
capital gains on assets brought into the UK, if those gains have not already crystallised in another
country before migration.
Group Arrangements
17.
HM Revenue and Customs recommends that a tonnage tax group should operate under a
group arrangement as set out in paragraph 120. A group arrangement will enable a nominated
company to act as a representative of the group. This will reduce (although not eliminate) the
need for administrative correspondence between HM Revenue and Customs and each individual
company in the group, and make some aspects of the legislation much simpler to implement, for
instance, the provisions of paragraphs 37 (75% limit) and 62 (finance costs).
18.
i)
ii)
iii)
iv)
v)
vi)
vii)
19.
i)
ii)
iii)
iv)
v)
A group arrangement will normally cover the following matters:

Dealing with HM Revenue and Customs on behalf of group companies in respect of
clearance applications.
Dealing with HM Revenue and Customs on behalf of group companies in respect of the
tonnage tax election and renewal elections.
Making notifications on behalf of group companies as to whether or not the 75% limit on
chartering-in (set out in paragraph 37) has been exceeded and making any appeal under
paragraph 43 (against an exclusion from tonnage tax notice).
Preparing and negotiating with HM Revenue and Customs calculations required under
paragraph 62 (finance costs).
Dealing with HM Revenue and Customs on matters arising under paragraph 126(4)
(dominant party on a merger) and making an appeal under paragraph 126(5) (against Inland
Revenue determination).
Making notifications under paragraph 129 (duty to notify Inland Revenue of group
changes).
The provision of any other information in relation to the tonnage tax regime, which it
would be expedient to be provided on a group-wide basis.
Notification of a group arrangement will normally include the following details:
The name and unique taxpayer reference of each qualifying company in the group.
The name and unique taxpayer reference of the representative company.
A list of the matters to be handled by the representative company on behalf of the group, if
different to the list in paragraph 18(i)-(vi) above, or confirmation that the representative
company will handle all items in that list.
A declaration signed by an authorised person for each qualifying company confirming that
the representative company is authorised to act on their behalf in respect of these specified
matters.
A declaration signed by an authorised person for the representative company confirming
that it agrees to act on behalf of the group companies in respect of these specified matters.
HM Revenue and Customs will agree in writing to the proposed group arrangement and
20.
the issues to be covered by it, or suggest modifications to the proposals, as appropriate.
The group arrangement does not need to be renewed if the composition of the group
21.
changes unless there is a change in representative company. Paragraph 129 notifications will be
accepted as notice of changes to the composition of the group arrangement, provided they include
a declaration under paragraph 19(iv) in respect of any new additions to the group.
The Tonnage Tax Election (Part II)
22.
Where a company is a member of a group of companies, the tonnage tax election must be
a group election. It is likely that most tonnage tax election will be group elections. Where,
exceptionally, a single company makes a tonnage tax election, none of the information
requirements listed below in relation to groups will be relevant, and may be ignored.
23.
The initial tonnage tax election should contain the information listed below.
i)
ii)
The name and unique taxpayer reference of each qualifying company in the group.
A name for the tonnage tax group that can be used as convenient shorthand in
correspondence and on tax returns. For example, XYZ TT Group. It is suggested that
TT be included in the name, as a tonnage tax group may have a different membership to
the UK group for other tax purposes.
Full details of the tonnage tax group structure, including details of non-qualifying
companies. For many groups this will be a straightforward comment to the effect that the
group consists of XYZ parent company with 100% subsidiaries A, B and C. However,
where control is, for instance, traced through individuals or complex share structures,
then appropriate details will be required. For foreign owned groups, the information
should include appropriate details of the overseas structure within which the UK
companies are placed.
The accounting period(s) from which the election is to take effect. If this is not the
period in which the election is made, then further details must be given (see paragraph 26
below for more information).
The signature of an authorised person from each company to confirm that the
companies are jointly making the election.
A declaration confirming that:
a) all companies included on the election are qualifying companies,
b) all qualifying companies in the tonnage tax group are included in the election, and
c) a certificate of approval from the Department of the Environment, Transport and
the Regions is in force with respect to the initial training commitment.
iii)
iv)
v)
vi)
The 75% limit on chartered-in tonnage is not a qualifying condition for making an
24.
election. However, an election made during the initial period will be treated as never having been
of effect if the limit is exceeded in the first accounting period after entering tonnage tax.
Elections made after the initial period will be treated as never having been of effect, if the
25.
75% limit is exceeded in the each of the first three accounting periods (paragraph 38 refers).
However, where an election is made after the end of the initial period and the 75% limit
26.
is exceeded only in the first accounting period, or only in the first and second accounting periods,
the election does not have effect for the one or two exceeded accounting periods. Entry is
effectively deferred until the first period that the limit is satisfied. In these circumstances, it is
essential that the election must still be made within 12 months of becoming a qualifying
company.
27.
A renewal election should contain similar information to the initial election, with the
following changes:
i)
ii)
A start date is not required.

The training declaration should be that a training certificate is in force and that the group
or company is not subject to a certificate of non-compliance.
An election will usually take effect from the start of the accounting period in which it is
28.
made. However, paragraph 12 provides for an election to take effect from the beginning of
certain other accounting periods. Where this is subject to the agreement of HM Revenue and
Customs, the election should include details of the commercial reasons why one of these
alternative start dates is required. For instance, the group might be carrying out a reorganisation
to prepare for tonnage tax, and therefore would not wish the election to take effect until after this
reorganisation was complete.
29.
In exceptional circumstances, paragraph 12(4) allows the elections made during the
initial period to take effect from the second accounting period after the one in which the election
is made. The exceptional circumstances must be such that it is commercially impracticable for
the company/group election to take effect at an earlier date. This could include contractual
arrangements that affect qualification and which cannot be renegotiated in time, or unusually
complex restructuring that will take more than one accounting period to achieve. An example of
exceptional circumstances might be the inability to renegotiate long-term time charters that
would push a company or group above the 75% limit on time chartering-in.
30.
HM Revenue and Customs will issue to the representative company an acknowledgement
to confirm receipt of the election. The acknowledgement will normally include a statement of the
date on which the ten-year period covered by the election will start and end, effectively
confirming agreement to any backdating or postponement of the starting date, subject to any
necessary enquiry into the date of entry. This acknowledgement will not mean that HM Revenue
and Customs necessarily accepts that the companies, their activities or their vessels qualify for
tonnage tax. A group that wishes to have reassurance on this point should take advantage of the
clearance procedure discussed above.
31.
Paragraph 10(3) extends an opportunity for newly qualifying groups of companies to

elect into tonnage tax after the initial window of entry. It includes a rule to prevent a group
avoiding the normal time restrictions for making an election (paragraph 10(1) - initial period) by
making minor changes to the composition of the group. For example, a group that became nonqualifying by divesting itself of its shipping interests and then became qualifying by buying most
of them back would be substantially the same group as before and would not be eligible to make
an election.
Qualifying Companies and Qualifying Ships (Part III)

Ships
Paragraph 16(1)(b) requires a qualifying company to operate qualifying ships in this

32.
context ships can mean a single ship.
Strategic and commercial management
33.
The definition of a qualifying company in paragraph 16 provides that qualifying ships
operated by a company must be strategically and commercially managed in the UK. This is a
completely different and separate test to that of central management and control relevant in
determining whether a company is resident in the UK.
The strategic and commercial management test arises from the European
34.
Commissions guidelines on State Aid in the maritime sector. No specific EC guidance is
available on the meaning of strategic and commercial management and HM Revenue and
Customs proposes therefore to adopt a common-sense interpretation, taking into account the
various different strands of management activity that can be carried out in respect of a ship. HM
Revenue and Customs is happy to provide guidance on this test as part of the clearance procedure
outlined in paragraphs 8 to 14 above.
35.
All elements of management activity relevant to the ships in question will be taken into
account in determining whether strategic and commercial management is carried out in the UK
may include:
A
Strategic functions for the shipping business, including

i)
Location of headquarters, including senior management staff
ii)
iii)
iv)
Decision-making of the company board of directors

Decision-making of operational board
UK stock exchange listing
The types of decision included in (ii) and (iii) above include: decisions on
significant capital expenditure and disposals (e.g. purchase and sale of ships);
award of major contracts; agreement on strategic alliances (e.g. shipping
conferences and pooling); and the extent to which foreign offices work under the
direction of UK-based personnel.
B
Commercial management of the ship/fleet, including

i) Route
planning
ii)
Taking bookings for cargo or passengers
iii)
Managing the bunkers, provisioning and victualling requirements
iv)
Personnel management
v) Training
organisation
vi)
Technical management including making decisions on the repair and
maintenance of vessels
vii)
Extent to which foreign offices/branches work under the direction of UKbased personnel
viii)
Support facilities in the UK (e.g. training centre, terminal, etc.)
The fact that a vessel may be flagged, classed, insured or financed in the UK may add
36.
further weight to the indicators in 35A and 35B above in deciding whether that vessel is
strategically and commercially managed in the UK.
Elements of each leg of the test, i.e. both strategic and commercial management, must be
37.
demonstrated the strategic management by features such as in list 35A above, and the
commercial management by features such as in list 35B above.
The more elements that are carried out in the UK, the more likely it is that the company
38.
will be accepted as satisfying this test. However, the approach will not be purely mechanistic; the
weight given to each element will depend on the precise facts of each case. Greater weight will
be given to higher levels of decision-making and management, as opposed to routine day-to-day
management. HM Revenue and Customs recognises that a worldwide shipping operation may
have many of the lower level activities devolved to local branches. In assessing the weight and
relevance of the various elements of commercial management activity, HM Revenue and
Customs will take account of such factors as:
i)
ii)
iii)
iv)
v)
The extent to which each element is carried out in the UK, as compared with the
extent that it is carried on elsewhere
The nature and extent of the accommodation occupied in the UK
The number of employees engaged in these activities in the UK
The country of residence of key management staff, including company directors
For an international group, the extent to which such activities in the UK correspond to
the UKs share of the worldwide fleet. If some group functions in relation to the fleet
are carried out in the UK and other functions elsewhere, the group may still be seen as
commercially managing its fleet from the UK provided there is a reasonable balance
of activities in the UK considering the proportion of the worldwide fleet represented
by ships within the UKs tonnage tax regime.
39.
An activity, such as ship management, contracted out to a third party will still count as a
positive indicator, provided that it is carried on in the UK.
40.
The test does not require the vessels to be operated in UK waters.
Paragraph 16(1)(c) states that the qualifying ships operated by a UK tonnage tax
41.
company must be strategically and commercially managed in the UK. This does not mean that
each ship operated by the company from the UK must be managed in like manner and to the same
extent as every other one. So long as each ship can satisfy some of the criteria in lists A and B
above, and the companys fleet as a whole is strategically and commercially managed in the UK,
the paragraph 16(1)(c) test will be satisfied.
Examples of strategic and commercial management
EXAMPLE 1
42.
A wholly UK shipping company, where all management activities in relation to its ships are
carried out in the UK.
This company will certainly satisfy the test.
43.
EXAMPLE 2
A company that has no commercial presence in the UK apart from its registered office and the
occasional board meeting.
This company will almost certainly not satisfy the test.
EXAMPLE 3
44.
An international group operates a quarter of its fleet from the UK, through a UK sub-group. The
UK sub-group has UK premises and employs around 100 staff in the UK. All technical
management of the worldwide fleet is carried out in the UK, but personnel management is in the
Far East. The booking system for all vessels is intranet-based using a computer in North
America, but UK staff contribute a quarter of worldwide bookings. The operational board of the
UK sub-group includes directors based in London, but meets at various locations around the
world.
The UK ship operating company (ies) would be likely to pass the test, as sufficient
activity is carried on in the UK to reflect its share of the ships.
Temporary cessations
Paragraph 17 is aimed at a single company that temporarily ceases to operate any
45.
qualifying ships, perhaps for instance through loss at sea, and allows such a company to remain
within tonnage tax throughout the period of temporary cessation. Such a single company would
otherwise be excluded from tonnage tax for ten years under the rule in paragraph 140. A group
company would not be so excluded, although it may also choose to take advantage of this
provision if for example it were to sell all of its qualifying ships at once. HM Revenue and
Customs will generally presume that a cessation of more than three months is permanent, unless
there is evidence to the contrary.
46.
A company that takes advantage of this provision will calculate its tonnage tax profits as
though it still operated the same ships as immediately prior to the cessation. The training
obligation will continue to apply.
A group election covers all qualifying activities carried on by any company within the
47.
group. If one company within the group ceases to operate any qualifying ships, but at least one
other company in the group continues to do so, the group election will continue to have effect. If
it is still in force, that election will cover the first company if it later starts to operate qualifying
ships again.
48.
Subject to the rules on mergers in Part XII, the group election also extends to newly
acquired companies. If a single company has ceased to have any qualifying activities and is then
acquired by a larger group and the company resumes qualifying activities after the merger, it will
be within the tonnage tax regime if there is a group election in force. The fact that the group
contains what was formerly a single ex-tonnage tax company does not prevent the group making
a tonnage tax election or a renewal election (paragraph 140(3) refers).
Seagoing
49.
Paragraph 19(1) describes a qualifying ship as a seagoing ship of 100 tons or more gross
tonnage. Sub-paragraph (4) defines seagoing as certificated for navigation at sea by the
competent authority of any country or territory. HM Revenue and Customs will normally accept
that a ship is seagoing if it is certificated as such under the International Load Line or the SOLAS
(Safety of Life at Sea) conventions.
Excluded vessels
Paragraph 19(2) prevents a vessel that is used to provide goods or services of a kind
50.
normally provided on land from being a qualifying ship. Examples of businesses where HM
Revenue and Customs will apply this rule include:
i)
ii)
iii)
iv)
v)
vi)
vii)
retailers
restaurants
hotels
prisons
radio stations
casinos
financial service providers
This list is not exhaustive.

Pleasure craft are excluded from the tonnage tax regime under paragraph 20(1)(b). HM
51.
Revenue and Customs accepts that a commercially operated cruise liner, although operated
primarily for the recreation of its passengers, is not a pleasure craft. This exclusion will be
interpreted so as to exclude a vessel that is chartered as a whole by its passengers (for instance a
holiday yacht) but not to exclude a vessel that has individual fare paying passengers. Chartered
as a whole will include charter by a passenger alone, or by passengers acting together, or by a
third party acting on behalf of one or more of the passengers.
The 75% Limit (Part V)
52.
Where a company or group has breached the 75% limit for chartered-in tonnage under
paragraph 37, and the breach has continued for two or more consecutive periods then, in the
absence of any mitigating circumstances, HM Revenue and Customs will consider excluding the
company or group from tonnage tax under paragraph 39.
53.
If a company or group is to avoid exclusion, there will have to be mitigating

circumstances of an exceptional commercial nature and the company or group must demonstrate
a reasonable expectation of falling within the limit in the near future. An example of such
mitigating circumstances might be the accidental loss of an owned vessel and its temporary
replacement with another on time charter.
54.
The power to exclude is a permissive one. If HM Revenue and Customs considers that
there is evidence of an attempt to engineer an early exit from the tonnage tax regime, then it may
decide not to exercise the power to exclude.
Anti-avoidance (Part V)
55.
Paragraphs 41 and 42 provide that a company or group that abuses the tonnage tax
regime may be expelled. The provision is aimed at deliberate cases of serious or repeated abuse
and will not be used to attack minor errors in the computations or genuine misunderstandings.
Nor will it be used to attack any bona fide pre-election restructuring that is required to enable a
group to opt for the regime, for instance the divisionalisation of shipping and non-shipping
activities.
56.
Examples of situations where the provision may bite include:

i)
ii)
iii)
The artificial engineering of non-qualifying income so that it falls within the

tonnage tax ring-fence; for example, including within the sale price of a cruise
entitlement to a significant discount on the purchase of goods or services to be
provided onshore;
Creating a financing structure that circumvents the rules in paragraph 62.
Involvement in leasing arrangements designed to circumvent the restrictions in
Part X on finance leases.
Relevant Shipping Profits (Part VI)

Core qualifying activities
Paragraph 46 provides that core qualifying activities include the operation of qualifying
ships and activities integral and necessary to such operation.
57.
58.
Operation of the ship is defined by paragraph 18 in terms of ownership, but to be
qualifying the ship must, under paragraph 19(1), be used for transporting passengers or cargo,
providing marine assistance, or providing transport for services at sea.
59.
Activities necessary and integral are those activities that are essential to enable the ship
operation to take place. These include ship management operations such as purchasing fuel and
hiring crew and commercial management operations such as booking cargo. They do not include
activities that are merely customary or desirable, although such activities may count as qualifying
secondary activities. For instance, providing food for short sea ferry passengers is not integral
and necessary to their transport and is therefore not core. However, it is a wholly qualifying
secondary activity.
60.
The following paragraphs give guidance on some specific maritime activities.
Tugs
61.
The operations of a seagoing tug will normally be accepted as core qualifying activities.
These will include:
i) Assistance at sea
ii)
Salvage (but see also paragraph 62 below)
iii) Construction work in the marine environment
iv) Support activities for seagoing ships
62.
Where a tug is involved in raising sunken cargo, this will be regarded as diving support
and will need to be treated under the principles described below for transport for services at sea.
Any profits from the sale of salvaged goods will fall outside the tonnage tax ring-fence.
Vessels providing transport for services at sea

63.
Vessels providing services at sea include diving support vessels, cable layers and crane
barges (or ships performing a similar function). It is necessary to apportion the profits/losses
from the operation of such vessels between that attributable to transport and that attributable to
the service provided. HM Revenue and Customs will accept any method of apportionment, which
produces a just and reasonable result.
64.
For example, HM Revenue and Customs will accept that the profit from transport will be
the income that would be receivable on a time charter of a similarly modified vessel for the
duration of the accounting period, less the actual expenses of running the vessel (excluding any
expenses relating to the provision of the service). Any remaining profit will be the profit relating
to the provision of the service and will remain outside the tonnage tax ring-fence.
65.
Alternatively, the reverse of the method in paragraph 64 above could be used. For
example, where both divers and a diving support vessel were provided, the income and expenses
of providing the divers alone could be deducted from the overall profit or loss. Any remaining
amount would then be relevant shipping profits for tonnage tax.
Merchant adventurers
Some ship operators behave as merchant adventurers by taking full or part ownership of
66.
their cargo, rather than simply acting as carriers. If there is a price risk associated with the cargo,
then a just and reasonable apportionment of the profit or loss on the voyage must be made. A
price risk is any situation where the operator buys and sells the cargo at different prices. HM
Revenue and Customs will accept that where the ship operator does not bear any price risk
relating to the cargo, then the whole of any profit or loss on the voyage will be within relevant
shipping profits for tonnage tax purposes.
67.
Tanker operators provide an example of merchant adventuring. For instance, some

tanker owners load their own cargo of oil and transport it to a destination in the hope of reaching
the market at the right time to achieve a larger profit. Similarly, oil can be sold on a delivered
basis, where the oil is sold at the end of a voyage at the prevailing price, the price risk remaining
fully with the ship operator. In these situations a profit split would need to be made between the
non-tonnage tax profit on the oil and the tonnage tax profit on its transportation.
68.
However, where the oil is sold FOB (free on board) to the ship operator and then sold on
C&F (cost and freight), the ship operator would not have a price risk on the oil itself. In effect,
the operator would receive freight income for the route, depending on supply and demand for
tankers, plus additional remuneration from the shipper if diversions were made from that route to
another port. In such a situation a profit split would not need to be made.
Pooling on liner services

69.
A ship operator may form alliances or pools with other companies and share liner routes.
It is the nature of a pooled liner service that the cargo, having been booked by the ship operator,
may actually be carried in one of the partners ships. HM Revenue and Customs accepts that,
provided a balance is maintained between the bookings made with originating customers (not
being other shipping lines) and the cargo carried in its own ships, then the trade will be regarded
as one of ship operation and will be a core qualifying activity.
70.
A reasonable balance will be regarded as maintained where in an alliance or pool, over a

three year period, the aggregated slots/space allocated for use by originating customers of tonnage
tax companies in a UK tonnage tax group match the slots/spaces provided to the alliance or pool
in ships operated by those companies. An excess of bookings over cargoes carried of not more
than 10% will be disregarded. Where there is consistent structural underprovision of more than
10% cargo carrying on own vessels, bookings over the 10% will be regarded as the carrying on of
a separate trade outside tonnage tax.
71.
Where similar arrangements exist in other non-liner sectors, similar principles will be
applied as appropriate, suitably adapted to the circumstances of the sector.
Secondary activities
72.
Qualifying secondary activities are defined in the Tonnage Tax Regulations 2000. This
next section provides guidance on some of the operational aspects of these regulations.
Some of the regulations and notes below contain provisions whereby activities are
73.
allowed up to a certain limit. Where this limit is breached, then the whole of the profit or loss
from that activity will fall outside the tonnage tax ring-fence. However, where the limit is
breached to a minimal extent then HM Revenue and Customs may accept, on de minimis grounds,
that no adjustment is required. This relaxation is to apply in exceptional circumstances only and
will not apply to habitual breaches.
74.
Activities that are not listed in the regulations and which are not core qualifying activities
will be outside the tonnage tax ring-fence. It is not possible to provide an exhaustive list, but
some examples are given below:
The operation of a port or harbour. In small ports where the port and a qualifying
wharf/terminal are effectively one and the same, the non-qualifying element should be
determined on a just and reasonable basis.
ii) The processing of goods and materials whether on-board, on the quayside or elsewhere,
other than consolidation and breaking of cargo under the regulations. The protection and
maintenance of cargo (such as refrigeration or the maintenance of any ripening fruit) will
not be regarded as processing.
iii) The storage of cargo beyond what is immediately necessary whilst awaiting loading onto
ships or onward transportation. For example, a warehousing or cold storage trade will not
be within tonnage tax.
iv) The hire of containers to customers for use otherwise than for cargoes booked by the
tonnage tax company for transit by sea.
v) Dealing or speculation in shipping futures or other shipping related financial instruments
such as bunkers, not wholly entered into to hedge the companys tonnage tax trade.
vi) A ship based holiday where the ship remains moored and there is no sea transportation
element.
vii) Sales where orders are taken on- board for go ods t o be subseq uently delive red to an
address provided by the c ustomer or w here the goods are not of a custo mary type for
cruise or ferry passengers to purchase.
viii) Operations that would fall to be treated as a separate trade under normal tax principles.
For example, it is accepted the buy ing and selling ships is part of the norm al operation of
ships and is a core qualify ing activit y. However, where the buy ing and selling takes
place to such an extent tha t the trade effec tively becomes one of ship-dealing rather than
ship operation, then it would fall outside tonnage tax.
i)
The regulations allow activities carried out by one member of a tonnage tax group in
75.
connection with qualifying ships operated by another member of the same group to be qualifying
secondary activities.
The regulations also set out that if such activities are carried out additionally for third
76.
parties they may qualify as secondary activities if certain conditions are met. The first condition is
that the activities for third parties should only use such staff and resources as are necessary to
carry out the main function of the company that is to say all qualifying activities (core or
secondary) which it carries out in respect of qualifying ships that it (or another member of the
same tonnage tax group) operates. The second condition is that the level of third party services
should be minimal compared with the level of activities carried out in respect of those qualifying
ships. These conditions refer to the total of all third party activities, but in most cases, it will be
simpler and more practical to apply them on an activity by activity basis. For example if a
booking office for a cruise line also sold railway tickets, the level of railway ticket sales which
could qualify as secondary activities would depend on the level of staff needed to sell the groups
cruise tickets and the comparative volume of railway tickets sold compared with cruise tickets.
77.
Companies may prefer to separate out secondary activities carried on for third parties and
compute and return the profit on such activities outside the ring-fence. In such cases, HM
Revenue and Customs would only look at the third-party work still conducted within the tonnage
tax ring-fence in applying the test to determine whether third-party work was minimal.
78.
For example, say a ship operator within tonnage tax has a substantial ship management
department providing services to third parties as well as other members of the group. It divides
its 32 staff into 12 managing group ships and a dedicated section of 20 staff doing third party ship
management. If the 20 third party staff do occasional work to help the in-house department, this
work should be transfer-priced across the ring-fence. If the 12 in-house staff do occasional work
for the third-party department then, provided this is minimal in comparison with the level of the
in-house work done by those 12 staff, then any profit from that third-party work would be within
tonnage tax.
In order to determine whether the conditions are met, the level of activity may be
79.
determined by any reasonable method including reference to turnover, costs, tonnage of ships or
number of TEUs, as appropriate. Only if the conditions are not met will it be necessary to make a
full and proper allocation of income and expenditure between secondary activities inside the ring
fence and those outside it.
Whether the level of an activity is minimal will depend on the measure used and the facts
80.
of the case, but HM Revenue and Customs will not normally accept that third party activity is
minimal in any case where it exceeds 20% of that activity carried out in support of ships operated
by the tonnage tax group.
Where third party services are provided under a reciprocal arrangement between two
81.
operators, HM Revenue and Customs will accept that third party services may qualify as
secondary activities to the extent that they are reciprocated by the other party.
Companies may seek confirmation concerning the extent to which an activity for third
82.
parties will qualify as part of the clearance procedure outlined in paragraphs 8 to 14 above.
83.
Where administrative and financial services provided under the regulations also relate to
the non-sea leg of an inclusively priced journey or, in the case of passengers, to a related
excursion or holiday on land, then they will be accepted as being part of the wholly qualifying
secondary activity.
Passengers
HM Revenue and Customs will accept that the following activities are carried out in
84.
connection with the embarkation or disembarkation of passengers or as part of an inclusive
transport service bought in at an arms length price:
i)
ii)
Car parking, provided that receipts from non-passengers do not on average exceed
10% of receipts from passengers;
Train, coach, bus or other transport services (including flights) to take passengers to
or from the ship or eligible linked holiday; including:
a) purchase of single seats or block of seats on scheduled services, and
iii)
iv)
b) chartered-in transport to and from cruise, provided that only qualifying

passengers are carried;
A single night's accommodation for passengers in transit immediately prior to
embarkation or immediately after disembarkation;
The provision of quayside shopping facilities for passengers, provided that the range
of goods available is no wider than would qualify to be sold on board under the
regulations.
85. HM Revenue and Customs will accept that the provision of excursions for
passengersregulation includes:
excursions on non-qualifying vessels;
i)
the provision of a shore-based facility for the exclusive use of own passengers;
ii)
trips of longer than a single day provided the cabin on board ship remains
iii)
occupied by the passenger.
Gambling
Gambling is to be interpreted broadly and will include slot machines, casino games of
chance, raffles, bets on horse racing etc. HM Revenue and Customs will accept that the turnover
from gambling is negligible if it amounts to less than 10% of ticket sales plus receipts from the
letting of cabins and sale of food and drink for immediate consumption for that voyage. For the
purposes of this test, turnover will be regarded as receipts from gambling after deducting
winnings paid out, but before any other expenses. The test applies separately to each individual
voyage. In this context, a round-the-world cruise will be viewed as a single voyage.
86.
87.
Where the turnover from gambling on a particular voyage is more than negligible, then
the whole of the profits from gambling on that particular voyage will fall outside the ring-fence.
88.
Where third party concessionaires offer gambling facilities and the ship operators
income from the concessionaire varies partly in relation to turnover, then the negligible test will
also apply to the income from the concessionaire.
Sale of luxury goods

89.
Whether or not goods are luxury goods depends upon the standard of goods and services
that would normally be expected by the passengers on a particular cruise or journey, and the
extent to which they will continue to be enjoyed by the purchaser after completion of the journey.
HM Revenue and Customs will accept that turnover from the sale of luxury goods is negligible if
it does not exceed 10% of total ticket sales plus receipts from the letting of cabins and sale of
food and drink for immediate consumption for that voyage.
Where the turnover from sale of luxury goods on a particular voyage is more than
90.
negligible, then the whole of the profits from sale of luxury goods on that particular voyage will
fall outside the ring-fence.
Where luxury goods are offered for sale on-board by third party concessionaires and the
91.
ship operators income from the concessionaire varies partly in relation to turnover, then the
negligible test will also apply to the income from the concessionaire.
Slot charters
92.
Slot charters between shipping companies will be accepted as qualifying secondary
activities under the same principles set out in paragraphs 69 to 71 above on pooled liner services.
Incidental activities
93.
This category of income will be very restricted in scope and will deal with minor items of
shipping related income that do not fit comfortably into core or secondary categories. The aim
will be to prevent what is otherwise a wholly qualifying shipping company from having to apply
normal corporation tax rules to insignificant items of ship-related income.
94.
Incidental shipping related activities may come within tonnage tax if the turnover from
them is less than 0.25% of the turnover from other activities that fall within the tonnage tax ringfence. Any unused balance of this limit will not be available to set off against non-qualifying
secondary activities.
95.
However, if ship-related activity, which could fall within the definition of qualifying
incidental activities is consistently returned outside the tonnage tax ring fence, then HM Revenue
and Customs will not argue that it should be treated as a qualifying incidental activity for the
purposes of applying the 0.25% of turnover test to other items of incidental income.
Distributions of overseas shipping companies

The tests set out in paragraph 49(2) are very strict, in particular the paragraph 49(2)(d)
96.
requirement that all the overseas companys income is such that it would be relevant shipping
income if it were a tonnage tax company. HM Revenue and Customs appreciates that this test
may in practice be very difficult to comply with, particularly where the company is not wholly
owned. For instance, dividends from a company with income from a secondary activity in excess
of permitted levels could not be included under this provision.
97.
Tonnage tax groups wishing to ensure that overseas companies will qualify under
paragraph 49(2) should make sure that any non ship-related activities are taken out of those
companies. The condition in 49(2)(d) will be satisfied if the overseas company has no activities
which could generate income other than relevant shipping income. However, the test applies to
income and not to activities, and HM Revenue and Customs will accept that the test is satisfied if
effective arrangements are in place to ensure that no income arises which is not relevant shipping
income. This will ensure that all profits arising from non-qualifying activities will be taxed
outside the tonnage tax ring-fence when paid up to the UK as dividends.
98.
HM Revenue and Customs will accept that the tests should be applied afresh for every
period of account of the overseas company. For example, suppose a tonnage tax company has an
overseas subsidiary with a December year-end that carries out mixed activities. During 2005, this
overseas company sells its non-shipping activities so that in 2006 and 2007 it complies with the
paragraph 49(2)(d) condition. Half way through 2008, it again becomes a mixed activity
company. In this example, dividends declared out of 2006 and 2007 profits paid in either of those
two years would meet the conditions. Dividends declared out of profits for 2005 and prior or
2008 and subsequent (whenever paid) would not meet the conditions.
99.
HM Revenue and Customs will also accept that where an overseas company receives
minimal levels of non-relevant shipping income, this may be disregarded on de minimis grounds
when considering the paragraph 49(2)(d) condition. Minimal in this case means income up to the
level specified in paragraph 48(2), i.e. 0.25% of turnover from core and qualifying secondary
activities.
100. In paragraph 49(2)(f) there is a condition that the profits from which the dividends are
paid must be subject to tax. This test may still be satisfied even if there is no actual liability to tax
on those profits (for example because of the operation of loss relief), so long as the profits in
question are subject to a tax on profits. The rules of computation for tax purposes of those
profits are also immaterial - for example, dividends paid by a company within a comparable
tonnage tax regime in another country would satisfy the subject to a tax test.
101.
HM Revenue and Customs will accept that a qualifying dividend that is credited in the
accounts of a tonnage tax company will fall within the tonnage tax ring-fence, even if it is
actually received when the company has ceased to be a tonnage tax company. A dividend that is
credited in the accounts of a company after it has ceased to be a tonnage tax company will not fall
within the tonnage tax ring-fence, even if it meets the conditions of paragraph 49
102. HM Revenue and Customs will accept that profits arising on the disposal of all or part of
an overseas shipping business may be paid out as dividends under these rules, provided that the
overseas company has qualified to pay such dividends (see above paragraphs) for the five years
prior to the disposal
103.
Where dividends from overseas shipping companies are regarded as relevant shipping
income, the supporting computations must give appropriate details. These should include all the
information to justify inclusion within tonnage tax, such as name of ship, IMO number, type of
charter, etc. plus of copy of the accounts for each foreign company
Exclusion of interest income etc

104. Under paragraph 50, only such interest, as would under normal corporation tax rules be
treated as being trading income arising from the trade consisting of a companys tonnage tax
activities, may come within the ring fence as relevant shipping profits.
105. In deciding whether or not interest received would be treated as a trade receipt under
normal corporation tax principles, companies should bear in mind the cases of Nuclear Electric v
Bradley (68 TC 760) and Bank Line Ltd v CIR (49 TC 307). In the latter case Lord Avonside
commented Income becomes a trading receipt when it arises from capital actively employed and
at risk in the business because it is required for its support or, perhaps, to attract customers
looking to the credit of the business. Trading income is the fruit of the capital employed in the
business in the present and active sense. This description would not extend to cover interest
arising from the proceeds of ships held on deposit whilst replacement ships are sought.
The Ring Fence (Part VII)
Transfer-pricing
106. Paragraphs 58 and 59 require adjustments to be made (in accordance with Schedule
28AA ICTA 1988) where transactions or arrangements involving connected persons, or indeed
tonnage tax and non-tonnage tax divisions of the same company, are not on arms length terms.
This applies to all transactions regardless of whether or not a hard charge would normally be
made for the goods/services provided. The existence of the special ring-fencing rules for finance
costs does not over-ride the requirement to apply the transfer-pricing rules to financial
transactions across the ring fence or with a connected party outside the UK.
Finance costs
107. HM Revenue and Customs will not insist on hard charging for the cost of finance across
the ring fence. However, where finance costs across the ring fence are at less than arms length
rates, transfer pricing across the ring fence should be undertaken before reallocation of finance
costs is computed.
108. A tonnage tax company or group must ensure that an appropriate proportion of its finance
costs, in accordance with paragraph 61 or 62, is included in the companys or groups return(s) of
profits, if it is not already charged against its relevant shipping profits. Further guidance is
available in the Annexe to this Statement of Practice.
Capital Allowances (Part IX)
Transfers of ships within a tonnage tax group

109. Section 343 of the Income and Corporation Taxes Act 1988 (company reconstructions
without a change in ownership) can apply to transfers of shipping trade between members of the
same tonnage tax group. Where a shipping business is transferred between members of a tonnage
tax group in such circumstances as Section 343 would normally apply, the tonnage tax pool
relating to that shipping business may be transferred along with the shipping business itself to the
new owner.
110. One member of a tonnage tax group may own a ship which it bareboat charters to another
member of the same group. HM Revenue and Customs will accept that this is a trade for the
purposes of Section 343 ICTA 1988. If the ship (still subject to the bareboat charter) is
transferred to A third Company within the group, the tonnage tax pool relating to that ship may
also be transferred to the third company.
Industrial buildings
111. Paragraph 82 provides that where an identifiable part of a building is used for tonnage
tax purposes, then that part of the building will be treated as though it does not qualify for
industrial buildings allowances. Normal principles should be followed when applying this rule.
For instance, the 25% rule in Section 18 of the Capital Allowances Act 1990 will apply in the
usual manner.
Finance Leasing (Part X)
112. Part X applies special rules to ships leased into the tonnage tax regime under finance
lease terms. Paragraph 90 prevents a finance lessor claiming capital allowances in respect of the
cost of a ship leased to a tonnage tax company where the leasing arrangement includes provision
of security to such an extent that most of the non-compliance risk associated with the lease is
removed from the lessor.
113. In measuring the non-compliance risk it will be necessary to take into account the future
realisable value of the ship. This may be derived from a series of valuations carried out as at
regular intervals over the length of the lease. For example on a 20-25 year lease, valuations
should be made as at intervals of not less than 5 years. These should be professional valuations
taking into account normal valuation principles: factors such as the anticipated state of that sector
of the shipping market, the forecast of future trends, the adaptability or otherwise of the ship to
other purposes and the dominance of the lessee in that particular sector may be relevant if they
are part of a normal valuation process.
114.
The valuation should be done from the perspective of Day 1 if the circumstances
subsequently change, HM Revenue and Customs will not seek to revisit the valuation.
115.
The ship should be valued unencumbered by any security sought (such as a mortgage
given to a third party guarantor), to avoid any difficulties with circularity.
116.
Paragraph 90 will not apply to certain types of security. These are

i) Any security inherent in the leased ship itself, provided to the lessor or to a third party
guarantor, including
- a mortgage on the leased ship
- an attachment of the lessees earnings from the leased ship
- assignment of any insurance proceeds arising in respect of the leased ship
- rental rebates arising from the arms length sale of the leased ship
ii) Any guarantee or other security which satisfies the conditions set out in
paragraph 91(3)-(5).
117. Parental guarantees are also left out of account in considering whether the 50 per cent
limit has been breached. In the case of a guarantee by the lessees parent this is because subparagraphs 92(2) and 91(3) apply equally to the lessee and a person connected with the lessee. In
the case of a guarantee from the lessors parent, it is by virtue of paragraph 91(6).
118.
Whilst the paragraph 91 only refers to the security inherent in the leased ship, where
more than one ship is leased as part of the same deal, HM Revenue and Customs will accept that
the cross-collateralisation of all the ships leased under that deal falls under this heading.
119. The forms of security listed in Paragraph 91 will be completely disregarded in

considering whether or not more than 50 per cent of the non-compliance risk associated with the
lease is removed from the lessor (or a person connected with the lessor). This means that any such
security should not be taken into account in computing the non-compliance risk and furthermore
any security within paragraph 91 will be treated as not removing any of that non-compliance risk
from the lessor.
120. Pre-delivery guarantees, whereby the putative lessor obtains guarantees in respect of
interim finance during the construction stage, may also be left out of account in looking at the
extent of removal of non-compliance risk from the lessor, since HM Revenue and Customs
accepts that such guarantees are not part of the leasing structure once the ship has been delivered
and the lease is in place.
Offshore Activities (Part XI)
121.
Paragraph 103(2) provides that the special rules applicable to offshore activities do not
apply unless the number of days in which qualifying ships are operated in offshore activities
exceeds 30. The 30 days to be taken into account are the total number of ship-days within the
designated area operated by all of a company's vessels in the accounting period. Thus, a
company operating two vessels in offshore activities, one for 15 days and the second for 16 days
exceeds the 30 days total and both ships come within the special rules for offshore activities.
122.
Qualifying ships engaged in the search for oil or gas on the UK continental shelf, e.g. a
seismic vessel, fall within the description of offshore activities in paragraph 104(1) and, similarly,
qualifying ships engaged in the exploitation of UKCS oil or gas e.g. a pipe-laying vessel also fall
within it. However, the term offshore activities is much wider than this because of the words
in connection with and covers all types of ships used in the actual task of exploring for or
exploiting gas or oil either in an ancillary, subordinate or supporting role, e.g. a diving support
vessel.
123.
Paragraph 105 excludes certain vessels from the special rules for offshore activities. The
reference to supply vessels, tugs and anchor handling vessels includes vessels performing one or
more of the activities of supply, towage and anchor handling.
124.
The period of inactivity referred to in paragraph 106(a) will include the period during
which the vessel is being commissioned in preparation for its forthcoming operation. Similarly,
any decommissioning activity on completion of the contract will also be included.
125.
Paragraph 110(4) refers to where plant and machinery ceases permanently to be used for
the purposes of offshore activities. In this context the question of whether an item of plant and
machinery has permanently ceased to be used for offshore activities purposes is primarily a
question of fact. In general HM Revenue and Customs would be prepared to regard a period of
two years or less during which the item of plant and machinery is not used for offshore activities
as being merely temporary.
Groups, Mergers & Related Matters (Part XII)

126.
Paragraph 117(2) provides that a company will not be brought into a tonnage tax group if
the individual treated as controlling it does not in practice have any significant influence over the
affairs of the company in question. Whether significant influence exists will be interpreted
according to the facts of each particular case. It will generally be presumed that where there is a
close family relationship, such as husband and wife or parent and minor child, then significant
influence will exist. An example of where significant influence may not exist is where there has
been a long-term demonstrable family rift and the controlling parties have no contact with each
other.
127.
Where a foreign group including companies operating qualifying ships comes to the UK
for the first time, it will have 12 months to decide whether to elect into tonnage tax under
paragraph 10(3). If it decides to elect in, the election will have effect from the time that the group
came to the UK. If such an election is made, the group will be considered as a tonnage tax group
from the moment it comes to the UK for the purposes of applying the rules on mergers set out in
paragraphs 123 to 126.
Corporate Partnerships (Part XIII)
128.
Companies that are members of a partnership may bring qualifying activities carried on
through that partnership into tonnage tax, even if some or all other partners are outside the
regime. The detailed rules are contained in Paragraphs 130 to 136 and in Regulation 8 onwards
of the Tonnage Tax Regulations 2000.
129.
These rules cover, amongst other things:

i) the computation of tonnage tax and non-tonnage tax profits,
ii) the application of the 75% chartering-in limit,
iii) the computation of chargeable gains, and
iv) the calculation of capital allowances following a partners exit from tonnage
tax ,
and will apply equally to those partnerships that have legal personality (as in Scotland),
as they do to partnerships that do not.
130.
Broadly speaking, the effect of these provisions will enable a partner, which is a tonnage
tax company to calculate the partnership profit along tonnage tax lines. Partners, who are not
within tonnage tax, will calculate their share of partnership profit by reference to normal UK
corporation tax principles. Thus, there may be different parallel computations of the profits of
one partnership, e.g. one on tonnage tax lines and one on normal corporation tax lines. The
Tonnage Tax Unit at Liverpool, Large Business Office (see paragraph 6 above) will advise on
points of concern or difficulty.
Exit Charges (Part XIV)
131.
Paragraph 137(2) provides that exit charges will apply where a company ceases to be a
tonnage tax company ...for reasons relating wholly or mainly to tax. This paragraph is aimed at
situations where a company or group deliberately engineers an exit from tonnage tax, perhaps
through a temporary cessation of all qualifying activities or a deliberate manipulation of corporate
structures. HM Revenue and Customs will not seek to apply exit charges if:
(i) the company has reached the natural expiry date of its election (even if the reason that the
company chooses not to renew its election is relating wholly or mainly to tax, for
instance, if the reason for not renewing is that it wishes to utilise shipping losses); or
(ii) the company has good commercial reasons, aside from considerations of tax, for leaving
tonnage tax; or the company is wound up, except in circumstances where company
liquidations are a feature of a group scheme to engineer a deliberate exit from tonnage
tax; or
(iii) the company leaves the UK except in circumstances where the change in company
residence is a feature of a group scheme to engineer a deliberate exit from tonnage tax; or
(iv) the company ceases to be a tonnage tax company as a result of the operation of the rules
on mergers.
ANNEXE
Finance costs
Broad approach of the legislation
This statement provides guidance on the implementation of paragraphs 61 to 63. These
1.
require that where a single company or members of a group include an excessive deduction for
finance costs in computing profits outside the tonnage tax ring-fence, then additional taxable
profits should be brought into account to reflect the excess. The rules will apply to all tonnage tax
companies or groups that carry on non-tonnage tax activities and incur finance costs that are
deductible for the purposes of corporation tax.
2.
A simple example of a situation where an additional charge would normally arise is a
diversified group that funds its shipping subsidiaries through equity and its non-shipping
subsidiaries through debt.
3.
The legislation does not include detailed rules prescribing exactly how the calculation of
the additional profits should be carried out. Instead, companies and groups may choose an
appropriate methodology for this calculation to ensure a just and reasonable result when their own
circumstances are taken into account.
4.
This guidance assumes that a tonnage tax group is involved, although the principles can
be adapted for a single company, as shown in example G below. Where a group operates under a
group arrangement as described in paragraphs (17) to (21) above, HM Revenue and Customs will
accept that these calculations should be carried out by the representative company and not by
every tonnage tax company in the group. However, any resulting adjustment should be allocated
to all the tonnage tax companies, as required by paragraph 62(5).
Computational principles
The calculation of the excess finance costs for an accounting period will involve the
5.
following stages:
i)
Determine the total UK-deductible finance costs of the tonnage tax group that are
taken into account in computing profits arising outside the ring-fence (after any
statutory disallowances including transfer-pricing adjustments). Intra-group finance
costs with a corresponding direct receipt chargeable to UK Corporation tax (outside
the ring fence) in the same accounting period elsewhere in the group do not need to be
counted for this purpose.
ii)
Determine the total UK-deductible finance costs of the tonnage tax group, as if
there were no tonnage tax election in place. This could be approximated by the
amount determined in (i) above, plus finance costs charged in the calculation of
relevant shipping profits. Intra-group finance costs with a corresponding
contemporaneous UK taxable receipt that were not counted under (i) above should
again be ignored here.
iii)
Determine the proportionate amount of the costs calculated in (ii) that cannot be
regarded as being incurred so as to give rise, directly or indirectly, to relevant
shipping profits. This should be done on a just and reasonable basis having regard to
the underlying funding and the generation of relevant shipping profits. Further
guidance is given below.
iv)
Calculate the excess of (i) over (iii), if any.
v)
Allocate this excess to the tonnage tax companies in proportion to their tonnage tax
profits.
6.
Stages (i) to (iv) can be represented by the following formulae, which are used to
facilitate the examples below:
E = A - (F x B)
IF (F x B) > A THEN E = 0
where:
is the excess finance costs to be allocated to the tonnage tax companies.
is the group finance costs that can be taken into account outside the ring-fence
(before the application of paragraph 62).
B is the group finance costs determined as if there were no tonnage tax election in
place.
F is a just and reasonable fraction.
E
A
7.
Where there are non-coterminous accounting periods, then the periods should be matched
using any just and reasonable method.
Definition of finance costs

8.
Finance costs are defined at paragraph 63. All of the costs arising from debt financing
should be included and HM Revenue and Customs will expect this provision to be interpreted
very broadly. It could include off-balance sheet methods of financing. However, finance costs
will not normally include costs incurred through the late payment of debts, such as interest paid to
trade suppliers or interest on late payments of corporation tax/PAYE/VAT.
Determining the just and reasonable fraction (F)
It is not possible to specify a single universally applicable formula for determining F, as
9.
different groups will have different operational and financial circumstances. Each group will
therefore have to devise its own methodology. A group may wish to discuss this with its tax
office as part of the clearance procedure.
10.
In devising an appropriate methodology, HM Revenue and Customs will generally expect
the following considerations to be taken into account:
i)
The calculations must observe the principle of fungibility. This means that individual
items of finance should not be linked with individual activities or individual assets.
Instead the financing should be viewed as funding the totality of all the tonnage tax and
non-tonnage tax activities of the group's UK companies and those of its overseas
subsidiaries.
ii)
Any consideration of tonnage tax activities must include the activities of overseas
shipping companies whose dividends would ordinarily be relevant shipping profits under
paragraph 49 (and thus subject to UK corporation tax solely under the tonnage tax
regime). This is the case irrespective of whether any such dividends are paid during the
accounting period under review. This approach is necessary to avoid distortionary tax
effects that could otherwise be caused as a result of the groups commercial decisions as
to where debt is to be located. See examples I and J below.
iii)
If the funding requirements of a business differ from activity to activity the calculation of
F should take this into account. Shipping is generally a capital-intensive activity due to
the high costs of the assets and would be expected to require greater funding than many
other activities.
iv)
The existence of and circumstances surrounding intra-group financing across the ringfence should be taken into account in considering the nature of the activities outside the
ring fence and in arriving at the adjustment required.
v)
A group that utilises complex international funding structures must take these fully into
account in determining whether or not a proposed methodology produces a just and
reasonable result.
11.
The methodology chosen must be used consistently from period to period, unless group
circumstances change so that this would no longer produce a just and reasonable result.
Examples
12.
The examples below are designed to demonstrate how a just and reasonable result might
be reached. They are not exhaustive and are necessarily simplified.
A tonnage group carries out wholly qualifying shipping operations and all income and
expenses (including 100 finance costs) are accounted for within the tonnage tax ring-fence.
In this situation there are no activities outside the ring-fence and therefore neither
paragraph 61 nor paragraph 62 applies.
The same situation as A, except that the 100 finance costs are borne outside the tonnage tax
ring-fence, and the group now has 100 of interest income outside the ring-fence. This
interest income is negligible when compared to the rest of the group's activities and therefore
any funding used to support the interest bearing deposit will also be negligible.
This means that F is 0% so E is 100. The net result is taxable income outside the ringfence of 100.
The same situation as B, except now the 100 of interest income is material to the group,
representing 10% of its total income.
It might now be reasonable to regard some of the debt as funding the interest bearing
deposit, and therefore F increases to (say) 10% and E reduces to 90.
The same situation as C, except the 100 of interest income now represents 10% of the
groups total profits but only a negligible proportion of its total income.
A just and reasonable view might be that the funding applicable to the interest bearing
deposit is negligible compared to the funding for the business as a whole, giving the
result that F is 0% and E is 100.
A tonnage tax group contains two UK companies, one of which is a tonnage tax company
carrying out wholly qualifying shipping operations and the other of which is not a tonnage tax
company. Both businesses are of similar size with similar funding requirements and
therefore it is appropriate for F to be 50%. Each company incurs 100 finance costs, of
which the tonnage tax companys are inside the ring fence.
In this situation A = 100 and B = 200. This means that E = 0 and no adjustment is
required.
The same situation as E, except that the tonnage tax company is now wholly equity funded
and all the finance costs have been charged in the non-tonnage tax company.
Now A = 200, B = 200, F = 50%, and therefore E = 100.
The same situation as F, except that the tonnage tax group is a single company with two
divisions. The finance costs are charged equally inside and outside the ring-fence.
There is already an equal sharing of finance costs on either side of the ring-fence, so E =
0.
A tonnage tax company decides to increase its borrowings at the same time as it acquires a
non-tonnage tax company. Finance costs are 100. Before this borrowing, the group was
entirely equity funded. The two businesses are of similar size and with similar funding
requirements. The group takes the full 100 into account in computing its profits outside the
ring fence.
The principle of fungibility means that the finance costs must be regarded as relating to
both businesses. Thus, F = 50%, and A = 100, B = 100 and therefore E = 50.
A tonnage tax group consists of three companies: one is a tonnage tax company carrying out
wholly qualifying shipping operations, another is an overseas company qualifying to pay
dividends under the provisions of paragraph 49 and the other is a UK non-shipping company.
All three businesses are of similar size and with similar funding requirements. Finance costs
of 900 are all taken into account in computing the profits of the non-shipping company.
Non-tonnage tax activities account for one third of the group.
The paragraph 49 company counts as tonnage tax for this purpose therefore F = 33%.
This means that A = 900, B = 900 and E = 600.
The same situation as I, except that the finance costs are charged 375 in each UK company
and 150 overseas.
This means that A = 375, B = 750 and F = 33% giving E = 125. It can be seen that this
gives a net UK deduction of 250/750 outside the ring-fence, which is proportionately the
same as the 300/900 in example I. This satisfies the principal at 10(ii) and takes proper
account of the fact that overseas debt reduces the extent of the group's UK source
financing requirement.
The same situation as J, except that the non-shipping company is now an overseas company.
This means that A = 0, B = 375 and E = 0 (E cannot be negative).
The same situation as J, except that additional finance costs of 150 are paid by the nontonnage tax company to the tonnage tax company.
The interest does not constitute trading income and is therefore taxed outside the ringfence. A still = 375 (as the additional costs can be ignored), B still = 750 and F = 33%
giving E = 125 (as in J).
The same situation as L, except that the additional finance costs of 150 are paid by the nontonnage tax UK company to the overseas shipping subsidiary.
A = 525 (the additional costs are now brought into account), B = 900 and F = 33%
giving E = 225.
Mrs X controls a group of UK non-tonnage tax companies that are funded primarily by debt.
Her husband controls a group of tonnage tax companies that are funded primarily by equity.
The debt and finance costs in the Mrs X companies must be taken account of in the
paragraph 62 calculations.
A tonnage tax group incurs UK finance costs of 100 outside the ring-fence. F is determined
at 2/3 which means that E = 33.3. The group enters into a financing arrangement whereby
equity is invested in a subsidiary in a low tax regime and funds loaned back from this
subsidiary to a tonnage tax company.
There are no additional commercial activities created by this transaction and prima
facie, F remains at 2/3. Interest paid by the tonnage tax company to the overseas finance
company increases B but has no impact on A, thus reducing E. The main benefit of this
arrangement to the group is to avoid an additional tax charge. HM Revenue and
Customs would view this as not being a just and reasonable result and would expect a
further adjustment to be made.
SP1/01
Treatment of Investment Managers and their overseas clients
1.
This statement gives guidance on the application of the rules in Finance Act 1995
regarding the assessment of UK investment managers who act on behalf of overseas clients. In
particular, it sets out HM Revenue and Customs view on:
(a) the extent to which trading in the UK by a non-resident client affects protection from
assessment in the name of an investment manager (section 127, Finance Act 1995);
(b) the factors to be taken into account in determining whether active management of a
portfolio on behalf of a non-resident client constitutes the exercise of a trade in the
United Kingdom by that client;
(c) the circumstances in which an investment manager is considered to be acting in an
independent capacity within section 127(3)(c) Finance Act 1995, and
(d) the application of the 20% rule in section 127(4) Finance Act 1995.
Part I: Background
2.
Sections 78-85 Taxes Management Act 1970 contained a number of provisions
concerning the assessment of a UK agent acting on behalf of a non-resident principal. In
particular section 78(2) ensured that certain UK investment managers were not assessable to tax
on behalf of their overseas clients. Statement of Practice 15/91 gave guidance on the application
of those provisions.
3.
Finance Act 1995 repealed sections 78-85 Taxes Management Act 1970 and introduced
(in sections 126-129 and Schedule 23) new provisions which apply to agents generally from April
1996 and in relation to investment managers from April 1995. This Statement of Practice gives
guidance on the application of the Finance Act 1995 provisions.
4.
The broad effect of the 1995 legislation is to ensure that non-residents (excluding certain
non-resident trustees) are not exposed to any additional liability to tax by using the services of
independent investment managers in the UK. This is done by restricting the tax chargeable on the
income of non-residents in respect of investment transactions carried out through independent UK
investment managers. The tax is restricted to the tax, if any deducted at source. Special rules
apply where the transactions carried out by the UK investment manager amount to the carrying
on of the whole or part of the non-residents financial trade in the UK. These special rules are
considered in Part III.
5.
The provisions do not apply to income from or connected with a trade carried on in the
UK by the non-resident other than through a broker or independent investment manager. For
instance income arising from the temporary lodgement of funds used in a manufacturing business
carried on in the UK is liable to corporation tax or income tax in the normal way. The same
applies where the transactions are part of a wider trade, e.g. insurance, carried on in the UK
whether by the investment manager, another agent, or a branch of the non-resident.
6.
Where the limit on charge does not apply to income arising through the UK investment
manager, it does not necessarily follow that the non-resident is liable to UK tax on that income.
For example certain UK securities are exempt from tax. Also, the non-resident may be able to
claim exemption under a Double Taxation Agreement where the investment manager is not a
permanent establishment of the non-resident. Exemption under an Agreement will depend on
both the facts and the terms of the Agreement.
7.
It is sometimes the case that a non-resident appoints an investment manager overseas
who in turn appoints a UK investment manager, often its affiliate, to manage the investment of all
or part of the portfolio. In those circumstances the legislation is applied as between UK manager
and the non-resident on the basis of looking through the overseas manager. The fee income
retained by the overseas investment manager should do no more than reflect the work carried out
offshore.
Part II: Relevance of Trading
8.
Section 127 Finance Act 1995 only applies to an investment manager who is carrying on
the trade of a non-resident client in the UK. If the non-resident is not trading in the UK then the
investment manager cannot be the non-residents UK Representative within section 126 Finance
Act 1995 and cannot be assessed.
9.
If the transactions carried out through the investment manager are part of the trade carried
on by the non-resident then, unless the conditions in section 127 are satisfied (see Part III), the
income from that trade, including any profit from the realisation of securities, etc., is taxable.
10.
Whether or not a taxpayer is trading is a question of fact to be determined by reference to
all the facts and circumstances of the particular case. This applies as much to financial
transactions as to other activities.
11.
In determining the question of trading, any transactions carried out through an investment
manager are to be considered in the context of the status and world-wide activities of the nonresident. An individual is unlikely to be regarded as trading as a result of purely speculative
transactions. For a company, a transaction will generally be either trading or capital in nature.
(This may also be the case for non-resident collective investment vehicles whether open-ended or
closed). If the main business of a non-resident company is a trade outside the financial area, or an
investment holding business, the activities in the UK would normally amount to trading only if
they constituted or were part of a separate financial trade. But if, exceptionally, activities which
are an integral part of the profit earning activities of a non-financial trade are carried out through
a UK investment manager (e.g. hedging on the London terminal markets by a non-resident dealer
in physical commodities), then that might amount to trading here. The view to be taken on a
particular case will depend on all the facts of that case.
12.
The active management of an investment portfolio of shares, bonds and money market
instruments such as bills, certificates of deposit, floating rate notes and commercial paper does
not normally constitute a trade. But every case must be considered in the light of its own facts.
Where futures and options are concerned, the Statement of Practice 14/91 tax treatment of
transactions in financial futures and options will be applied to non-resident clients who are
collective investment vehicles (whether open-ended or closed), pension funds and other bodies
which either do not trade or whose principal trade is outside the financial area.
13.
If a non-resident carries on a financial trade outside the UK, any transactions carried out
through a UK investment manager are likely to amount to trading in the UK. That is so whether
there is a discretionary agreement or whether the manager acts on the instructions of the client.
The criteria for deciding whether a non-resident financial company is an investment company or a
trading company are the same as those which apply to a resident company.
Part III: Particular Provisions of Section 127(3) Finance Act 1995 - the independence test
and the 20% rule
14.
Where there is trading in the UK, no assessment is due on the investment manager if the
provisions of section 127 are satisfied. And, except in the circumstances mentioned in paragraph
5 above, no assessment is due on the non-resident. Liability is instead limited to tax deducted at
source.
15
The following paragraphs give guidance on two of the tests that must be passed: the
independence test (see paragraph 18 below) and the 20% rule (see paragraph 24 below). These
two tests ensure that section 127 does not apply to financial trades carried out through an
investment manager who is either not independent of the non-resident or who acts on terms other
than would be customary between independent parties acting at arms length.
16.
Application of the investment manager provisions is restricted to transactions in shares,
stock, commercial paper and warrants, futures (including forward) contracts, options contracts or
securities of any description (but not futures contracts or option contracts relating to land,
although futures or options contracts involving indices of land may qualify), interest rate swaps,
equity swaps, currency swaps, commodity swaps and commodity index swaps (but not
transactions in physical commodities, including gold, nor warrants on the London Metal
Exchange which give the holder title to the metal).
17.
It is also a requirement that the non-resident does not carry on any other trade through the
investment manager.
a)
The independence test
18.
The manager must act for the non-resident in an independent capacity. This means
ascertaining whether, having regard to its legal, financial and commercial characteristics, the
relationship between manager and client is a relationship between persons carrying on
independent businesses that deal with each other at arms length. Where the other conditions of
section 127(3) are met, the Revenue will regard the independence test as satisfied where any of
the following applies:
i.
the provision of services to the non-resident and persons connected with the non-resident
is not a substantial part of the investment management business;
ii.
from the start of a new investment management business provided the above condition
was satisfied within 18 months;
iii.
an intention to satisfy either of the above conditions was not met for reasons outside the
managers control, although reasonable steps to fulfil that intention were taken;
iv.
investment management services are provided to a collective fund, the interests in which
are quoted on a recognised stock exchange or otherwise freely marketed, for instance as
units in a unit trust;
v.
investment management services are provided to a widely held collective fund.
19.
The condition in (i) above would be satisfied where that part did not exceed 70% of the
investment management business, either by reference to fees or to some other measure where that
would be more appropriate. Where investment management services are provided to a collective
investment scheme constituted as a partnership, participants in the scheme would not be regarded
as connected persons for this purpose solely by reason of membership of the partnership.
20.
Most funds which are transparent for UK income tax purposes (i.e. where the beneficial
entitlement to the income rests with the participant rather than the fund itself) will satisfy the
condition in (i) above.
21.
Condition (v) is likely to apply mainly to overseas funds which are not treated as
transparent for UK income tax purposes, e.g. most funds constituted as limited companies. The
condition will be regarded as satisfied if either no majority interest in the fund was held by five or
fewer persons and persons connected with them, or no interest of more than 20% was held by a
single person and persons connected with that person.
22.
The list in paragraph 18 above is not exhaustive. Cases which fall outside these
categories would have to be considered on their own facts. A subsidiary may be considered
independent of its parent company in this regard notwithstanding the parents ownership of the
share capital.
23.
An example of a fund not meeting any of the criteria in paragraph 18, but which is likely
to be independent on the facts, would be a company which is not widely held but which is itself a
subsidiary of a company that is.
b)
The 20% rule
24.
In essence the requirement is that the investment manager and persons connected with
him (the definition of connected persons is that in section 839 ICTA 1988) must not have a
beneficial entitlement to more than 20% of the non-residents taxable income arising from
transactions carried out through the investment manager. Professional fees paid to the investment
manager and persons connected with him are not included in the 20% provided they are allowable
as deductions in arriving at the taxable income. This applies equally to incentive or performance
fees which are calculated by reference to any increase in the net asset value or profits of the
relevant non-resident.
25.
Where the 20% threshold is broken, the part of the income of the non-resident to which
the investment manager and connected persons are beneficially entitled is excluded from the
limitation of charge. The limitation of charge will apply to the part to which they are not
beneficially entitled, provided the other conditions in the investment manager provisions are met.
26.
The 20% rule is treated as satisfied throughout any period, not exceeding 5 years, for
which it is met in respect of the total taxable income of the period arising from transactions
carried out through the investment manager. It is also treated as satisfied if the manager intended
to meet that condition but failed to do so, wholly or partly, for reasons outside the managers
control, having taken any reasonable steps to fulfil that intention. This means that the manager
must fulfil the intention to keep the beneficial entitlement within 20% of the total taxable income
for the period insofar as it is reasonable to do so, but is not required to get within that figure at
any cost, for instance where there are good commercial reasons for not achieving that.
27. Exam
ple
Years
Taxable income of non-resident
100
200
200
250
250
Entitlement of manager to above
32
58
40
35
Expressed as percentage for each year
32%
29%
20%
14%
2%
Average percentage over qualifying period
32%
30%
26%
22%
17%
It may be assumed that the test is satisfied for year 1 because (a) in this example it was the
managers intention to have a beneficial entitlement to an average of 20% or less in aggregate
over a five year period and (b) that intention was fulfilled. Had the 20% beneficial entitlement
been achieved before the five years were up, then that shorter period would have been the
qualifying period.
A second qualifying period of up to five years could include years 2, 3, 4, 5 and 6 and so on.
28.
In relation to a tax-transparent fund (see paragraph 20) having overseas investors, the
non-residents will be participants in the fund. In such circumstances the 20% rule would be
automatically broken where a non-resident participant is connected to the investment manager
since this would mean that all the non-resident participants were connected under section 839(4)
by virtue of their being partners in the same partnership. The investment manager and connected
persons would then be entitled to all the income of that non-resident. Accordingly, where the
investment management services are provided to a collective investment scheme (as defined in
the Financial Services and Markets Act 2000), the 20% rule is applied by looking at the scheme
as a whole rather than at the individual participators. It is not then relevant that the investment
manager may be connected to the non-resident as partner (section 127(10)) or that the nonresident participants themselves carry on a financial trade: the availability of section 127
protection is instead tested solely by reference to the nature of the activities of the notional
company represented by the scheme.
29.
In certain circumstances the investment manager may be connected with the participants
because both are partners in one or more partnerships which have an interest in the fund in
question. Where the 20% test is failed as a consequence of aggregating the managers income
with that of certain partners who are not connected persons otherwise than as a result of section
839(4), the failure will be regarded as a failure under section 127(4)(b) to fulfil an intention to
satisfy the test. In certain situations that failure will be considered as (a) attributable to matters
outside the control of the manager and persons connected with him and (b) as not being the result
of a failure to take reasonable steps to mitigate the effect of those matters in relation to the
fulfilment of that intention. In those situations the 20% test will therefore be passed (see
paragraph 26 above). The legislation will be applied in this way where:
the connected persons are partners other than solely in a fund under consideration, and
partnership is the only reason that the manager is connected with them.
30
Where overseas pension funds are set up under trust the trustees do not have beneficial
ownership of the pension fund income although they may be the legal owners. The 20% rule will
not therefore apply where the trustee is connected to the UK investment manager. In practice it
would be unusual for an overseas pension fund to be carrying on a financial trade.
31
Where the establishment of a connected persons relationship depends on the question of
whether a person falls to be regarded as having control of a companys affairs within the terms of
s416 (2) ICTA 1988, it is not considered that a persons ability (whether de facto or de jure) to
appoint the majority of the Commissioners for Her Majestys Revenue and Customs of directors
will itself constitute control of the companys affairs unless, that is, the Commissioners for Her
Majestys Revenue and Customs exercises powers which would normally be exercised by the
shareholders at a general meeting.
c)
Interaction of the independence test and the 20% rule
32.
The independence test and the 20% rule apply quite separately. Two examples may help
to illustrate this.
i.
A UK investment manager acts for an overseas trading fund constituted as a company

which accounts for 75% of the business. The parent of the investment manager is an
investor in the fund Company. If the investment manager is not acting in an independent
capacity in relation to the fund company then the whole of the income of the fund is
liable to assessment. If the independence test is satisfied, say because no majority
interest in the fund is held by five or fewer persons and persons connected with them,
then the 20% test must be separately addressed. If the parents interest in the fund
company is 30% then that share of the funds trading income is liable to assessment.
ii.
A UK investment manager acts for a transparent trading fund constituted as a collective

investment scheme in which its overseas parent company is an investor. The facts may
show that the investment manager is acting in an independent capacity (e.g. because
condition (i) in paragraph 18 above is satisfied) in relation to all investors including the
parent company. As a separate matter the 20% test is then applied to the share in the
whole of the taxable profits of the fund to which the manager and persons connected with
him are entitled, so that depending on the level of the investment the test may or may not
be satisfied.
ESC B40
33.
Exceptionally, income in jointly held funds may have come within ESC B40 but not
within the provisions of FA 1995. Where this applies and such funds were marketed by means of
a prospectus or otherwise before 24 November 1994, ESC B40 will continue to apply on the same
basis as before for the intended life of the fund when it was marketed (not including renewals or
extensions), but not beyond 5 April 2005.
SP2/01
Application of local currency rules in Finance Act 2000 to partnerships which

include companies
This statement of practice is obsolete with effect from accounting periods beginning on or after
1st January 2005
GENERAL
1.
This Statement of Practice supplements, and in one respect supersedes, an earlier
statement (SP4/98) in so far as it relates to partnerships with corporate members where either the
company or the partnership is subject to sections 93 and 94 Finance Act (FA) 1993 as amended
by section 105 FA 2000. The pre-FA 2000 legislation provided for the right to elect to use a
currency other than sterling in certain circumstances for restricted aspects of the calculation of
trading profits or losses for tax purposes. The FA 2000 amendments replace this elective
approach with a more widely drawn rule setting out the circumstances in which profits and losses
for the purposes of corporation tax should be computed in a currency other than sterling.
Accordingly, paragraph 29 of SP4/98, which deals with the making of local currency elections,
ceases to be relevant for periods governed by the amended version of sections 93 and 94 FA
1993. Otherwise, that earlier Statement of Practice continues to apply in full.
2.
The amended legislation takes effect generally for the purposes of corporation tax in
relation to accounting periods of companies beginning on or after 1 January 2000 and ending on
or after 21 March 2000. However, any company which did not make a local currency election
under The Local Currency Election Regulations 1994 (SI 1994/3230) for the immediately
preceding accounting period may elect that sections 93 and 94, as amended, should not apply to it
until its first accounting period beginning on or after 1 July 2000. Such an election must be made
on or before 31 August 2000. This Statement of Practice applies for all accounting periods to
which the amended version of sections 93 and 94 FA 1993 applies. This means both the
accounting periods of corporate members of partnerships and accounting periods of partnerships
of which a company is a member.
Statutory framework
3.
Section 8(2) Income and Corporation Taxes Act 1988 (ICTA) provides that a resident
company is chargeable to corporation tax on profits arising to it under any partnership wherever it
would be so chargeable if the profits accrued to the company directly. Section 11(2) ICTA 1988
provides that a non-resident company is chargeable to corporation tax on the profits arising to it
from a trade carried on in the UK through a branch or agency. A partnership is regarded as a
branch or agency for this purpose.
4.
Section 114 ICTA 1988 gives the rules for computing not only the profits and losses of a
trade or profession carried on by persons in partnership where one member or more of the
partnership is a company, but also the profits and losses of such partnerships which carry on nontrading business. In this context the word business has a very wide meaning and generally
encompasses any activity or venture of a commercial nature. The profits and losses of the
partnership are computed, for the purposes of corporation tax, as if the partnership is a company,
separate from any company which is a partner. The trade, profession or business carried on is
also treated as separate from any trade or business which the company member carries on
individually on its own account.
5.
For the purposes of corporation tax, section 114 provides that the profits or losses of a
partnership with a UK resident corporate member are to be computed as if the partnership were a
UK resident company. The corporate members share of the resultant figure is determined in
accordance with its interest in the partnership for the relevant period and charged on the company
as if it had been carrying on the business itself.
6.
If a corporate member of a partnership is not UK resident, section 114 (read with section
115) provides that the computation of partnership profits is to be made on the basis that the
partnership is a non-UK resident company. The corporate members share of the profit
determined in accordance with its interest in the partnership for the period is to be charged on the
company as if it was carrying on the business itself through a UK branch. Accordingly, in a
partnership involving both UK resident and non-UK resident companies, the profits and losses of
the partnership have to be computed on two separate bases for the purposes of arriving at the
profits and losses of these two types of corporate partner.
7.
The effect of section 114 (as extended by section 115) is to determine the share of the
section 93 and 94 FA 1993 profit of partnerships with UK resident corporate members, non-UK
resident corporate members or both on which such companies are respectively to be charged to
corporation tax.
8.
Sections 93 and 94 FA 1993, as amended by section 105 FA 2000, set out the
circumstances in which profits and losses of a business or part of a business for the purposes of
corporation tax should be computed in a currency other than sterling and provide for the ways in
which this computation may be made. The rules for computing any proportion of chargeable
gains or capital losses for corporation tax remain as before, namely all are to be computed in
sterling.
9.
Paragraph 12 of Schedule 18, FA 1998 provides that the corporate members company
return must include any amount which in a relevant partnership statement, within the meaning
of section 12AB Taxes Management Act (TMA) 1970, is stated to be its share of the partnership
results for the period. That statement is not directly concerned with the underlying accounts. But
the statement is to form part of the partnership return required by section 12AA TMA 1970. In
accordance with subsections (2) and (3) of the latter section an officer of the Commissioners for
Her Majestys Revenue and Customs may require the partners, or one of them, to deliver a return
of relevant information which may include accounts, statements and documents.
10.
Such a partnership return is only required where the partnership is a UK partnership or a
foreign partnership which carries on business in the UK through a branch or agency. A UK
company may be a member of a foreign partnership which does not carry on business in the UK.
In that case the companys corporation tax return requires it to enclose a copy of the partnership
accounts and tax computations showing its share of the partnerships taxable profits and losses for
the relevant period.
Election to defer application of the amended legislation

11.
For the purposes of corporation tax, the profits and losses of partnerships to which
section 114 applies for the accounting periods referred to in paragraph 2 above will have to be
computed on the basis that sections 93 and 94 FA 1993 apply to the partnership. It is the view of
HM Revenue and Customs that, because section 114 ICTA 1988 provides for computations to be
prepared as if a partnership were a company, where at least one of the partners is a qualifying
company it is open to that partnership to make an election to defer the application of the new
rules to it until its first accounting period beginning on or after 1 July 2000. Such an election
which may only be made if the partnership had not previously elected to use a non-sterling
currency in respect of its trade had to have been made on or before 31 August 2000 and been
signed by all partners who, at the time of the election, were subject to United Kingdom
corporation tax. Without all the signatures, HM Revenue and Customs will treat the election as
not effective.
Cases where amended Sections 93 and 94 FA 1993 apply to a partnership with company
members
12.
For the purposes of applying section 114 ICTA 1988 to a UK resident corporate member
of a (UK or foreign) partnership, it will be necessary to compute the profits and losses of the
partnerships business, or part of its business, in accordance with the rules in sections 93 and 94
FA 1993 (as amended) if
the partnership prepares its accounts as a whole in a currency other than sterling in
accordance with normal accounting practice; or,
although preparing partnership accounts as a whole in sterling, so far as relating to the

business or part of its business the partnership accounts are prepared using the closing
rate/net investment method from financial statements prepared in a currency other than
sterling.
13.
For the purposes of applying section 114 ICTA 1988 to a non-UK resident corporate
member of a partnership, it will be necessary to compute the profits and losses of the
partnerships business or part of its business in accordance with the rules in sections 93 and 94
FA 1993 (as amended) if
the partnership prepares its accounts as a whole in a currency other than sterling and uses
that, or another, foreign currency in the accounts of the UK part of the business which may be
required by section 12AA TMA 1970; or
the partnership prepares its accounts as a whole in sterling but, so far as relates to part of its
UK business, the accounts are prepared using the closing rate/net investment method from
financial statements prepared in a currency other than sterling; or
the accounts supporting the partnership return required by section 12AA TMA 1970 are in
sterling but, so far as they relate to part of its UK business, they are prepared using the
closing rate net investment method from financial statements prepared in a currency other
than sterling.
14.
It is the view of HM Revenue and Customs that the profits and losses of the business or
part business for the period, as computed in the relevant foreign currency, should be allocated to
corporate members of the partnership in accordance with their entitlement to share in the profits
of the partnership for that period. This sum should then be adjusted to take account of the
corporate partners share of any of the items mentioned in subsection (4)(b) of section 93
FA 1993 as determined in accordance with its entitlement by reference to its partnership interest
in the relevant preceding period. (Paragraph 16 of SP4/98 sets out HM Revenue and Customs
view that the partnership itself cannot carry forward items such as non-trading deficits.)
15.
The sterling equivalent of the amount computed as a result of the process outlined in the
preceding paragraph should then be found in accordance with the rules in section 94 FA 1993 as
amended to the extent necessary to find the companys profits or losses for the period for the
purposes of corporation tax.
16.
The notices of election to use an average arms length exchange rate and withdrawal of
such an election for which section 94(5) provides will only be accepted by the Revenue where
signed by all partners who, at the time of the election, are subject to United Kingdom corporation
tax. Without all the signatures, HM Revenue and Customs will treat the notice of election or
withdrawal as not effective. A valid election once made will not cease to be effective on
subsequent partnership changes, unless validly withdrawn by all partners who at the time of the
withdrawal are subject to United Kingdom corporation tax. Notices of election and withdrawal
will take effect with reference to the accounting period of the partnership and not that of
individual corporate partners.
17.
Where the accounting period of the partnership differs from the accounting period of a
corporate member of the partnership, the sterling figure of the companys share of the results of
the partnerships business for the period should be allocated between the companys relevant
accounting periods on a just and reasonable basis (normally on a time basis).
18.
To the extent that a corporate member of a partnership is entitled to a share of losses
(within the meaning of section 93(7) FA 1993) computed in the relevant foreign currency which
are not utilised for the purposes of corporation tax by the company in the companys relevant
accounting period or periods, it is the view of HM Revenue and Customs that these losses should
be carried forward in the tax computations of the company to the next accounting period in that
currency.
Cases where amended Sections 93 and 94 apply to non-partnership income of a company
member of a partnership
19.
A company which carries on business in partnership may separately carry on its own
business or part of its business in a currency other than sterling and, accordingly, be within the
scope of sections 93 and 94 FA 1993 as amended in respect of that business or part business. It is
possible that the company keeps its own accounts in the same currency as the currency used by
the partnership or each may use a different non-sterling currency. Alternatively the company may
account in foreign currency for its own business, but the business of the partnership may be
accounted for in sterling.
20.
Irrespective of the way in which the company accounts for its share of the partnership in
any of these situations, it is the view of HM Revenue and Customs that it is necessary to arrive at
the companys share of the partnership profits for the relevant accounting period or periods and
losses (to the extent these are brought into account for the purposes of corporation tax in that
period) in sterling (by conversion of non-sterling profits and losses as computed above where the
figure is not already in sterling). This is because section 114 ICTA 1988 treats the partnership
income of a company as if it were due to an entirely separate company and only brings the two
figures of profits together for the purposes of the companys corporation tax computation. The
profits and losses of the company in respect of its non-partnership business as computed in any
non-sterling currency must be separately computed and converted to sterling in accordance with
sections 93 and 94 FA 1993 so far as these are brought into account for corporation tax purposes
for the accounting period. The two sterling amounts must then be combined to arrive at the final
corporation tax liability of the company.
SP3/01
Relief for underlying tax
General
In addition to tax credit relief for direct foreign tax on a dividend, where the United Kingdom
resident shareholder is a company controlling directly or indirectly not less that 10% of the voting
power in the foreign company paying the dividend, it is entitled to relief for the underlying tax
attributable to the dividend. This relief may be due under the terms a double taxation agreement
or, alternatively, on a unilateral basis under section 790(6) ICTA 1988.
The amount of underlying tax to be taken into account for credit relief purposes is so much as is
properly attributable to the proportion of the foreign companys relevant profits as is
represented by the dividend paid to the United Kingdom company (section 799(1) ICTA 1988).
A. Split rate taxes
Under some foreign tax systems the amount of tax charged on company profits is dependent on
how much of the profits is distributed. HM Revenue and Customs view is that in such
circumstances the amount of tax to be taken into account in respect of a particular dividend is the
actual tax charged on the portion of the profits that the dividend represents. The amount of
underlying tax taken into account will therefore reflect the rate charged on the distributed profits
and not the average rate of tax paid at that point on all of the relevant profits.
The Underlying Tax Group will accept computations done on either basis for dividends paid to a
UK company between 31st March 2000 and 31st December 2001 inclusive.
Example 1
A foreign company has taxable profits of 1000, and after paying 20% company tax has relevant
profits of 800. The company pays a dividend of 400 to a United Kingdom resident company. The
foreign company pays additional company tax on the dividend at the rate of 10% - 40.
The amount of underlying tax to be taken into account in respect of the dividend of 400 is 140
[(400/800 x 200) + 40].
Example 2
A foreign company has taxable profits of 1000, and after paying 40% company tax has relevant
profits of 600. Distributed profits are taxed at 25% and on payment of a dividend of 300 to a
United Kingdom resident company the foreign company receives a dividend rebate of 100.
The amount of underlying tax to be taken into account in respect of the dividend of 300 is 100
[(300/600 x 400) - 100]. If the remaining 300 relevant profits are distributed there will be a
further rebate of 100, giving underlying tax of 100, calculated in the same way.
B. Losses
Where the foreign company that pays a dividend has accumulated losses, HM Revenue and
Customs view's is that the relevant profits are the undistributed profits of the most recent period
available at the time that the dividend was paid. The Underlying Tax Group will accept
computations prepared in accordance with this or in line with previous practice for dividends paid
to a UK recipient between 31st March 2000 and 31st December 2001 inclusive.
Example 1
The accounts for a foreign company show the following results
Profits/(losses)
Accumulated profits/(losses)
Year 1
1000
1000
Year 2
(3000)
(2000)
Year 3
1500
(500)
After the end of Year 3, it pays a dividend of 2000 out of unspecified profits.
The relevant profits are 1500 from Year 3 and 500 from Year 1.
Alternatively, if the company pays a dividend of 500 for Year 1, the relevant profits are Year 1
profits.
Example 2
Profits/(losses)
Accumulated profits/(losses)
Year 1
1000
1000
Year 2
(2000)
(1000)
Year 3
1500
500
After the end of Year 3 it pays a dividend of 2000 out of unspecified profits. The relevant profits
are 1500 from Year 3 and 500 from Year 1.
If the dividend were paid before the end of year 3, the relevant profits would be 1000 from Year 1
and 1000 from the most recent preceding profitable period.
SP4/01
Double taxation relief: Status of the UKs double taxation conventions with the
former USSR and with newly independent states
Introduction
1.
This statement of practice replaces and supersedes SP3/92, which made public the UKs
understanding at that time of the status, in relation to those former Soviet Republics that had been
recognised by the United Kingdom as independent sovereign states, of the UK/USSR Double
Taxation Convention. (The Convention between the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of the Union of Soviet Socialist
Republics for the Avoidance of Double Taxation with respect to Taxes on Income and Capital
Gains.)
What SP3/92 said
2.
SP3/92 confirmed that the UK/USSR convention continued in force for Armenia,
Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan,
Turkmenistan, Ukraine, and Uzbekistan. It also stated that the position in relation to the Baltic
States (Estonia, Lithuania and Latvia) was unknown.
Developments since
3.
The UK has subsequently concluded new, separate, double taxation conventions with
Azerbaijan, Belarus 2 , Estonia, Kazakhstan, Latvia, Lithuania 3 , Russian Federation, Ukraine and
Uzbekistan. Negotiations for a new double taxation convention are also taking place with
Georgia.
4.
Details of the new conventions are provided later in this statement. Copies may be
obtained from the Stationery Office, London (tel. 0870 600 5522).
5.
We now know that the Baltic states have never considered themselves bound by the terms
of the UK/USSR convention. It has also been established that, contrary to the previous
understanding, Armenia, Georgia, Kyrgyzstan, and Moldova do not consider themselves bound
by the UK/USSR convention.
2
3
Not yet in force

Not yet in force
Announcement
6.
In these circumstances, the UK will not apply the terms of the UK/USSR double taxation
convention in the case of residents of Armenia, Georgia, Kyrgyzstan, Lithuania, and Moldova:
for profits arising on or after 1 April 2002, in the case of corporation tax
for income and gains arising on or after 6 April 2002, in the case of income tax and capital
gains tax.
7.
The UK will continue to apply the terms of the UK/USSR double taxation convention in
the case of residents of Armenia, Georgia, Kyrgyzstan, Lithuania and Moldova in respect of
profits arising before 1 April 2002 and income and gains arising before 6 April 2002.
8.
The position in relation to each of the former Soviet republics is summarised fully below.
Country
Armenia
Azerbaijan
Belarus
Estonia
Georgia
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Position
Armenia has indicated that it is not operating the UK/USSR Double
Taxation Convention (DTC) in relation to residents of the UK.
The UK will cease to operate the UK/USSR DTC in relation to
residents of Armenia, in accordance with paragraph 6 of this
statement.
A new DTC is in force. See the Double Taxation Relief (Taxes on
Income) Azerbaijan Order 1995 No 762.
Pending the entry into force of the new UK / Belarus DTC the
Double Taxation Relief (Taxes on Income) (Belarus) Order 1995
No 2706 - both Belarus and the UK will continue to operate the
UK/USSR DTC in respect of their residents.
Income) Estonia Order 1994 No 3207.
Georgia has indicated that it is not operating the UK/USSR DTC in
relation to residents of the UK.
residents of Georgia, in accordance with paragraph 6 of this
statement.
A new DTC is under negotiation.
Income) Kazakhstan Order 1994 No 3211 and the Double
Taxation Relief (Taxes on Income) Kazakhstan Order 1998 No
2567 (Protocol).
Kyrgyzstan has indicated that it is not operating the UK/USSR
DTC in relation to residents of the UK.
residents of Kyrgzystan, in accordance with paragraph 6 of this
statement.
Income) Latvia Order 1996 No 3167.
A new DTC is in force with effect from April 2002. See the
Double Taxation Relief (Taxes on Income) Lithuania Order 2001
No 3925 and the Double Taxation Relief (Taxes on Income)
Lithuania Order 2002 No 2847 (Protocol).
Moldova has indicated that it is not operating the UK/USSR DTC
in relation to residents of the UK.
Russian Federation
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
SP5/ 01
1.

residents of Moldova, in accordance with paragraph 6 of this
statement.
Income) Russian Federation Order 1994 No 3213.
Both Tajikistan and the UK will continue to operate the UK/USSR
DTC in respect of their residents.
Both Turkmenistan and the UK will continue to operate the
UK/USSR DTC in respect of their residents.
Income) Ukraine Order 1993 No 1803.
Income) Uzbekistan Order 1994 No 770.
CTSA: Claims to loss relief, capital allowances and group relief - outside limit
The Commissioners for Her Majestys Revenue and Customs have powers under
Section 393A(10) ICTA88 to admit late claims to set off or carry back losses
paragraph 82(2) Schedule 18 FA 1998 to allow the late making, amending or

withdrawing of claims for capital allowances
paragraph 74(2) Schedule 18 FA 1998 to allow the late making or withdrawing of

claims for group relief.
In this statement references to making claims should be read accordingly so that
for capital allowances, making a claim includes amending or withdrawing a claim

and
for group relief, making a claim includes withdrawing a claim.
The statement explains the time limit rules, sets out the Commissioners for Her Majestys
Revenue and Customs general approach to late claims and gives details of the
procedures to be followed.
The normal rules
Loss relief
2.
Loss relief claims can be made within two years of the accounting period in which the
loss is incurred. A loss relief claim made in a Company Tax Return may be amended at any time
up to 12 months from the statutory filing date or, if the claim is within the rules in Schedule 1A
TMA 1970 within 12 months of making the claim.
Capital allowances
3.
Claims to capital allowances under CTSA can be made, amended or withdrawn, up to the
latest of:
the first anniversary of the claimant companys filing date
if the Revenue issues a notice of enquiry into the claimant companys return, 30 days
after the enquiry is completed
if the claimant companys return is amended by HM Revenue and Customs following

an enquiry (under paragraph 34(2) Schedule 18 FA 1998), 30 days after notice of the
amendment is issued
if the claimant company appeals against the Revenues amendment, 30 days after the
date on which the appeal is finally determined.
Group relief
4.
Claims to group relief under CTSA can be made or withdrawn up to the latest of the
following dates:
the first anniversary of the claimant companys filing date
if the Revenue issues a notice of enquiry into the claimant companys return, 30 days
after the enquiry is completed
if the claimant companys return is amended by HM Revenue and Customs following

an enquiry (under paragraph 34(2) Schedule 18 FA 1998), 30 days after notice of the
amendment is issued
if the claimant company appeals against the Revenues amendment, 30 days after the
date on which the appeal is finally determined.
5.
In general a claim to group relief can only be made where notice of consent has been
given by the surrendering company and the claim must be accompanied by a copy of the notice.
But groups may apply to the Commissioners for Her Majestys Revenue and Customs to enter
into simplified arrangements for claiming and surrendering group relief (SI 2975/1999).
Special rules where the Revenue makes certain assessments or amendments
6.
Special time limit rules apply where the Revenue makes certain assessments or
amendments. They are:
a Revenue amendment of a Company Tax Return under paragraph 34(2A) Schedule

18 FA 1998
a discovery assessment made under paragraph 41 Schedule 18 FA 1998 (other than

an assessment made in a case involving fraudulent or negligent conduct ), and
an assessment to recover excess group relief made under paragraph 76 Schedule 18

FA 98.
7.
Where such an assessment or amendment is made, a company may under paragraph 61
Schedule 18 FA 1998 make, revoke or vary certain claims etc. The time limit for these claims is
one year from the end of the accounting period in which the closure notice was issued or the
assessment was made. Any claims etc. made, given, revoked or varied cannot reduce the
combined tax liability of the company and any other persons affected by an amount greater than
the additional liability to tax arising from the amendment or assessment.
8.
Where the Revenue makes a discovery assessment under paragraph 41 Schedule 18 to
recover tax lost through fraudulent or negligent conduct, the rule in paragraph 65 Schedule 18
applies. It allows the admission of any claims which can be given effect in that assessment
regardless of time limit.
The Commissioners for Her Majestys Revenue and Customs approach to extending time
limits for making claims
9.
The time limits allowed for making claims to loss relief, capital allowances and group
relief under CTSA and the further provisions described above should generally be adequate and
the Commissioners for Her Majestys Revenue and Customs will not make routine use of its
powers to accept claims made outside these limits. But the Commissioners for Her Majestys
Revenue and Customs recognises that there may be exceptional reasons why a claim is not made
within the time specified. Applications to allow further time in accordance with the powers
referred to at paragraph 1 above will be considered with the assistance of the following criteria.
10.
In general, the Commissioners for Her Majestys Revenue and Customs approach will
be to admit claims which could not have been made within the statutory time limits for reasons
beyond the company's control. This would include, for example, cases where:
at the date of the expiry of the time limit, the company or its agents were unaware of
profits against which the company could claim relief, or
the amount of a profit or loss depended on discussions with an Inspector which were
not complete when the time limit expired, and the delay in agreeing figures is not
substantially the fault of the company or its agents.
In such cases the Commissioners for Her Majestys Revenue and Customs approach will be to
admit late claims up to the amount of the profit or loss in question. Where the claim involves the
withdrawal of an existing claim and the making of a fresh claim, the Commissioners for Her
Majestys Revenue and Customs approach will be to admit these to the extent of the profit or
loss in question. Claims which go beyond this and affect profits which were not in dispute at the
time of expiry of the statutory time limits will not be within this approach.
Reasons beyond the company's control would also include a claim where all of the following four
features were present:
an officer of the company was ill or otherwise absent for a good reason
the absence or illness arose at a critical time and prevented the making of a claim
within the normal time limit
there was good reason why the claim was not made before the time of the absence or
illness
there was no other person who could have made the claim on the company's behalf
within the normal time limit
11.
The Commissioners for Her Majestys Revenue and Customs would not, however, regard
the following as reasons beyond the companys control:
oversight or negligence on the part of a claimant company or its agent
failure, without good reason, to compute the necessary figure
the wish to avoid commitment pending clarification of the effects of making a claim
illness or absence of an agent or adviser to the company.
12.
There may be cases falling outside the general approach outlined in paragraph 10 where it
would nevertheless be unreasonable, given the overall circumstances of the case, for the
Commissioners for Her Majestys Revenue and Customs to refuse a late claim. It is likely that
such cases will involve a combination of factors, but the following criteria may be relevant:
the reason why a claim is late where the reason does not in itself warrant admission
of the claim under the approach outlined above, it will still be taken into account by
the Commissioners for Her Majestys Revenue and Customs in assessing the
circumstances as a whole
the extent to which it is late
the consequences for the company if the claim is refused
any particularly unusual features.
For the purpose of this paragraph and those above, if the late claim forms part of a scheme or
arrangement, the main purpose or one of the main purposes of which is the avoidance of tax
(including the payment of tax), then that will be taken into account in the Commissioners for Her
Majestys Revenue and Customs approach.
Procedures
13.
An application to admit a claim outside the statutory time limits should be sent to the
Inspector dealing with the claimant company and should include a full explanation of the
circumstances of the case. The explanation should cover, but need not be limited to, all the
criteria set out in paragraph 12. The application should be made as soon as possible. Delay in
making a late claim after the circumstances which caused the claim to be late have ceased to
apply may result in the claim being rejected.
SP1/02
Corporation Tax Self Assessment and Chargeable Gains Valuations
Corporation Tax self assessment enquiries: FA98/SCH18/PARA24: enquiries remaining open

after expiry of the period within which a notice of enquiry may be issued solely because of an
unagreed valuation for chargeable gains purposes.
The following Statement of Practice applies where, in the case of an enquiry into a return made
under paragraph FA98/SCH18/PARA3,
HM Revenue and Customs has given notice under FA98/SCH18/PARA24 of their intention
to enquire into that return,
and
the enquiry remains open after the expiry of the period within which that notice had to be
issued (enquiry period),
and
the enquiry remains open solely because of an unagreed valuation for chargeable gains
purposes.
In such circumstances HM Revenue and Customs will not, as a matter of practice, raise further
enquiries into matters unrelated to the valuation or the chargeable gains computation unless the
circumstances are such that, had the enquiry already been completed, an officer could have made
a discovery within the meaning of FA98/SCH18/PARA41. This practice applies only to
valuations made for the purpose of computing chargeable gains of companies and other bodies
within the charge to Corporation Tax. .
This practice does not alter or fetter HM Revenue and Customs right to ask further questions or
make additional enquiries on matters in connection with, or consequential to, the obtaining of the
valuation which were not raised when the valuation was first referred to Shares Valuation
Division or the Valuation Office Agency.
SP2/02
Introduction
1.
This Statement of Practice sets out HM Revenue and Customs practice in relation to the
tax treatment of exchange rate fluctuations in the tax computations of persons who are carrying
on a trade, other than companies within the charge to corporation tax. It is put forward as a
practical guide to facilitate the preparation and agreement of tax computations of such taxpayers,
and takes account of case law and of the enactment of section 42 FA 1998 which requires the
profits of a trade or profession (and hence, by virtue of section 21A ICTA 1988, a property
business) to be returned on a basis that reflects a true and fair view. It is not relevant for concerns
which are companies within the charge to corporation tax for which the rules relating to exchange
differences are contained in sections 92 to 94AB FA 1993 and in Chapter 2 Part 4 FA 1996 (loan
relationships) and Schedule 26 FA 2002 (derivative contracts). The general rules it contains may
need to be modified in the way in which they are applied in particular circumstances, for
example, where the local currency of an overseas trade or property business is a currency other
than sterling.
The Case Law - Marine Midland
2.
The most recent relevant case law on the subject of exchange differences is Pattison v
Marine Midland Ltd [1984] STC 10; 57 TC 219. In that case a United Kingdom resident bank
carried on business in international commercial banking. For the purpose of making dollar loans
and advances in the course of its banking business, it borrowed 15 million US dollars in the form
of subordinated loan stock, redeemable in 10 years. As a result of exchange rate fluctuations, the
sterling value of the loans to its customers increased, but so also did the liability in sterling terms
of the loan stock. Its general aim was to remain matched in each foreign currency and for the
most part the dollar borrowings remained invested in dollar assets. After 5 years the loan stock
was repaid out of existing dollar funds and at no time was any of the 15 million dollars converted
into sterling.
3.
Each year in the accounts, the monetary assets and liabilities denominated in a foreign
currency were valued in sterling at the exchange rate at the balance sheet date but to the extent
that currency liabilities were matched by currency assets, no profit or loss was shown for
accounts purposes. The Court of Appeal and the House of Lords held that in these circumstances
no profit or loss arose for tax purposes. On the other hand the company brought into its profit and
loss account any increase or decrease in the sterling value of excess dollars - i.e. to the extent that
it was in an unmatched position - and this had been accepted as a profit or loss for tax purposes.
Lord Templeman said that this practice reflected the success or failure of the company in
acquiring and holding excess dollars which could be converted into sterling. He noted without
disapproval the Revenues acceptance of the practice and said it was . . . not inconsistent with the
companys submission that no profit or loss was attributable to dollar assets equal in dollar terms
to dollar liabilities.
Definitions
4.
In this Statement:
Translation into sterling is regarded as the valuation of a foreign currency asset or liability in
terms of sterling at a particular date;
Conversion into sterling is the exchange of that asset or liability for sterling;
Local currency is the currency of the primary economic environment in which the trade or
business is carried on and net cash flows are generated.
The recognition of exchange differences: accounts treatment and tax consequences

5.
Before the enactment of section 42 FA 1998 (which has effect for periods of account
beginning after 6 April 1999) it was the general practice in the case of trading companies to bring
exchange translation adjustments, other than those in respect of capital items, into account for tax
purposes where they have similarly been brought into account in arriving at the accounting profit
or loss. Since the accounting treatment is sanctioned by Statement of Standard Accounting
Practice 20 (Foreign Currency Translation) (SSAP 20), it follows that accounts which observe
this practice are, in this regard, giving a true and fair view, and since there is no rule of law which
would overturn this practice, it must be followed for tax purposes.
6.
It has also been the practice in some circumstances mainly in the case of certain
overseas trading activities dealt with for accounts purposes on what is now generally referred to
as the closing rate/net investment basis to translate the net profit or loss for tax purposes (the
so called profit and loss account basis). The Revenue considers that, following section 42 FA
1998, where this basis is used in the accounts in accordance with SSAP 20 it also must be
followed for tax purposes.
Capital and current liabilities
7.
Nothing in section 42 FA 1998 or in the case law regarding the computation of trading
profits requires the distinction between capital and revenue items to be decided other than by
reference to principles well established in tax case law. In computing trading profits for tax
purposes, the question whether a loss or profit on exchange on a foreign currency loan made to
the taxpayer is respectively an allowable deduction or assessable receipt is determined by the
nature of the loan and whether it is to be properly regarded as a capital or current liability. The
case law (such as Marine Midland and Beauchamp v F W Woolworth plc [1989] STC 510; 61 TC
542) shows that the distinction between capital and current liabilities is essentially between loans
providing temporary financial accommodation and loans which can be said to add to the capital
of the business. The answer in any particular case must turn on its facts and circumstances,
which have to be considered in detail.
8.
The Court of Appeal and the House of Lords did not find it necessary to decide whether
the borrowing by Marine Midland was a capital or current liability; the House of Lords indicated
that it would have needed further evidence and argument to decide the issue. The Commissioners
and the High Court, however, agreed with the Revenues view that the borrowing was a capital
liability. The Revenue remains of the view that the liability in question in the Marine Midland
case was of a capital nature.
Matched assets and liabilities
9.
The Court of Appeal and House of Lords judgements in Marine Midland indicate that
where foreign currency borrowings are matched by assets in the same currency the capital or
current nature of the borrowing would no longer be relevant in determining whether adjustments
are to be made for the purposes of computing trading profits or losses for tax. In these
circumstances exchange differences, whether profits or losses, arising on long-term borrowings
are not to be distinguished and adjusted in computing trading profits or losses for tax.
Gains and losses taken to reserve
10.
Under SSAP 20, some gains and losses on monetary assets and liabilities may be taken to
reserve rather than to the profit and loss account. This may happen where paragraphs 27 to 29
SSAP 20 (liabilities hedging investments in certain equity holdings) and paragraphs 15 to 20
SSAP 20 (closing rate/net investment method) apply. In such cases, the gains and losses are not
recognised for tax purposes even if they are not capital items.
Same currency
11.
Liabilities and assets of the same trader are regarded as matched in the way described in
paragraph 9 above to the extent that foreign currency denominated monetary assets are equalled
by liabilities in the same currency and a translation adjustment on one would be cancelled out by
a translation adjustment on the other. In general, therefore, where there are transactions in more
than one foreign currency the question of matching must be considered separately for each
currency (see paragraphs 15 and 34 below). However, it is possible for assets and liabilities in
different currencies to be regarded as effectively matched when hedging transactions, such as
forward foreign currency contracts, are taken into account (see paragraphs 41 to 43 below).
Matching of capital assets in foreign currency with current liabilities
12.
There may be circumstances where foreign currency assets which for tax would be
treated as capital assets are matched with current liabilities in the same currency the reverse of
the situation in Marine Midland. This may arise for example in the case of certain monetary
assets, e.g. where loans to subsidiary companies, which for tax would be treated as capital, are
matched by short term currency borrowings, which for tax may fall to be treated as current
liabilities. The Revenue takes the view that the Marine Midland matching principle applies in
such circumstances, with the result that again exchange differences arising on the assets or
liabilities are not to be distinguished and adjusted.
Assets and liabilities not matched
13.
In general, an adjustment is required to the tax computation of trading profits in respect
of exchange differences that have been debited or credited to the profit and loss account in respect
of capital items. It will be for the trader to demonstrate matching of capital currency liabilities, or
assets, by reference to the position both during and at the end of the accounting period; and where
such liabilities or assets are wholly or partly matched, to show the effect if any on the tax
computation.
14.
However, in practice, the extent to which currency assets are matched with currency
liabilities will in most cases fluctuate in the course of an accounting period, so that it would be
impracticable to measure and take account of such fluctuations on a day-by-day basis in
determining what adjustment is required in the tax computation to the net exchange difference
debited or credited in the profit and loss account. Instead, the practice outlined in paragraphs 17
and 34 below may be adopted, provided it is applied on a consistent basis from year to year.
A practical approach
15.
In essence the practice offered at paragraphs 17 and 34 below assumes that the extent to
which currency assets and liabilities are matched during an accounting period is reflected in the
size of the net exchange difference debited or credited to the profit and loss account. The rules
suggested for determining the adjustment to be made for tax purposes in respect of the exchange
difference arising on capital assets or liabilities which are unmatched, or only partly matched, are
based on the premise that capital liabilities are matched primarily with capital assets in the same
currency. Any capital liabilities not matched by capital assets in the same currency are regarded
as matched by current assets of the same currency only to the extent that the current assets exceed
the current liabilities in that currency.
16.
Where this practice is not adopted, capital liabilities and assets will be regarded as
matched only to the extent that this can be demonstrated by reference to the traders currency
assets and liabilities during the accounting period.
17.
Under the practice referred to in paragraph 15 above, the first step will be to ascertain the
aggregate of exchange differences, positive and negative, on capital assets and liabilities in the
profit and loss account figure.
a. If there are no such differences then no tax adjustment is necessary.
Example 1
An individual normally trading in sterling incurs a liability on a trade debt of $600,000 when $1.
5 = 1. The liability is entered in the books in sterling at 400,000. By the accounting date
sterling has fallen to $1. 25 = 1, so that the sterling value of the liability has increased to
480,000. The exchange loss of 80,000 is charged to the Profit and Loss Account. There were
no capital exchange differences. No adjustment is required for tax purposes because the
transactions are wholly on revenue account.
b. If the net exchange difference on capital items is a loss and the net difference in the profit
and loss account is also a loss, the smaller of the two figures is the amount to be disallowed
in the tax computation as relating to capital transactions.
Example 2
An individual trader borrows $600,000 on long-term capital account when $1. 5 = 1. He retains
$150,000 as current assets and converts the balance of $450,000 to 300,000. The books will then
show the following entries:
Capital loan ($600,000)
400,000
Current assets ($150,000)
100,000
Cash on hand
300,000
400,000
400,000
By the accounting date when sterling has fallen to $1. 25 = 1 these become:
480,000
120,000
Cash on hand
300,000
Exchange difference to Profit

and Loss Account
60,000
480,000
480,000
The exchange difference on capital account is 80,000 (480,000 - 400,000) but the tax
adjustment is limited to the amount charged to the Profit and Loss Account so that 60,000 is
disallowed. This reflects the fact that $150,000 of the liability is matched with $150,000 assets.
The whole of the exchange difference 60,000 is attributable to the excess currency liability on
capital account, the value of which has increased from 300,000 to 360,000.
Example 3
A trader incurs a liability by way of overdraft on current account of $300,000 and borrows
$600,000 on capital account when $1. 5 = 1. She retains $150,000 as current assets and converts
the balance of $750,000 to $500,000. The books will then show the following items:
400,000
100,000
Overdraft on current account
($300,000)
200,000
600,000
Cash on hand
500,000
600,000
By the accounting date sterling has fallen to $1. 25 = 1 and the book entries are then:
480,000
Current basis ($150,000)
120,000

($300,000)
240,000
Cash on hand
500,000

and Loss Account
100,000
720,000
720,000
The net exchange loss of 100,000 in the Profit and Loss Account is made up of 120,000 loss on
the liabilities and 20,000 profit on the assets.
The exchange difference on capital account is 80,000 (480,000 - 400,000). This is less than
the Profit and Loss Account figure so the 80,000 is disallowed for tax purposes. This reflects
the matching of the $150,000 current assets with $150,000 of the current liabilities. The capital
liability is therefore wholly unmatched.
b. If the net exchange difference on capital items is a profit and the net difference in the
Profit and Loss Account is also a profit, then the smaller of the two figures is the
amount to be deducted in the tax computation.
Example 4
A trading partnership, consisting of individuals, incurs a liability by way of overdraft on current
account of $150,000 and borrows a further 300,000 as a capital loan when $1. 5 = 1. It
converts the 300,000 to $450,000 and makes a loan (not in the course of trade) of $600,000 to an
associated company. The books show the following entries at this point:
100,000
Capital assets ($600,000)
400,000
($150,000)
Capital loan
300,000
400,000
400,000
By the accounting date sterling has fallen to $1. 25 = 1 and the book entries are as follows:
($150,000)
Capital loan
120,000

and Loss Account
60,000
480,000
300,000
480,000
480,000
The net exchange profit of 60,000 in the Profit and Loss Account comprises 80,000 profit on
the assets and 20,000 loss on the liability.
The net capital exchange difference is 80,000 (480,000 - 400,000) but the adjustment for tax
purposes is limited to the figure in the Profit and Loss Account of 60,000. This reflects the fact
that $150,000 of the assets are matched with the dollar liability. The non-taxable exchange profit
is attributable to the excess capital assets, whose sterling value changed from 300,000 to
360,000.
d. Where the net exchange difference on capital items produces a loss but the net difference
in the Profit and Loss Account is a credit entry, then no tax adjustment is required.
Similarly no adjustment is necessary where there is a profit in respect of exchange
differences on capital items but a net loss on exchange is debited to the Profit and Loss
Account.
Example 5
A partnership of individuals borrows $900,000 on capital account and raises a further sterling
loan of 200,000. It converts the 200,000 to $300,000 and makes a loan (not in the course of
trade) of $750,000 to an associated company. At this time $1. 5 = 1. The balance of $450,000
is retained as a current asset. The books show the following entries at this point:
600,000
500,000
Capital loan
200,000
300,000
800,000
800,000
By the accounting date the exchange rate alters to $1. 25 = 1 and the book entries become:
720,000
600,000
Capital loan
200,000
360,000

and Loss Account
40,000
960,000
960,000
The Profit and Loss Account entry for the net exchange profit of 40,000 is made up of 160,000
profit on the assets and 120,000 loss on the liability.
The net capital exchange difference is a debit of 20,000 i.e. (720,000 - 600,000) - (600,000 500,000) but the Profit and Loss Account shows a net credit of 40,000. No adjustment is
therefore required for tax purposes. This reflects the matching of the net capital liability of
$150,000 with part of the dollar current assets. The taxable exchange profit of 40,000 is
attributable to the balance of the dollar current assets, whose value increased from 200,000 to
240,000.
e. It follows that normally the amount of any tax adjustment is limited in each case to the
credit or debit for net exchange differences in the Profit and Loss Account.
More than one currency
Where there are transactions in more than one currency, the same principles will apply but each
currency must be considered separately. In such circumstances the exchange difference in the
profit and loss account is the aggregate of the net exchange profits and losses arising in the
various currencies and the tax computation adjustment is determined by comparing the aggregate
exchange difference on capital assets and liabilities in a particular currency with the exchange
difference for that currency in the profit and loss figure (but see paragraphs 41 to 43 below where
hedging transactions are involved).
Example 6
A partnership of individuals borrows $900,000 on long-term capital account and DM 300,000 on
overdraft when 1 = 1. 5 = DM 3. 0. It makes a loan of $600,000 to an associated company (not
in the course of trade) and converts $300,000 into DM 600,000. It loans DM 500,000 to another
associated company (not in the course of trade) and retains the balance of DM 400,000 as a
current asset.
600,000
400,000
Overdraft (DM 300,000)
100,000
Capital assets(DM 500,000)
167,000
Current assets
(DM 400,000)
133,000
700,000
700,000
By the accounting date sterling has fallen to 1 = $1. 20 = DM 2. 5 and the book entries are as
follows:
750,000
500,000
Overdraft (DM 300,000)
120,000
Capital assets
(DM 500,000)
Current assets
(DM 400,000)
and Loss Account
200,000
870,000
160,000
10,000
870,000
The net exchange difference of 10,000 comprises 50,000 loss on the Dollar assets and
liabilities offset by 40,000 profit on the Deutschmark assets and liabilities.
The Dollar exchange loss is entirely on capital account and should be added back to the tax
computation.
The Deutschmark exchange difference comprises 60,000 profit on the assets and 20,000 loss
on the liability. The net capital exchange difference on Deutschmark assets and liabilities is a
profit of 33,000 i.e. (200,000 - 167,000) so the adjustment for tax purposes is limited to
33,000. This reflects the fact that the overdraft is matched with Deutschmark current assets and
the Deutschmark capital assets are unmatched.
Thus the overall adjustment to the tax computation is an addition of 17,000 i.e. (50,000 33,000).
Hedging transactions
In considering whether a trader is matched in a particular currency, forward exchange contracts
and currency futures entered into for hedging purposes may be taken into account, provided the
hedging is reflected in the accounts on a consistent basis from year to year and in accordance with
accepted accounting practice. For example, where a trading transaction is covered by a related or
matching forward contract, under SSAP 20 the transaction may be translated using the rate of
exchange specified in the forward contract. Alternatively, the forward contracts open at the
balance sheet date may be shown as assets or liabilities, valued on a market to market basis or
by reference to the difference between the contracted forward exchange rates and the spot rate on
the balance sheet date.
Where a trader enters into a currency swap agreement to exchange borrowed currency for an
equivalent amount of another currency (including sterling) for a fixed period, the two transactions
in the original currency should be treated as matched, so that the underlying liability in the first
currency is effectively converted into a liability in the second currency for the duration of the
swap. If, when the swap is terminated, the currencies are swapped back at the spot rate of
exchange prevailing at the commencement of the swap there will be for Case I purposes no
exchange loss or profit in terms of the original currency (but the capital gains consequences of
unwinding the swap will need to be taken into account).
In the Revenues view, where currency assets or liabilities are hedged by transactions in currency
options no matching can be said to have taken place and such transactions are unaffected by the
Marine Midland decision.
Example 7 Hedging
The facts are those of example 3 above in the subsequent accounting period at the start of which
the book entries are:
480,000
120,000

($300,000)
240,000
Cash on hand
500,000
Exchange difference b/f
100,000
720,000
720,000
Three months from the end of the period of accounts (there having been no transactions in the
meantime affecting the assets and liabilities referred to in the example), when $1. 18 = 1, the
trader enters a forward contract to purchase $600,000 at $1. 20 = 1 in 6 months time, to hedge
the capital loan which is repayable on the date the forward contract matures. By the accounting
date, when $1. 10 = 1, the books show either:
Capital loan ($600,000)*
500,000
150,000

($300,000)
300,000
Cash on hand
500,000
100,000
Exchange different to Profit

and Loss Account
50,000
800,000
translated at forward rate $1. 20 = 1
or
800,000
Capital loan ($600,000)*
600,000
150,000

($300,000)
300,000
Cash on hand
500,000
Forward contract
100,000
100,000

and Loss Account
50,000
900,000
900,000
Because the forward contract specifically hedges the capital loan the net exchange loss on capital
items on either basis is 20,000 (500,000 - 480,000; or 600,000 - 480,000 less 100,000
profit on forward contract).
Because this is less than the overall exchange loss of 50,000, the capital loss of 20,000 is
disallowed for tax purposes.
Overseas branches and trades
18.
Where a trade carried on wholly abroad, or an overseas branch of a trade, has a local
currency other than sterling, accounts will normally be drawn up in the local foreign currency and
translated into sterling using the closing rate/net investment/ method (SSAP 20 paragraphs 25
and 46). In such circumstances, computations taking as their starting point the sterling equivalent
of accounts prepared in local currency, translated into sterling using the closing rate/net
investment method, will be the only acceptable method for tax purposes. Capital allowances and
other statutory reliefs and charges must be calculated in sterling.
19.
The principles outlined in this Statement of Practice should be applied in considering to
what extent an adjustment for tax purposes should be made to the profit figure to be translated
into sterling in respect of an exchange difference in the local foreign currency accounts.
Assets held on the realisation basis
20.
Some financial concerns hold assets, the profits on the disposal of which are treated for
tax purposes as receipts of their trade but which are not stock in trade. Where the concern does
not account for such assets on a mark to market basis, such profits are assessable only when the
assets are disposed of (the realisation basis). Nevertheless it may be the practice for accounting
purposes to revalue the assets to reflect exchange rate fluctuations. Where the resulting exchange
differences are either taken to Profit and Loss Account or set off against exchange differences on
liabilities as part of the matching process, with the result that the profits or losses on realisation
are recognised for accounts purposes effectively net of exchange differences, the accounts
treatment must be followed for tax purposes. The following example shows how this works.
Example 8
A partnership of individuals which is a financial concern borrows $600,000 on capital account
and raises a further sterling loan of 200,000. It converts the 200,000 to $300,000 and buys
financial assets (realisation basis) for $900,000. At this time $1. 5 = 1. The books then show the
following entries:
400,000
Capital loan
200,000
Cost of financial assets

($900,000)
600,000
600,000
600,000
At the accounting date the rate of exchange is $1. 25 = 1 so the entries are as follows:
480,000
Capital loan
200,000

and Loss Account
40,000
Financial assets ($900,000)
720,000
720,000
720,000
Since the capital exchange difference is a debit of 80,000 (480,000 - 400,000) and there is a
net exchange profit of 40,000 overall, no tax adjustment to the 40,000 is needed.
At the end of the next accounting period the rate of exchange has altered to $1. 2 = 1 and the
assets are sold so the entries become:
500,000
Capital loan
200,000
Exchange difference for Year

2 to Profit and Loss Account
Exchange difference for Year
1 brought forward
* Profit on realisation of
assets
10,000
Cash proceeds of sale of

financial assets ($1,200,000)
1,000,000
40,000
250,000
1,000,000
1,000,000
*Sale proceeds $1. 2m less cost $0. 9m giving a profit on realisation of $0. 3m or (at $1. 2 = 1)
250,000. The exchange profit from holding the $900,000 assets while the exchange rate moved
from $1. 5 = 1 to $1. 2 = 1 has already been taken into account in the exchange differences.
The capital exchange difference is a loss on the loan of 20,000 (500,000 - 480,000) but there
is a profit of 30,000 in respect of current assets, i.e. 750,000 ($900,000 at $1. 2 = 1) 720,000. Thus, there is no adjustment to the figure in the Profit and Loss Account for the
exchange difference.
Activities which are not trading
21.
The practice outlined above applies to professions and to property business where the
profits are computed in accordance with the rules of Case I (Schedule A and overseas property
businesses). They have no application outside these contexts. In such cases, the capital gains tax
rules will apply to the acquisition and disposal of foreign currency chargeable assets (except
where the transactions give rise to profits assessable under Case VI of Schedule D) and exchange
fluctuations will generally have no tax consequences outside the capital gains field.
Capital gains
22.
The decision in Bentley v Pike [1981] STC 360; 53 TC 590 established that a gain or loss
on an asset should be computed by comparing the sterling value at the date of sale of the sale
consideration with the sterling value at the date of acquisition of the acquisition cost. The
principle was reaffirmed in Capcount Trading v Evans [1993] STC 11; 65 TC 545 and is not
affected by the Marine Midland decision, by section 42 FA 1998 or this Statement.
SP3/02
Introduction
1.
This Statement of Practice sets out the Inland Revenue's views on the tax treatment
of transactions in futures and options of the sorts defined in section 143 TCGA 1992 and
relating to shares, securities, foreign currency or other financial instruments. It does not
apply to contracts falling within the financial instruments legislation in Chapter 2 Part 4 FA
1994; or, for accounting periods beginning on or after 1 October 2002, derivative contracts
falling within Schedule 26 FA 2002. The principles set out are of relevance to:
UK residents such as unauthorised unit trusts, charities and others (including com panies)
which either do not trade or whose principal trade is outside the financial area; and
non-resident collective in vestment veh icles (whether open- or cl osed-ended), pension
funds and ot hers (including com panies) whic h either do not tra de or whose principal
trade is outside the financial area.
2.
This Statement does not apply to approved pension schemes, whose profits from
futures and options are generally exempt from tax.
3.
In relation to companies, this Statement will be applicable for accounting periods
beginning on or after 1 October 2002 and only in relation to financial futures and options
where the underlying subject matter is shares, a holding in an authorised unit trust, or a
security to which section 92 or 93 FA 1996 applies.
"Financial futures" is a wide term. It includes:
4.
5.
contracts for future delivery of shares, secu rities, f oreign currency or other financial
instruments;
contracts that are settled by payment of cash differences determined by movements in the
price of suc h instrum ents (including cont racts where settlement is based on the
application of an interest rate or a financia l index to a notional principal amount), as well
as contracts settled by delivery; and
both exchange traded and over the counter contracts.
"Options" includes:
both exchange traded and over the counter options;

options that are settled by a cash pa yment be tween the parties, as well as those that
provide for delivery; and
warrants.
Relevance of trading
6.
Section 128 ICTA 1988 and section 143 TCGA 1992 provide, broadly, that
transactions in financial futures and options will be treated as capital in nature unless they
are regarded as profits or losses of a trade. It is immaterial for this purpose whether the
profits of the trade are taxed under Case I of Schedule D or otherwise (see HSBC Life (UK)
Ltd and others v Stubbs and others [2002] STC (SCD) 9).
7.
If, under normal statutory and case law principles, profits or losses fall to be treated
as trading in nature then section 128 ICTA 1988 and section 143 TCGA 1992 have no
application to those profits or losses. It is therefore necessary first to determine whether or
not the taxpayer's transactions in futures and options give rise to trading profits or losses.
8.
Whether or not a taxpayer is trading is a question of fact and degree, to be
determined by reference to all the facts and circumstances of the particular case. However,
the Inland Revenue consider that an individual is unlikely to be regarded as trading as a
result of purely speculative transactions in financial futures or options. Transactions in
financial futures or options by a company may be either trading or capital in nature.
9.
However, a financial futures or options transaction which is clearly ancillary to a
trading transaction on current account will give rise to trading profits or losses. In
contrast, a financial futures or options transaction which is clearly ancillary to a transaction
which is not a trading transaction on current account will be capital.
10.
A financial futures or options transaction that is not clearly ancillary to another
transaction may be a trading transaction in its own right. Whether this is so will depend on
all the facts and circumstances of the case. Consideration will be given to what are known
as the "badges of trade". In such a case, intention and frequency are important. The
transaction will not necessarily be regarded as trading. It may well be regarded as capital
in nature, depending on all the facts and circumstances.
Elimination or reduction of risk
11.
In determining whether a financial futures or options transaction is ancillary to
another transaction the following points are relevant:
there must be another transaction;

that other transaction must already have been undertaken, or there must be the intention
to undertake it in the future;
the financial futures or options transaction is ancillary to the other transacti on if the
intention is to eli minate o r reduce risk, or to reduce transaction c osts, in respe ct of that
other transaction;
the financial futures or options trans action m ust be econom ically ap propriate to the
elimination or reduction of risk, or to the reduction of transaction costs;
the financial futures or options transaction may be ancillary to more than one other
transaction, and more than one financial futures or options transaction may be ancillary to
another transaction;
it m ay be ne cessary to e nter into ne w financ ial futures or options transactions or to
terminate existing ones to reflect changes in the value of the asset s or liabilities resulting
from the other transaction.
12.
These points apply to long and short positions and apply whether the futures
position is closed out or held to final maturity, or, in the case of an options position, closed
out, exercised or held to final expiry.
13.
In considering whether the financial futures or options transaction is "economically
appropriate" to the elimination or reduction of risk, the Inland Revenue take the view that:
the transaction must be on e which, by virtue of the relationship between fluctuations in

its price and any fluctuati ons in the value of t he ot her transaction, m ay reasonabl y be
expected to be appropriate to be used in order to eliminate or reduce risk;
the use of a financial futures or options transaction based on an index of som e sort is not
regarded as precluding the existence of such a reasonable expectation;
it would not normally be expected that the amount of the principal on which the financial
futures or options transact ion is based shoul d signif icantly exceed the principal of the
other transaction.
14.
There may be cases where a financial futures or options transaction is entered into
in order to eliminate or reduce risk, but the other transaction then falls away (or the
intention to enter into the other transaction is abandoned). If the financial futures or
options transaction is closed out within as short a period as is practicable after this happens
the transaction will continue to be treated in accordance with the principles outlined above.
If, however, the futures or options transaction is not closed out at that time it may be
arguable that any profit or loss arising subsequently is of a trading nature. In practice,
where the taxpayer is not otherwise trading, the Inland Revenue would not normally take
this point in view of the taxpayer's original intention.
Base currency
15.
The question may arise as to whether a financial futures transaction to buy or sell
currency forward is ancillary to a capital transaction. In many cases the answer will be
dependent on which currency is the taxpayer's base currency (that is, the currency in which
value is measured).
16.
For UK resident taxpayers the base currency will normally (but need not
necessarily) be sterling. In determining whether there is a non-sterling base currency the
Inland Revenue will have regard to factors such as:
the currency in which accounts are prepared;

the currency in which share capital is denominated; and
evidence of the taxpayer's intentions (for example in a published prospectus).
Examples
17.
The following examples illustrate the above and are not intended to cover every
situation that may arise. In the first eight, the assets concerned are held or will be acquired
as investments and the financial futures or options transactions would normally be treated
as capital (on the assumption that the condition in the first bullet in paragraph 13 above is
fulfilled):
(1)
A taxpayer which holds gilts sells gilt futures to protect the value of its capital in the
event of a fall in the value of gilt-edged securities generally.
(2)
A taxpayer which intends to purchase an asset does so in two stages, by (a) purchasing
a foreign currency future in advance of the purchase of an asset denominated in that
currency, or (b) purchasing an option in respect of an underlying asset as a first step
towards the acquisition of the asset itself.
(3)
A taxpayer which holds a broadly based portfolio of UK equities sells FTSE 100
index futures or purchases FTSE 100 index put options to protect against the risk to
the value of the portfolio from a fall in the market.
(4)
A taxpayer holding foreign currency assets acquires a futures or options contract to

reduce the risk of a fall in the value of the foreign currency assets (as measured in the
taxpayer's base currency).
(5)
A taxpayer which is intending to acquire a broad range of UK securities buys a call

option on an FTSE 100 index to protect against a rise in the price of the securities in
the period before they can be acquired.
(6)
A taxpayer sells or buys options or futures as an incidental and temporary part of a

change in investment strategy, (e.g. changing the ratio of gilts and equities).
(7)
A taxpayer either has existing liabilities (e.g. loans) denominated in a currency other
than its base currency or expects to incur such liabilities (e.g. as a result of an
intention to borrow to acquire investments) and uses a futures or options contract to
protect itself against a rise in the currency in which the liabilities are or will be
denominated.
A taxpayer whose base currency is the dollar holds yen-denominated securities and, in
order to eliminate the perceived risk of a fall in their value, enters a forward contract
to sell for dollars an amount of yen equivalent to the yen value of the securities. (This
is because the forward contract may be regarded as ancillary to the transaction in
securities.)
(8)
The next two examples involve financial futures or options transactions which would
be treated as trading (because they would be ancillary to other trading transactions):
(9)
A taxpayer's futures or options transactions are incidental to its trading activity, for
example a manufacturer entering into transactions to reduce the risk of fluctuations in
the price of raw materials. (The profits and losses from these transactions would be
taken into account as part of the profits and losses of the trade.)
(10)
A taxpayer has borrowed money at a floating rate of interest, for trade purposes, and
enters into an interest rate future or option with a view to protecting itself against rises
in interest rates. (Receipts or payments relating to the future or option would be taken
into account as trading income or expenditure on current account. This is because the
future or option is ancillary to a trading transaction i.e. the payment of interest for
trade purposes. Given this, it does not matter whether or not the borrowing is on
capital account.)
Finally, the three examples below illustrate circumstances where a taxpayer's transactions
in financial futures and options will not generally be regarded as ancillary to another
transaction. It is therefore necessary to look at the transactions in their own right to see
whether they are to be treated as capital or as trading transactions.
(11)
A taxpayer uses futures and options in conjunction with a holding of cash, bonds etc
so as to create synthetic assets. (On the assumption that, in such circumstances, the
financial futures or options transactions cannot all be shown to be ancillary to other
transactions.)
(12)
A taxpayer uses futures and options to take a position in a currency in which it does
not have a portfolio, and has no intention of acquiring a portfolio, so as to create an
exposure to fluctuations in that currency by reference to its base currency.
(13)
A taxpayer whose base currency is sterling holds yen-denominated securities and, in

order to eliminate the perceived risk of a fall in their value, enters a financial futures
transaction to sell for dollars an amount of yen equivalent to the yen value of the
securities. There is no intention of selling the yen-denominated securities and using
the proceeds to acquire dollar-denominated securities. (The effect of the financial
futures transaction is to increase the taxpayer's dollar exposure and to decrease its yen
exposure.)
SP4/02
Definition of financial trader for the purposes of paragraph 31 Schedule 26

Finance Act 2002
General
1.
For accounting periods of companies beginning on or after 1 October 2002, Schedule 26
FA 2002 provides rules for the tax treatment of derivative contracts. This means futures, options
warrants and contracts for differences, except where the underlying subject matter is:
land, tangible assets (excluding commodities) or intangible fixed assets; or

in some cases, shares.
2.
An anti-avoidance rule in paragraph 31 Schedule 26 FA 2002 applies where certain
derivative contracts to which non-residents are also party are entered into by companies to which
the Schedule applies. Broadly, this rule (which replaces section 168 FA 1994) disallows any
payment to the non-resident which is determined (wholly or mainly) by reference to a rate of
interest. This applies for example to periodic payments under an interest rate swap or currency
swap. However, paragraph 31(5) of the Schedule provides an exemption where the paying
company is a bank, building society, clearing house or financial trader, holding the contract solely
for the purposes of a trade carried on by it in the UK, and to which it is party as principal.
Definition of financial trader
3.
The term 'financial trader' is defined in paragraph 54(4) Schedule 26 FA 2002 as
meaning:
(a) any person who:
(i) falls within section 31(1)(a), (b) or (c) of the Financial Services and
Markets Act 2000, and
(ii) has permission under that Act to carry on one or more of the activities
specified in Article 14 and, in so far as it applies to that Article, Article 64 of the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I.
2001/544); or
(b) any person not falling within paragraph (a) who is approved by The Commissioners for
Her Majestys Revenue and Customs for the purposes of paragraph 54.
4.
The Commissioners for Her Majestys Revenue and Customs approval under (b) above
will, for instance, be relevant for a financial trader who does not need to be regulated and so
would not qualify automatically as a financial trader by virtue of paragraph (a) above. Where an
agent is acting for a disclosed principal and the principal is entitled to rights and subject to duties
under the contract, the principal, as opposed to the agent, will require approval under (b).
5.
This Statement of Practice explains the guidelines which the Commissioners for Her
Majestys Revenue and Customs will operate in considering whether any person not within (a)
above should be approved as a financial trader for the purposes of paragraph 54 Schedule 26 FA
2002.
Financial trader guidelines
6.
To obtain the Commissioners for Her Majestys Revenue and Customs approval, a
company must demonstrate that:
it is carrying on a trade, the profits or losses of which would fall to be dealt with under
Case I of Schedule D;
this trade includes the provision of derivative contracts (within the meaning of Schedule
26 FA 2002) to counterparties in the normal course of trade; and
this part of the trade, on its own, satisfies the test in CIR v Livingston (11 TC 542) i.e.
the operations involved must be of the same kind and carried on in the same way as those
which are characteristic of ordinary trading in the line of business in which the venture is
made.
7.
Where a company enters into derivative contracts with associated companies, then it will
be easier for it to demonstrate that the third part of this test is satisfied if it also enters into
derivative contracts to a significant extent with third parties on the same terms. Failing this, a
company will need to produce evidence that it is conducting its operations with its associated
customers in the same way as if they had been unconnected. Relevant considerations will
include:
SP5/02
the type and range of contracts into which it enters;

the management of market risk;
the assessment of credit risk;
the level of reward obtained in terms of fees or spread.
Exemptions for companies gains on substantial shareholdings - sole or main
benefit test - Paragraph 5 Schedule 7AC Taxation of Chargeable Gains Act 1992.
Introduction
The regime in Schedule 7AC TCGA 1992 (Schedule 7AC) for the exemption of gains on
disposals of substantial shareholdings will apply to disposals of shares (or an interest in, or an
asset related to, shares) by companies which have held a substantial shareholding for at least 12
months where
the company holding the shares (or an interest in, or an asset related to shares) is a trading
company or a member of a trading group, and
the shares in question are shares in a trading company or the holding company of a trading
group or subgroup.
The exemptions provided by the regime may create opportunities for manipulation. The
provisions therefore contain an anti-avoidance rule at paragraph 5 of Schedule 7AC. This is
aimed at tax-driven arrangements which are intended to exploit any of the exemptions.
We expect cases where the anti-avoidance rule is in point to be unusual and infrequent.
In what follows, references to paragraphs are to paragraphs of Schedule 7AC.
Outline of the anti-avoidance rule
Paragraph 5 is aimed at arrangements from which the sole or main benefit that can be
expected to be derived is that a gain on a disposal will be exempt by virtue of an exemption in
Part 1 of Schedule 7AC. The remedy is to deny exemption on any gain arising on the relevant
disposal. Arrangements is defined widely and includes any scheme, agreement or
understanding, whether or not legally enforceable.
Paragraph 5(1) provides that certain events must occur in pursuance of the arrangements before
the sole or main benefit test in paragraph 5(2) can apply:
an untaxed gain must accrue to a company (company A) on a disposal of shares, or an

interest in shares or an asset related to shares, in another company (company B),
and before the gain accrued either
company A acquired control of company B, or the same person or persons acquired control of
both companies, or
there was a significant change of trading activities affecting company B at a time when it was
controlled by company A, or when both companies were controlled by the same person or
persons.
Paragraph 5(5) provides that there is a significant change of trading activities affecting company
B if
there is a major change in the nature or conduct of a trade carried on by company B or a 51%
subsidiary of company B, or
there is a major change in the scale of the activities of a trade carried on by company B or a
51% subsidiary of company B, or
company B or a subsidiary of company B begins to carry on a trade.
A major change in the nature or conduct of the trade in this legislation has the same meaning as
in S768 ICTA 1988.
For the purposes of paragraph 5(1) a gain is untaxed if the gain, or all of it but a part that is not
substantial, represents profits that have not been brought into account (in the United Kingdom or
elsewhere) for the purposes of tax on profits for a period ending on or before the date of the
disposal. Profits for these purposes means income or gains, including unrealised income or
gains. But profits are not untaxed profits if an amount in respect of these profits is apportioned
to and chargeable on a UK-resident company under the controlled foreign company rules for an
accounting period of the company ending on or before the date of the disposal
Application of the rule
It will be a question of fact in any particular case as to whether a gain wholly, or wholly except
for a part which is not substantial, represents untaxed profits. Broadly, this will involve looking
at how the consideration obtained for the shares is derived from assets held directly or indirectly
by company B.
It will usually be obvious when profits are untaxed within the meaning of paragraph 5. For
example, unrealised profits on capital assets will be untaxed profits. It is impossible to provide a
comprehensive catalogue of all situations where the gain will represent untaxed profits but some
examples of situations where the profits will not be untaxed profits for the purpose of paragraph 5
would be
a dividend received by a holding company that is paid out of taxed profits of the subsidiary;
where the profits in question themselves represent an exempt gain on disposal of a substantial
shareholding;
where no tax is payable on profits because they are covered by a specific relief (e.g. loss
relief).
In many cases a gain will represent both taxed and untaxed profits. In these circumstances, the
gain should be taken as first representing the taxed profits and only any balance which then
remains as representing untaxed profits.
In the context of this legislation we interpret substantial as meaning more than 20%.
Even if on this basis the gain wholly, or wholly except for a part which is not substantial,
represents untaxed profits, the exemption would be denied only if
each of the circumstances set out in paragraph 5(1) occurs in pursuance of arrangements, and
the sole or main benefit that could be expected to arise from the arrangements is that the gain
accruing on the disposal would otherwise be exempt under Schedule 7AC, and
from the outset the sole or main benefit expected to arise from the arrangements is the
achievement of that outcome.
http://www.hmrc.gov.uk/cgt/anti_avoid_examples.htm
SP1/03
Stamp duty: Disadvantaged Areas Relief
This Statement of Practice is intended as guidance for those claiming exemption from stamp
duty in respect of transfers of property situated in designated areas (Disadvantaged Areas
Relief) and explains how Inland Revenue Stamp Taxes will interpret the extension to the
relief introduced with effect from 10 April 2003.
The relief is one of a number of measures set out in the Governments Urban White Paper
Our Towns and Cities: The Future: Delivering an Urban Renaissance published in
November 2000. The measure is designed to stimulate the physical, economic and social
regeneration of the UKs most disadvantaged areas by attracting development and by
encouraging the purchase of residential and commercial property by individuals and
businesses. The areas eligible for relief were designated 'Enterprise Areas' by the
Chancellor in his 2002 Pre-Budget Report. In addition to the relief, a range of other
Government policies designed to support enterprise and economic regeneration, including
the Community Investment Tax Relief, will benefit these areas, helping to support the
development of new and existing businesses.
Introduction
1.
Disadvantaged Areas Relief (provided for by section 92 of, and Schedule 30 to, the
Finance Act 2001) was introduced on 30 November 2001 and was initially only available for
conveyances or transfers on sale (of both residential and commercial property) for which the
consideration did not exceed 150,000. Stamp duty in respect of conveyances or transfers of
commercial property in disadvantaged areas was abolished in consequence of the Stamp Duty
(Disadvantaged Areas) (Application of Exemptions) Regulations 2003 (the Regulations), which
have effect in relation to instruments executed on or after 10 April 2003. Thereafter the 150,000
limit applies only in relation to residential property.
2.
Finance Act 2002 inserted the following provisions in Finance Act 2001 to distinguish
residential from other property and to provide for differing stamp duty exemptions:
Section 92A which enables stamp duty relief in designated disadvantaged areas in respect
of all properties to be varied depending on whether or not the property is residential;
Section 92B which defines residential property for the purposes of the relief. Nonresidential property, in respect of which unlimited relief is available, is therefore defined
in the Act by exclusion. The section also sets out particular building uses that are
specifically included within, or specifically excluded from, the definition.
3.
In most cases there will be no difficulty in practice in establishing whether or not a
property is residential. This statement sets out in more detail the Stamp Offices approach to
borderline cases and gives guidance on the practical application of the legislation. The annexed
flowchart provides a quick guide for simpler cases as to whether property constitutes residential
property.
Certification
4.
Claims for unlimited relief must be accompanied by a certificate stating either that none
of the land in question is residential property or, if part is residential, the proportion that is nonresidential (together with the usual certificate of value for the remainder).
Residential property: Section 92A(4) of Finance Act 2001, together with the Regulations,
provides that the exemption will only apply if the document is certified to the effect that the
amount or value of the consideration does not exceed 150,000.
Non-residential property: Subsection (2) of section 92 of Finance Act 2001 provides that
the exemption will only apply if the document is certified to the Commissioners as being
an instrument on which stamp duty is not chargeable by virtue of subsection (1) of that
section.
5.
The following are suggested forms of words for particular certificates:
Residential Property: I/We hereby certify that the transaction effected by this instrument
does not form part of a larger transaction or series of transactions in respect of which the
amount or value of the consideration exceeds 150,000 and that stamp duty is not
chargeable thereon by virtue of the provisions of sections 92 and 92A of the Finance Act
2001.
Non-residential Property: I/We hereby certify that this is an instrument in respect of nonresidential property on which stamp duty is not chargeable by virtue of the provisions of
section 92 of the Finance Act 2001.
Mixed Use Property: I/We hereby certify that the transaction effected by this instrument
is in respect of property part of which is residential property, and which does not form
part of a larger transaction or series of transactions in respect of which the amount or
value of the consideration relating to the residential part exceeds 150,000 so that stamp
duty is not chargeable by virtue of sections 92 and 92A of the Finance Act 2001, and part
of which is non-residential property on which stamp duty is not chargeable by virtue of
the provisions of section 92 of the Finance Act 2001. The basis upon which the allocation
between residential and non-residential parts has been made is as follows:
6.
While the legislation does not specifically require the certificate to be included as part of
the document, it is suggested that it should be so included. If the person submitting the document
for stamping does not provide a certificate, either in the document or separately in writing,
exemption will not be granted.
7.
Appropriate contemporaneous evidence should be retained to support any certificate
provided. Estate agents specifications, site plans, planning applications or permissions,
marketing material and photographs may all provide relevant information.
8.
Anyone falsely certifying a document with a view to obtaining relief that is not due will
be committing a stamp duty fraud.
The meaning of residential property
9.
Section 92B defines residential property as a building which:
is used as a dwelling, or
is suitable for use as a dwelling, or
is in the process of being constructed or adapted for such use.
If a property meets any one of these separate tests it will be treated as residential property and be
subject to the 150,000 limit for relief, as will any garden or grounds belonging to it or any
interests or rights attaching to it. Each element of the definition is considered in turn below.
The question of whether and to what extent a building and grounds are defined as residential
property for stamp duty purposes may also have implications for its treatment for capital gains tax
and local authority rates.
Use as a dwelling
10.
Where a building is in use at the date of execution of the relevant instrument, it will be a
question of fact whether and to what extent it is used as a dwelling. Use at the date the instrument
is executed overrides any past or intended future uses for this purpose.
11.
Where the property in question is in use as a dwelling at the date of execution, it is
residential property for the purposes of the relief unless it is part of a multiple transaction
qualifying for relief under the Regulations (see paragraphs 35 to 39 below).
12.
For the treatment of buildings put to both residential and non-residential use, see
paragraphs 17 and 18 below.
Suitable for use as a dwelling
13.
The suitability test applies to the state of the building at the time the instrument is
executed, having regard to the facilities available and any history of use. For example, HM
Revenue and Customs will not regard an office block as suitable for use as a dwelling, but a
house which has been used as an office without particular adaptation may well be so.
14.
If a building is not in use at the date of execution but its last use was as a dwelling, it will
be taken to be suitable for use as a dwelling and treated as residential property for the purposes
of the relief, unless evidence is produced to the contrary (see paragraph 15).
15.
Whether a building is suitable for use as a dwelling will depend upon the precise facts
and circumstances. The simple removal of, for example, a bathroom suite or kitchen facilities will
not be regarded as rendering a building unsuitable for use as a dwelling. Where it is claimed that
a previously residential property is no longer suitable for use as a dwelling, perhaps because it is
derelict or has been substantially altered, the claimant will need to provide evidence that this is
the case. See also paragraph 29.
16.
Where a building has been used partly for residential purposes and partly for another
purpose, its overall suitability for use as a dwelling will be judged from the facilities available at
the date of execution of the relevant document. For example, if two rooms of a house were in use
as a dentists surgery and waiting room at the date of execution, HM Revenue and Customs
would nevertheless normally consider this property suitable for use as a dwelling unless the
claimant provided evidence to the contrary. In other words, the interaction of the Regulations
with section 92B(1) enables a building that is used only partly as a dwelling to be nevertheless
suitable for use wholly as a dwelling, with the effect that the 150,000 limit applies to the whole
of the consideration. Where only a distinct part of the building is used and suitable for use as a
dwelling, that part will be residential property for the purposes of the relief and the mixed use
provisions will apply (paragraphs 17 and 18 below).
Mixed use
17.
Where only part of a building (and land or interest relating to it) is residential property
within section 92B(1), the consideration shall be apportioned on such basis as is just and
reasonable between the residential and non-residential elements. The 150,000 limit is then
applied only to the residential portion, in accordance with the appropriate certification (regulation
5 of the Regulations). For example:
A property situated wholly within a disadvantaged area is bought for
a) 200,000
b) 400,000
50% of the property is residential property on the basis of a just and reasonable
apportionment.
Relief is conferred by section 92 FA 2001, applied in conjunction with regulation 5 of the

Regulations. Paragraph (3) of regulation 5 calls for an apportionment of the total
consideration between residential and non-residential elements. Paragraph (4) confirms
that relief applies to the residential property element only where the consideration
attributed to it does not exceed 150,000. In these examples:
a) 100,000 is attributed to the residential property element, so relief is due. The part of
the land that is not residential property is also exempt under the normal operation of
section 92 FA 2001. So no duty is payable.
b) the 200,000 attributed to the residential property element is not exempt, because of
regulation 5(4), but attracts duty at the rate of 1% (stamp duty payable 2,000). The nonresidential property element is exempt as above.
18.
The just and reasonable test is necessarily subjective, and each case will be considered
on its merits. Apportionment might be on the basis of the percentage areas quoted in planning
applications, where appropriate, or alternatively of floor space relating to the respective uses.
Other methods of apportionment will be considered as part of a claim.
Specific cases
19.
Some types of communal or institutional building are used neither as dwellings nor for
commercial purposes. The legislation therefore outlines how these are classified for the purposes
of relief, specifically including some such buildings within the definition of dwelling (section
92B(2)) and specifically excluding others (section 92B(3)). If they do not fall within any of the
specific categories of section 92B(3), most residential institutions will come within section
92B(2)(d) and will be treated as dwellings by default.
20.
Categories of building use specifically included within the definition of use as a
dwelling (so that transfers of such buildings only qualify for relief if the consideration does not
exceed 150,000) (section 92B(2)) are:
a) residential accommodation for school pupils, for example accommodation blocks in
boarding schools;
b) residential accommodation for students, other than that within section 92B(3)(b). Student
accommodation provided by private landlords is a dwelling, as is accommodation
leased to students by universities or colleges in flats or houses rather than in halls of
residence (see section 92B(3)(b));
c) residential accommodation for members of any of the armed forces, including
accommodation for their families (section 92B(2)(c));
d) an institution that is the sole or main residence of at least 90% of its residents and does
not fall within any of the categories referred to in section 92B(3) (see section 92B(2)(d)
and also paragraph 21 below). This would include, for example,
sheltered accommodation for the elderly where no nursing or personal care is
provided
accommodation for religious communities (subject to the rules regarding mixed use;
see paragraphs 17 and 18).
21.
Categories of building use specifically excluded from the definition of use as a dwelling
(so that transfers of such buildings in a disadvantaged area will qualify for unlimited relief)
(section 92B(3)) are:
a) a home or other institution providing residential accommodation for children;
b) a hall of residence for students in further or higher education. This is not defined in the
legislation but in practice property provided by a university or similar establishment will
c)
d)
e)
f)
be judged on the facts (number of inhabitants, type of facilities, availability of communal

areas);
a home or other institution providing residential accommodation with personal care for
persons in need of personal care by reason of old age, disablement, past or present
dependence on alcohol or drugs or past or present mental disorder;
a hospital or hospice;
a prison or similar establishment, or
a hotel or inn or similar establishment.
22.
The specific inclusions and exclusions set out in paragraphs 20 and 21 above apply not
only to a buildings actual use at the date of the transfer, but to the uses for which it is suitable at
that date. Where, however, a building is being put to one of the non-residential uses specified in
section 92B(3), this overrides any suitability for another use (section 92B(4)). For example, a
building used as a childrens home may also be suitable for use as a school boarding house, but
this will not preclude a claim to unlimited relief.
23.
Where a vacant building is suitable for at least one of the uses specified in section 92B(2)
and at least one specified in section 92B(3), the tiebreaker in section 92B(5) determines, for the
purposes of the relief, the use for which it is most suitable. Whether or not a vacant building has
one or more uses for which it is most suitable is a question of fact. Evidence supporting such uses
should be provided with the claim for relief.
24.
Where there is a single use for which a building is most suitable, the fact that it is also
suitable for another use will be discounted.
25.
If there are a number of uses for which a building is most suitable and they all come
within either of the two subsections, any other use for which the building is suitable will be
discounted.
26.
Where no most suitable use can be shown, the default will be to classify the building as
residential property and apply the 150,000 limit.
27.
Land and buildings that are not suitable for any use at the date of execution will be
treated as residential property if they are in the process of being constructed or adapted for such
use- see paragraphs 28 and 29 below.
Process of being constructed or adapted for use as a dwelling
28.
Undeveloped land is in essence non-residential, but land may be residential property for
the purposes of disadvantaged areas relief if a residential building is being built on it at the date
the instrument is executed. The process of construction is taken as commencing when the builders
first start work. A development of six or more dwellings is deemed to be non-residential under
regulation 6 of the Regulations, even if in the process of construction at the date of the instrument
(see paragraph 35 below).
29.
Where (at the date the relevant instrument is executed) an existing building is being
adapted for, or restored to, domestic use, it is residential property for the purposes of the relief.
This may apply, for example, where a derelict building is being made fit for habitation, or where
a previously non-residential building is being converted to a dwelling. Again, the process is taken
as commencing when the builders start work.
The garden or grounds of a building used etc. as a dwelling
30.
Section 92B(1)(b) includes within the definition of residential property land that is or
forms part of the garden or grounds of a building within paragraph (a) (including any building or
structure on such land). The test HM Revenue and Customs will apply is similar to that applied
for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation
of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable
enjoyment of the dwelling having regard to the size and nature of the dwelling.
31.
A caravan or houseboat is not a building for this purpose.
32.
Commercial farmland is not within the definition of residential property. A farmhouse
situated on agricultural land would be dealt with under the mixed use provisions (paragraphs 17
and 18 above).
33.
Outhouses on land within the section 92B(1)(b) definition will also be residential
property unless it can be demonstrated that they have a specific non-residential purpose. Where a
distinct non-residential use can be demonstrated, the mixed use provisions will apply.
Interest in or rights over residential property
34.
The treatment of interests in, or rights over, land or buildings for the purposes of
disadvantaged areas relief will follow that of the land or buildings to which they relate.
Six or more separate dwellings transferred by single contract
35.
The Regulations provide that where there is a single contract for the conveyance,
transfer or lease of land comprising or including six or more separate dwellings, none of that land
counts as residential property Accordingly the transaction will qualify for unlimited relief.
This recognises that commercial developers and institutional landlords, for example, frequently
deal in numerous properties at one time. The fact that those properties may individually be
residential property does not detract from the inherently commercial nature of the transaction
itself.
36.
To qualify as separate, the dwellings must be self-contained. So for example, flats
within a block, sharing some common areas but each with their own amenities, will qualify as
separate dwellings. Rooms let within a house will not constitute separate dwellings if tenants
share amenities such as a kitchen and bathroom.
37.
A transaction in respect of six or more such dwellings must be carried out by means of a
single contract in order to qualify for relief. Several instruments may however be presented for
stamping if the properties are held under separate title.
38.
Qualifying multiple transactions will be treated as non-residential property for the
purposes of relief, even where the proportionate consideration for individual dwellings exceeds
the 150,000 limit for residential property. It is not a condition of relief that multiple transactions
comprise only dwellings.
39.
The fact that some of the six or more dwellings within the single contract are outside a
designated disadvantaged area will not prevent them from constituting a non-residential
transaction. However relief will only be available for the portion of the land situated within the
disadvantaged area.
Property only partly within a disadvantaged area
40.
Schedule 30 to Finance Act 2001, together with the Regulations, determines how
property situated partly within and partly outside a designated disadvantaged area is to be treated
for the purposes of the relief. Such cases are relatively rare in practice. Queries may be referred to
Inland Revenue (Stamp Taxes) for guidance.
Lease Duty
41.
Relief is also available from duty on the rental element of new leases executed on or after
10 April 2003. Rental leases of residential property shall be eligible for relief where the average
annual rent is no more than 15,000 and/ or where any premium does not exceed 150,000. For
non-residential property, full relief is available for the rental element of leases as well as for any
premium.
Other issues
42.
The extended relief applies to documents executed on or after 10 April 2003, irrespective
of whether the contract was entered into before or after that date. There is no scope to reclaim
stamp duty already paid in respect of transfers executed on or before 9 April 2003.
FLOW CHART TO DETERMINE WHETHER PROPERTY IS OR IS NOT

'RESIDENTIAL PROPERTY'
Is the subject of the conveyance/transfer/lease
(A)
Is any part of
the building not
in use as a
dwelling?
Yes
A building
that is
1
in use as a
dwelling
(including any of
the uses
specified at
s.92B(2)2)?
No
Yes
The part that is in use as

a dwelling is residential
property
No
__________________________
[Continue down the flow

chart for the part of the
building that is not in use
as a dwelling]
A building that
is in use for any
of the specific
uses at
s.92B(3)3?
Yes
The building is
not 'residential
property'
No
A building that
is suitable for
use4 as a
dwelling
(including any
of the uses
specified at
s.92B (2))?
No
Yes
Is the building
also suitable
for one or
more of the
uses specified
at s.92B(3)
Yes
Is the building
most suitable5
for one of the
uses specified
at s.92B(2)?
No
A building that is
in the process of
being
constructed or
adapted for use6
as a dwellingNo
(including any of
the uses
specified at
s.92B(2))?
Yes
The building is
'residential
property' *
No
Is the building equally suitable
for one of the uses specified
at s.92B (2) and one of those
specified at s.92B(3)?
Yes
Yes
No
No
The building is not

'residential
property'.
*unless the conveyance, transfer or lease comprises or includes six or more separate dwellings7 made pursuant to a single
contract, in which circumstances none of the land will be residential property
(B)
Yes
Land that forms part of the
garden of grounds8 of a building
that is residential property as
determined under (A) above?
The land is 'residential

property'
No
The land is not

'residential property'
(C)
An interest in or right over land
that subsists for the benefit of a
building that is residential
property under (A) or land that is
residential property under (B)?
Footnotes
1.
2.
3.
4.
5.
6.
7.
8.
See paragraph [10] to [12] of SP

See paragraph [20] of SP
Yes
No
The interest/right is
The interest/right is not

SP2/03
Business by telephone services for non Contact Centre customers
For the purpose of this Statem ent of Practice, the term non Contact Centre Customer is used to
describe callers who contact an Inland Revenue office which is not currently served by a Contact
Centre.
The security afforded by Contact Centre technology enables us to offer a wider range of ser vices
to customers contacting those centres. We ar e committed to expand the num ber of offices which
will be served by Contact Centres and we intend that by 2005 ne arly all telephone calls will be
handled by our Contact Centre network. In the meantime, we are improving the range of services
offered to our non Contact Centre Customers.
Previously, Statement of Practice 2/1998 , restri cted Business b y Telepho ne to indivi dual
customers calling on t heir own behalf. From t odays date, we have extend ed the service t o
personal representatives w hose identity and credenti als can be verified and for whom we h old
written evidence of customer consent. We will also now provide so me specific informati on by
telephone.
Further guida nce will be i ssued with r egard to our contact with voluntar y intermediaries (e.g.
welfare organisations such as Citizens Advice Bureaux).
This Statement of Practice sets out, in full, the extended services which are now available for non
Contact Centre Customers. It supersedes Statement of Practice 2/1998.
Another Business by Telephone Statement of Practic e (SP3/03) is being issued toda y and will t o
apply to customers whose affairs are served by a Contact Centre.
SECURITY AND CONFIDENTIALITY
HM Revenue and Custo ms is committed to ensuring the infor mation it receive s is accurate and
that the priva cy of custom ers' affairs is protected. For the services described in this State ment of
Practice:
Callers will only be able to supply or amend information concerning individuals tax affairs.
We will take steps to che ck the identi ty of the caller before di scussing a customers tax
affairs.
Callers who fail to satisfy the identity checks will be asked to put their enquiry in writing.
We will check that we ha ve the customers written consent bef ore we discuss their affairs
with a personal representative.
We will carry out sam ple call backs to en sure, am ongst other things, that our prescribed
security procedures are being followed.
SERVICES AVAILABLE BY TELEPHONE FOR NON CONTACT CENTRE

CUSTOMERS
The services described bel ow are available to individual custo mers calling about their own tax
liabilities, and to personal representativ es acting on behalf of the custo mer providing that we
can satisfactorily check the identity of the caller.
The directions by The Commissioners for Her Majestys Revenue and Customs under section 118
FA 1998 which provide for these services are at annex A.
In most cases nothin g more than a telephone ca ll will be needed, although the call may lead to
further action by HM Rev enue and Cus toms (for exam ple, sending out a revised PAYE coding
notice). Where business cannot be co mpleted by telephone we will send custo mers any forms or
other information they need and explain what they need to do next.
PERSONAL REPRESENTATIVES
Some people prefer to ask a personal representa tive, such as an accountant, agent or fam ily
member, to deal with their tax affairs fo r them. We will accept some ty pes of information from
personal representatives providing that:
we have been able to check the identity of the personal representative, and
we hold wri tten evidence that the c ustomer has given their consent for that personal
representative to act on their behalf
Further guida nce will be i ssued with r egard to our contact with voluntar y intermediaries (e.g.
welfare organisations such as Citizens Advice Bureaux).
MATTERS THAT CAN BE DEALT WITH BY TELEPHONE
Personal Details
We will accept the following information over the telephone:
changes to name, address, post code and telephone number,
changes in personal circumstances such as marriage, separation or divorce,
other personal information - for example, National Insurance number and date of birth.
Customers can also tell us when a personal re presentative is no longer acting on their beha lf.
However, they will need to send us written consent for any new personal representative who
starts to act for them.
Employment Details
We will accept the following information over the telephone:
details of a customers new employer and the date when the new employment began,
a customers works or payroll number,
details of earlier employments.
We will not accept details of pay and tax over th e telephone. The se details should be notified in
writing.
Personal Allowances
We will accept current year clai ms to the following personal al lowances by telephone fr om
customers and personal representatives calling on the customers behalf:
Personal Allowance,
Married Couples Allowance 4,
Blind Persons Allowance.
The level of a persons inco me affects their entitlement to the age-related allowances. We will
accept new esti mates of i ncome over the telephone from customers or personal representatives
calling on their behalf. And, using the figures provided, we will advise whether the amount of the
customers allowances will change.
This allowance is available for tax year 2000/2001 and later years where either the husband or wife was
born before 6 April 1935.
All claims for previous years must be made in writing.

Expenses
Some employees are entitled to tax relief for expe nses or certain professional subscriptions the y
incur in carrying out their job. We will accept claims for flat rate expenses from customers and
personal representatives (Flat rate expenses ar e fixed am ounts we hav e agreed for certain
categories of employees to save them h aving to m ake clai ms for individual amounts.) We will
also acc ept clai ms for Pr ofessional Subscriptions up to a lim it of 100. (Most Trade Union
subscriptions do not qualify for relief but where, exceptionally, a Trade Union subscription does
qualify we will accept claims by telephone.)
We will also accept repeat clai ms to certain travel expenses, an d other necessary expenses of
employment where the entitlement has already been agreed in principle.
Employee Benefits in Kind
A customer, or a personal representative calling on the customers behalf, can tell us by telephone
about any benefit in kind, not just the most common ones such as car benefits and fuel benefits.
We will check the details of benefits in kind later, after the end of the tax y ear. But, telling u s
about them earlier will help us to keep PAYE tax codes up to date and help the custo mer to pay
the right am ount of tax during the tax year. In som e circu mstances, for exa mple if a benefit is
partly for work purposes or a benefit is shared with other e mployees, we may ask for the details
to be put in writing.
Other information
Customers, or personal representatives calling on the ir behalf, can also help us keep their PAYE
tax codes up to date by telling us about:
receipt of National Insurance Retirement Pension

receipt of tax able Incapacity Benefit (Incapacity Benefit paid at the short ter m lower rate fo r
the first 28 weeks is non-taxable)
small amounts of income, for example bank or building society interest received gross.
Where caller s provide inf ormation ove r the telephone about expenses, benefits in ki nd or other
information we will use this to adjust the customers PAYE code number for the current year and,
if appropriate, the next year. Where we need to make adjustments for earlier tax years customers
must put the information in writing.
TIME LIMITS
The same time limits apply to claim s and elections made by telephone as when they are made in
writing.
Where a claim is made by telephone, it will be treated as made at the time of the call provide d all
the relevant information can be provided b y th e customer during that call. And a cl
aim by
telephone will, of course, be subject to the sa me co nditions and checks as if it were made on
paper.
Where a cl aim cannot be dealt with by telephone, for exam ple, because the caller does not have
all the necessary inform ation, the customer may be asked to m ake the claim in writing. The
written claim must still be made within the usual time limits.
INFORMATION WE WILL GIVE TO CUSTOMERS BY TELEPHONE
We will provide the following details to custom ers, or personal representatives calling on their
behalf:
the customers Payments on Account,
any amounts the customer owes us,
the amount of a repayment awaiting issue,
amounts of unpaid tax for earlier years included in the tax code for the current year, and
amounts of tax due for the current year included in a tax code for a later year
GUIDANCE AND ASSISTANCE
In addition to the services above, non C ontact Centre Customers can expect the norm al range of
help and advice by telephone on general tax matters including:
general questions about income tax and capital gains tax for individuals,
help with completing returns and other Inland Revenue forms, and
requests for leaflets, forms, schedules and other Inland Revenue information.
But, please note requests for supple
mentary pag es to the Self Assessment return and the
helpsheets mentioned in t he tax return guide shoul d be made to the Self Assessment Ord erline
0845 9000404 . The Orderline is open from 8.00 am to 8.00 pm 7 days a week.
Annex A
DIRECTIONS UNDER SECTION 118 FINANCE ACT 1998
In the following directions references to ICTA88 mean the Income and Corporation Taxes Act
1988 and references to ITEPA03 mean the Income Tax (Earnings and Pensions) Act 2003.
Claims, elections and notifications not included on a return
The Commissioners of Inland Revenue hereby direct that from 1 September 2003 an individual
who is not required to make a self assessment return for a year under TMA/S8 (1), or has made a
self assessment return but the time limit specified in TMA70/S9ZA has passed, may:
make the claims or elections specified below, or

notify the income or benefits specified below
by telephone PROVIDED THAT:
claims or ele ctions are for the current y ear (that is the y ear of assess ment in which the
claim or election is made) or the year following the current year, AND
the clai m or election is made, or the inco me or benefit is no tified, in the manner
authorised below
THE MATTERS TO WHICH THE DIRECTIONS RELATE ARE AS FOLLOWS:

Claims and Elections
1
A claim to any of the following personal allowances

Claims to Personal Allowance
under
ICTA88/S257 (1)
ICTA88/S257 (2)
(claimant 65 or over)
Claims to Married Couples

Allowance
or
ICTA88/S257 (3)
(claimant 75 or over)
under
ICTA88/S257A (2)
This allowance is only available
where claimant or wife born before 6
April 1935 but under 75)
ICTA88/S257A (3)
(allowance where cl aimant or wife
75 or over)
or
Elections for the transfer of 50% of

the married couples allowance from
husband to wife
under
ICTA88/S257BA(1)
(An election under this section must
be made before the commencement
of the tax year to which it will relate.
The only exception to this time limit
relates to the year of marriage when
the election may be made during that
tax year).
Claims to Blind Persons allowance
under
ICTA88/S265 (1)
or
ICTA88/S265 (2)
(allowance to spouse)
A claim to an income tax reduction under the following provision

Relief for interest paid
under
ICTA88/S353
A claim to make any of the following deductions from income in respect of expenses,
Relief for professional membership
fees and annual subscriptions
under
ITEPA03/S343 or S344
Relief for flat rate deductions within

the terms of Extra Statutory
Concession A1
under
ITEPA03/S367
A claim to make any of the following deductions from income in respect of expenses (providing
the same class of expense was claimed the previous year),
Relief for expenses
under
ITEPA03/S336
ITEPA03/S337
ITEPA03/S338
ITEPA03/S341
ITEPA03/S342
ITEPA03/S346
ITEPA03/S352
ITEPA03/S370
ITEPA03/S371
ITEPA03/S373
ITPEA03/S374
ITEPA03/S376
Income and Benefits

Notification of any of the any of the following benefits provided by reason of employment
Cash vouchers
under
ITEPA03/S81
Non cash vouchers
under
ITEPA03/S87
Credit tokens
under
ITEPA03/S94
Living accommodation
under
ITEPA03/S102
Cars available for private use
under
ITEPA03/S120
Car fuel
under
ITEPA03/S149
Vans available for private use
under
ITEPA03/S154
Beneficial loan arrangements
under
ITEPA03/S173
Benefits in kind
under
ITEPA03/S201
Payments, etc. free of tax
under
ITEPA03/S222
Directors tax paid
under
ITEPA03/S223
Notification of any income from employment
THE MANNER AUTHORISED FOR DEALING WITH MATTERS BY TELEPHONE

Claims and elections
The claims, and elections specified above may be made orally, in a telephone conversation with a
tax office, if made by:
the individual, or
where the individual has notified HM Revenue and Customs that a personal
representative is authorised to act on his or her behalf, that personal
representative.
(The directions do not apply to claims made by an individual in his or her capacity as a trustee or
partner. Such claims must be made in writing)
The claim or election will be treated as made on the date the telephone call is made, so long as the
caller provides the information requested by HM Revenue and Customs during the telephone
conversation.
If the caller does not provide the information which HM Revenue and Customs requests during
the telephone conversation a valid claim, or election will not have been made. Failure to establish
a valid claim, or election by telephone does not prevent the caller from a further attempt to
establish the claim or election. But, any subsequent attempt must be made in writing, within the
statutory time limit for making the claim or election.
Income and benefits
The income and benefits specified above may be notified to HM Revenue and Customs orally, in
a telephone conversation with a tax office, if notified by:
the individual, or
where the individual has notified HM Revenue and Customs that a personal
representative is authorised to act on his or her behalf, that personal
representativ
e.
The notification will be treated as given on the date the telephone call is made, so long as the
individual, or personal representative, provides the information requested by HM Revenue and
Customs during the telephone conversation.
If an individual, or personal representative, does not provide the information which HM Revenue
and Customs requests during the telephone conversation a valid notification will not have been
given. The individual, or personal representative, should then write to the individuals tax office
to notify them about the income or benefit
REVOCATION OF PREVIOUS DIRECTIONS
The Commissioners of Inland Revenue hereby revoke their directions published on
24 August 1998 with effect from 1 September 2003.
SP3/03
Business by telephone Inland Revenue Contact Centres superseded by SP1/05
SP1/04
Stamp Duty Land Tax: Disadvantaged Area Relief
This Statement of Practice is intended as guidance for those claiming exemption from Stamp
Duty Land Tax in respect of transfers of property situated in designated areas (Disadvantaged
Area Relief).
The relief is one of a number of measures set out in the Governments Urban White Paper Our
Towns and Cities: The Future: Delivering an Urban Renaissance published in November 2000.
The measure is designed to stimulate the physical, economic and social regeneration of the UKs
most disadvantaged areas by attracting development and by encouraging the purchase of
residential and commercial property by individuals and businesses. The areas eligible for relief
were designated 'Enterprise Areas' by the Chancellor in his 2002 Pre-Budget Report. In addition
to the relief, a range of other Government policies designed to support enterprise and economic
regeneration, including the Community Investment Tax Relief, will benefit these areas, helping to
support the development of new and existing businesses
Background
1.
Disadvantaged Area Relief (provided for by section 92 of, and Schedule 30 to, the
Finance Act 2001) was introduced on 30 November 2001 and was initially available for
conveyances or transfers on sale (of both residential and commercial property) for which the
consideration did not exceed 150,000. Stamp duty in respect of conveyances or transfers of
commercial property in disadvantaged areas was abolished in consequence of the Stamp Duty
(Disadvantaged Areas) (Application of Exemptions) Regulations 2003 (the Regulations), which
have effect in relation to instruments executed on or after 10 April 2003. Thereafter the 150,000
limit applies only in relation to residential property.
2.
Finance Act 2002 inserted the following provisions in Finance Act 2001 to distinguish
residential from other property and to provide for differing Stamp Duty Land Tax exemptions:
FA2002 Section 92A which enables stamp duty relief in designated disadvantaged areas
in respect of all properties to be varied depending on whether or not the property is
residential;
Disadvantaged Area Relief under Stamp Duty Land Tax
3.
Section 57 and Schedule 6 Finance act 2003 provides for Disadvantaged Area Relief
under Stamp Duty Land Tax.
4.
The definition of residential property under Stamp Duty Land Tax is provided at section
116 FA2003. Non-residential property is therefore defined in the Act by exclusion. Section 116
also sets out particular building uses that are specifically included within, or specifically excluded
from, the definition.
5.
In most cases there will be no difficulty in practice in establishing whether or not a
property is residential. This statement sets out in more detail the Stamp Offices approach to
borderline cases and gives guidance on the practical application of the legislation. The annexed
flowchart provides a quick guide for simpler cases as to whether property constitutes residential
property.
Claiming the relief
6.
The way in which relief is claimed is different under Stamp Duty Land Tax. FA2003
Section 76 requires that most land transactions, including those that qualify for Disadvantaged
Area Relief, must be notified to HM Revenue and Customs on a Land Transaction Return Form
(SDLT 1).
7. Relief is claimed by simply completing a box within this form. Certificates of Value are no
longer required and no supporting evidence or documentation is required at this point. Once the
return has been submitted and we are satisfied with the information provided, the purchaser is
issued with a certificate which they must present with documents when applying for registration
of title at Land Registry, Registers of Scotland or Land Registry of Northern Ireland.
8. FA 2003 Schedule 10 Part 3 gives HM Revenue and Customs the power to enquire into a Land
Transaction Return. These provisions permit HM Revenue and Customs to open an enquiry into
any aspect of a Land Transaction Return, including claims to reliefs.
Appropriate contemporaneous evidence should be retained to support any claim to the relief.
There is no need to create records that would otherwise not be available. Estate agents
specifications, site plans, planning applications or permissions, marketing material, photographs
and print outs of an internet post code search may all provide relevant information should there be
an enquiry into a land tax return.
9.
As with all claims the onus is on the purchaser to check whether or not the relief is due.
The meaning of residential property
10.
FA 2003 Section 116(1) defines residential property as a building which:

is used as a dwelling,
or is suitable for use as a dwelling,
or is in the process of being constructed or adapted for such use.
If a property meets any one of these separate tests it will be treated as residential property and be
subject to the 150,000 limit for relief, as will any garden or grounds belonging to it or any
interests or rights attaching to it. Each element of the definition is considered in turn below. The
question of whether and to what extent a building and grounds are defined as residential property
for stamp duty purposes may also have implications for its treatment for capital gains tax and
local authority rates.
Use as a dwelling
11.
Where a building is in use at the effective date of the transaction it will be a question of
fact whether and to what extent it is used as a dwelling.
Use at the effective date overrides any past or intended future uses for this purpose. For example,
a purchaser is buying a house with the intention to refurbish it to create, in its place, an alternative
therapy treatment centre. For the purposes of the relief the house in considered to be a dwelling
because it was suitable for that use at the effective date of the transaction. (For another example
see paragraph 34)
12.
Where the property in question is in use as a dwelling at the effective date of the
transaction, it is residential property for the purposes of the relief unless it is part of a multiple
transaction qualifying for relief under S116 (7) FA 2003 (see paragraphs 40 to 44 below).
13.
There is no motive test applicable to the usage of land or buildings, so where a residential
property is purchased with the owner intending to use it as a non-residential business the building
is considered residential, under the suitability test, for the purposes of the relief.
14.
For the treatment of buildings put to both residential and non-residential use, see
paragraphs 19 and 20 below.
Suitable for use as a dwelling
15.
The suitability test applies to the state of the building at the effective date of the
transaction, having regard to the facilities available and any history of use. For example, HM
Revenue and Customs will not regard an office block as suitable for use as a dwelling, but a
house which has been used as an office without particular adaptation may well be so.
16.
If a building is not in use at the effective date of the transaction but its last use was as a
dwelling, it will be taken to be suitable for use as a dwelling and treated as residential property
for the purposes of the relief, unless evidence is produced to the contrary (see paragraph 17).
17.
Whether a building is suitable for use as a dwelling will depend upon the precise facts
and circumstances. The simple removal of, for example, a bathroom suite or kitchen facilities will
not be regarded as rendering a building unsuitable for use as a dwelling. Where it is claimed that
a previously residential property is no longer suitable for use as a dwelling, perhaps because it is
derelict or has been substantially altered, the claimant will need to provide evidence that this is
the case. See also paragraph 34.
18.
Where a building has been used partly for residential purposes and partly for another
purpose, its overall suitability for use as a dwelling will be judged from the facilities available at
the effective date of the transaction. For example, if two rooms of a house were in use as a
dentists surgery and waiting room at the effective date of the transaction, HM Revenue and
Customs would nevertheless normally consider this property suitable for use as a dwelling unless
the claimant provided evidence to the contrary. A building that is used only partly as a dwelling
may nevertheless be suitable for use wholly as a dwelling, with the effect that the 150,000 limit
applies to the whole of the consideration. Where only a distinct part of the building is used and
suitable for use as a dwelling, that part will be residential property for the purposes of the relief
and the mixed use provisions will apply (See paragraphs 19 and 20 below).
Mixed use
19.
Where only part of a building (and land or interest relating to it) is residential property
within section 116(1), the consideration shall be apportioned on such basis as is just and
reasonable between the residential and non-residential elements. The 150,000 limit is then
applied only to the residential portion (Schedule 6 FA 2003). For example:
A property situated wholly within a disadvantaged area is bought for
a) 200,000
b) 400,000
50% of the property is residential property on the basis of a just and reasonable
apportionment.
In these examples:
a) 100,000 is attributed to the residential property element, so relief is due. The part of
the land that is not residential property is also exempt. So no duty is payable.
b) the 200,000 attributed to the residential property element is not exempt, because of
Schedule 6 paragraph 6, but attracts duty at the rate of 1% (Stamp Duty Land Tax
payable 2,000). The non-residential property element is exempt as above.
Where a transaction involves six or more mixed use properties, under S116 (7) FA 2003,
providing certain conditions are met, the residential element is exempt and no Stamp Duty Land
Tax is payable. See paragraphs 40 to 44.
20.
The just and reasonable test is necessarily subjective, and each case will be considered
on its merits. Apportionment might be on the basis of the percentage areas quoted in planning
applications, where appropriate, or alternatively of floor space relating to the respective uses.
Other methods of apportionment will be considered as part of a claim.
Specific cases
21.
Some types of communal or institutional building are used neither as dwellings nor for
commercial purposes. The legislation therefore outlines how these are classified for the purposes
of relief, specifically including some such buildings within the definition of dwelling (section
116(2)) and specifically excluding others (section 116(3)). If they do not fall within any of the
specific categories of section 116(3), most residential institutions will come within section
116(2)(d) and will be treated as dwellings by default.
22.
Categories of building use specifically included within the definition of use as a
dwelling (so that transfers of such buildings only qualify for relief if the consideration does not
exceed 150,000) (section 116(2)) are:
a)
residential accommodation for school pupils, for example accommodation blocks
in boarding schools;
b)
residential accommodation for students, other than that within section 116(3)(b).
Student accommodation provided by private landlords is a dwelling, as is
accommodation leased to students by universities or colleges in flats or houses
rather than in halls of residence (see section 116(3)(b));
c)
d)
residential accommodation for members of any of the armed forces, including

accommodation for their families (section 116(2)(c));
an institution that is the sole or main residence of at least 90% of its residents and
does not fall within any of the categories referred to in section 116(3) (see section
116(2)(d) and also paragraph 23 below).
This would include, for example,
sheltered accommodation for the elderly where no nursing or personal care is
provided. An example of this would be where an elderly person purchases a
home on a warden-assisted housing development.
accommodation for religious communities (subject to the rules regarding
mixed use; see paragraphs19 and 20).
23.
Categories of building use specifically excluded from the definition of use as a dwelling
(so that transfers of such buildings in a disadvantaged area will qualify for unlimited relief)
(section 116(3)) are:
a)
a home or other institution providing residential accommodation for children;
b)
a hall of residence for students in further or higher education. This is not defined
in the legislation but in practice property provided by a university or similar
establishment will be judged on the facts (number of inhabitants, type of
facilities, availability of communal areas);
c)
a home or other institution providing residential accommodation with personal
care for persons in need of personal care by reason of old age, disablement, past
or present dependence on alcohol or drugs or past or present mental disorder (for
example, an institution that provides accommodation as part of a wider care
service such as residential care homes or residential drug treatment centres);
d)
a hospital or hospice;
e)
a prison or similar establishment, or
f)
a hotel or inn or similar establishment.
Bed and Breakfasts/Guest Houses
24.
Each case will be taken on its merits, however, paragraph 25 below provides general
examples of the treatment of B&Bs/guest houses.
25.
A property providing a Bed and Breakfast (B&B) service, which has amenities installed
in each room such as bathing facilities, telephone lines etc and is available all year round as the
rooms do not need any further adaptation, would be considered non residential for the purposes of
the relief.
Example;
Mr and Mrs Boyd run a bed and breakfast in a disadvantaged area of Blackpool. They
live on the premises and it is open all year round but trade declines during the winter
months.
Under section 116(3) FA 2003, the Boyds B&B is a hotel or inn or similar
establishment and is therefore not used as a dwelling.
Mrs Leaver lives in Southwest London and lets out two spare rooms on a B&B basis
during the fortnight of the Wimbledon tennis tournament. She doesnt make any
adaptations to the rooms other than the removal of some of her personal items.
For the purposes of the relief Mrs Leavers property is, at all times, considered to be in
use as and suitable for use as a dwelling.
26.
Buy-to-let properties suitable for use as a dwelling are residential unless they are a
development of six or more dwellings whereby they would be non-residential under S116 (7).
27.
The specific inclusions and exclusions set out in paragraphs 22 and 23 above apply not
only to a buildings actual use at the effective date of the transaction, but to the uses for which it
is suitable at that date. Where, however, a building is being put to one of the non-residential uses
specified in section 116(3), this overrides any suitability for another use (section 116(4)). For
example, a building used as a childrens home may also be suitable for use as a school boarding
house, but this will not preclude a claim to unlimited relief.
28.
Where a vacant building is suitable for at least one of the uses specified in section 116(2)
and at least one specified in section 116(3), section 116(5) determines, for the purposes of the
relief, the use for which it is most suitable. Whether or not a vacant building has one or more
uses for which it is most suitable is a question of fact. Evidence supporting such uses should be
retained.
29.
Where there is a single use for which a building is most suitable, the fact that it is also
suitable for another use will be discounted.
30.
If there are a number of uses for which a building is most suitable and they all come
within either of the two subsections, any other use for which the building is suitable will be
discounted.
31.
Where no most suitable use can be shown, the default will be to classify the building as
residential property and apply the 150,000 limit.
32.
Land and buildings that are not suitable for any use at the effective date of the transaction
will be treated as residential property if they are in the process of being constructed or adapted
for such use- see paragraphs 33 and 34 below.
Process of being constructed or adapted for use as a dwelling
33.
Undeveloped land is in essence non-residential, but land may be residential property for
the purposes of Disadvantaged Area Relief if a residential building is being built on it at the
effective date of the transaction. A development of six or more dwellings is deemed to be nonresidential under S116 (7), even if the process of construction or marketing has begun at the
effective date of the transaction (see paragraph 40).
34.
Where (at the effective date of the transaction) an existing building is being adapted for,
marketed for, or restored to, domestic use, it is residential for the purposes of the relief. The
process is taken as commencing when the developer begins marketing the properties for sale or
starts physical work on the site which ever is earlier.
This may apply, for example, where a derelict building is being made fit for habitation, or where
a previously non-residential building is being converted to a dwelling. For example:
Kristian is buying an apartment, in what will be a converted church, off-plan. The sale is
completed on 15th March 2004, the properties were marketed for sale on 3 January 2004
and work on converting the church commenced on 2nd February 2004. For the purposes
of this transaction the church is considered to be a dwelling, even though it has yet to be
fully converted, from 3rd January. If the consideration is greater than 150,000 Kristian
will have to pay the appropriate rate of Stamp Duty Land Tax.
In the above example the developer that initially purchased the church will have bought it as a
non-residential property regardless of the intention to turn the building into residential units.
The garden or grounds of a building used etc. as a dwelling

35.
Section 116(1)(b) includes within the definition of residential property land that is or
forms part of the garden or grounds of a building within paragraph (a) (including any building or
structure on such land). The test HM Revenue and Customs will apply is similar to that applied
for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation
of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable
enjoyment of the dwelling having regard to the size and nature of the dwelling.
36.
A caravan or houseboat is not a building for this purpose.
37.
Commercial farmland is not within the definition of residential property. A farmhouse
situated on agricultural land would be dealt with under the mixed use provisions (paragraphs 19
and 20 above).
It may often be the case that farmhouses will occupy only a small fraction of the total land and
will therefore, when apportioned, fall below the 150,000 consideration limit thus attracting the
residential relief.
38.
Outhouses on land within the section 116(1)(b) definition will also be residential
property unless it can be demonstrated that they have a specific non-residential purpose. Where a
distinct non-residential use can be demonstrated, the mixed use provisions will apply.
Interest in or rights over residential property
39.
The treatment of interests in, or rights over, land or buildings for the purposes of
Disadvantaged Area Relief will follow that of the land or buildings to which they relate.
Six or more separate dwellings transferred by a single transaction
40.
Section 116(7) FA 2003 provides that where six or more separate dwellings are the
subject of a single transaction involving the transfer of a major interest in, or the grant of a lease
over, them, then those dwellings are treated as not being residential property. This recognises
that commercial developers and institutional landlords, for example, frequently deal in numerous
properties at one time. The fact that those properties may individually be residential property
does not detract from the inherently commercial nature of the transaction itself.
41.
To qualify as separate, the dwellings must be self-contained. So for example, flats
within a block, sharing some common areas but each with their own amenities will qualify as
separate dwellings. Rooms let within a house will not constitute separate dwellings if tenants
share amenities such as a kitchen and bathroom.
42.
A transaction in respect of six or more such dwellings must be carried out by means of a
single transaction in order to qualify for relief.
43.
Qualifying multiple transactions will be treated as non-residential property for the
purposes of relief, even where the proportionate consideration for individual dwellings exceeds
the 150,000 limit for residential property. It is not a condition of relief that multiple transactions
comprise only dwellings. One example of this would be where a purchaser is buying eight houses
and four shops. Mixed use properties, such as pubs with self-contained residential
accommodation, are also treated as non-residential.
44.
The fact that some of the six or more dwellings within the single transaction are outside a
designated disadvantaged area will not prevent them from constituting a non-residential
transaction. However relief will only be available for the portion of the land situated within the
disadvantaged area.
Property only partly within a disadvantaged area
45.
Schedule 6, Part 3, FA 2003 determines how property situated partly within and partly
outside a designated disadvantaged area is to be treated for the purposes of the relief. Such cases
are relatively rare in practice. Queries may be referred to Inland Revenue (Stamp Taxes) for
guidance.
Grants of new leases
46.
FA2003 Schedule 6 Part 2 deals with the charge to Stamp Duty Land Tax on the grant of
a new lease.
Land all non-residential
47.
If all of the land is non-residential it is exempt from any charge to Stamp Duty Land Tax.
Land all residential
48.
The general rule is that:
(a) if the premium (and any other consideration than rent) does not exceed 150,000 then
this is exempt from Stamp Duty Land Tax, and
(b) if the net present value of the rental payments does not exceed 150,000 then this is
exempt from Stamp Duty Land Tax
Net present value is, broadly speaking, the total rental payments due under the lease,
discounted to reflect the fact that future rental payments are of less value than current rental
payments. There is a tool for calculating net present value on HM Revenue and Customs website.
There is a special rule where the average annual rent exceeds 600. In such a case there is no
relief or exemption for any premium. Any premium, however small, will be charged at 1% (or
at higher rates if it exceeds 250,000).
49.
Where there is mixed use apportionment is applied. The non-residential portion is exempt
from lease duty.
If the consideration includes rent and the relevant rental value does not exceed 150,000, the rent
does not count as chargeable consideration.
50.
If the consideration includes consideration other than rent then:

a) If the annual rent does not exceed 600 and the relevant consideration does not
exceed 150,000, the consideration other than rent does not count as chargeable
consideration
b) If the annual rent exceeds 600, the consideration other than rent is counted as
chargeable consideration
The annual rent is the average annual rent over the term of the lease.
Further Resources
Information can be found on our website, which also contains:
A postcode search tool to help identify whether a property falls within a disadvantaged area,
and
an intelligent decision-maker to help you decide whether a property is residential or nonresidential.
a lease duty calculator which provides the amount of Stamp Duty Land Tax payable on a
lease transaction
FLOW CHART TO DETERMINE WHETHER PROPERTY IS OR IS NOT

'RESIDENTIAL PROPERTY'
(A)
A building that is
1
in use as a
dwelling
(including any of
the uses
specified at
2
s.116(1) )?
Yes
Is any part of
the building not
in use as a
dwelling?
No
Yes
No
The part that is in

use as a dwelling is
residential property
__________________________
A building that
is in use for any
of the specific
uses at
3
s.116(3) ?
[Continue down the flow

chart for the part of the
building that is not in use
as a dwelling]
Yes
The building is
not 'residential
property'
No
No
A building that is
4
suitable for use
as a dwelling
(including any of
the uses
specified at s.116
(2))?
Yes
Is the building
also suitable
for one or
more of the
uses specified
at s.116(3)
No
A building that is
in the process of
being
constructed or
6
adapted for use
as a dwelling
(including any of
the uses
specified at
s.116(2))?
Yes
Is the building
5
most suitable
for one of the
uses specified
at s.116(2)?
Yes
The building
is 'residential
property' *
No
Is the building equally suitable
for one of the uses specified
at s.116(2) and one of those
specified at s.116(3)?
Yes
No
Yes
No
The building is
not 'residential
property'.
*unless the conveyance, transfer or lease comprises or includes six or more separate dwellings7 made pursuant to a single
transaction, in which circumstances none of the land will be residential property

(B)
Land that forms part of the

garden of grounds8 of a building
that is residential property as
determined under (A) above?
Yes
The land is 'residential

property'
No
The land is not 'residential
property'
(C)
An interest in or right over land
that subsists for the benefit of a
building that is residential
property under (A) or land that is
residential property under (B) ?
Yes
No
The interest/right is
The interest/right is not

Footnotes
9. See paragraph [11] to [14] of SP
10. See paragraph [22] of SP
SP2/04
Allowable expenditure: Expenses incurred by personal representatives and

corporate trustees
A new Statement of Practice, SP2/04, replaces SP8/94 in relation to certain expenses incurred by
the personal representatives of deceased persons where the death in question occurred on or after
6th April 2004, and to expenses incurred by corporate trustees in making transfers and disposals
on or after 6th April 2004. The text of SP2/04 is reproduced below.
Both Statements of Practice set out standard scales of allowable expenses which may be used
for certain purposes of the Taxation of Chargeable Gains Act (TCGA) 1992 in place of the
actual allowable expenditure incurred.
The main changes introduced by SP2/04 are
an increase in the monetary values set out in the scales broadly in line with the increase in the
Retail Price Index since 1994, and
the introduction of two new higher bands to cover larger estates.
In addition, there are some minor changes in wording to improve the clarity of the text.
Expenses incurred by personal representatives
1.
Following consultation with representative bodies, the scale of expenses allowable under
Section 38(1)(b), TCGA 1992, for the costs of establishing title in computing the gains or losses
of personal representatives on the sale of assets comprised in a deceased person's estate, has been
revised. The Commissioners for Her Majestys Revenue and Customs will accept computations
based either on this scale or on the actual allowable expenditure incurred.
2.
The revised scale is as follows:

Gross value of estate
Allowable expenditure
A. Not exceeding 50,000
1.8% of the probate value of the assets sold by the

personal representatives.
B. Over 50,000 but not exceeding 90,000
A fixed amount of 900, to be divided between all

the assets of the estate in proportion to the probate
values and allowed in those proportions on assets
sold by the personal representatives.
C. Over 90,000 but not exceeding 400,000
1% of the probate value of the assets sold.
D. Over 400,000 but not exceeding 500,000
A fixed amount of 4,000, to be divided as at B.

above.
E. Over 500,000 but not exceeding 1,000,000
0.8% of the probate value of the assets sold.
F. Over 1,000,000 but not exceeding 5,000,000
A fixed amount of 8,000, to be divided as at B.

above.
0.16 per cent of the probate value of the assets
sold, subject to a maximum of 10,000.
G Over 5,000,000
3.
2004.
The revised scale takes effect where the death in question occurred on or after 6th April
Expenses incurred by corporate trustees

4.
Following consultation with representative bodies, HM Revenue and Customs have
agreed the following scale of allowable expenditure under Sections 38 and 64(1), TCGA 1992,
for expenses incurred by corporate trustees in the administration of estates and trusts. The
Commissioners for Her Majestys Revenue and Customs will accept computations based either
on this scale or on the actual allowable expenditure incurred.
5.
The scale is as follows:
Transfers of assets to beneficiaries etc

(i) Publicly marketed shares and securities
(A) One beneficiary
25 per holding transferred
(B) Two or more beneficiaries

between whom a holding
must be divided
As (A), to be divided in equal shares

between the beneficiaries
(ii) Other shares and securities
As (i) above, with the addition of any

exceptional expenditure
(iii) Other assets
As (i) above, with the addition of any

exceptional expenditure
For the purpose of this statement of practice, shares and securities are regarded as marketed to the
general public if buying and selling prices for them are regularly published in the financial pages
of a national or regional newspaper, magazine, or other journal.
Actual disposals and acquisitions
trustees
The investment fee as charged by the
As (i) above, plus actual valuation costs
(iii) Other assets
The investment fee as charged by the

trustees, subject to a maximum of 75,
plus actual valuation costs
Where a comprehensive annual management fee is charged, covering both the cost of
administering the trust and the expenses of actual disposals and acquisitions, the investment fee
for the purposes of (i), (ii) and (iii) above will be taken to be 0.25 per 100 on the sale or
purchase moneys.
Deemed disposals by trustees
8 per holding disposed of
Actual valuation costs
(iii) Other assets
Actual valuation costs
6.
This scale takes effect for transfers of assets to beneficiaries, actual disposals and
acquisitions, and deemed disposals by corporate trustees on or after 6th April 2004.
SP3/04
Double taxation relief: Status of the UKs double taxation conventions with the
former Socialist Federal Republic of Yugoslavia superseded by SP3/07
SP1/05
BUSINESS BY TELEPHONE CUSTOMS & REVENUE CONTACT

CENTRES superseded by SP1/10
SP1/06
Self Assessment: Finality and Discovery
Overview
Self Assessment tax returns are usually issued to taxpayers in April, shortly after the end of the
tax year. The Return has to be completed and sent in by the following 31 January. The Revenue
can open an enquiry into that return within twelve months of 31 January to check that the self
assessment returns the right amount of tax. If it is incorrect the self assessment can be corrected.
There are some circumstances in which the tax inspector can assess further tax after the twelve
month enquiry period. This usually happens when tax was under-assessed because of fraud or
negligence by the taxpayer but it can also happen if the taxpayer does not provide enough
information for the inspector to realise, within the enquiry period, that the self assessment is
insufficient.
The judgement of the Court of Appeal the case of Langham v Veltema was concerned with how
much information the taxpayer needs to provide to remove the possibility of the inspector making
a further assessment, known as a discovery assessment.
This Statement of Practice clarifies the circumstances in which HMRC seeks to recover tax when
a self assessment is found to be insufficient either:
after the end of the period in which a notice of enquiry may be given, or
after an enquiry into a return has been completed.
and it is considered that the information provided by the taxpayer was not sufficient to make the
Inspector aware of the insufficiency.The following examples illustrate what information
taxpayers must disclose to guard against the possibility of a subsequent discovery assessment:
Most taxpayers who use a valuation in completing their tax return and state in the Additional
Information space at the end of the Return that a valuation has been used, by whom it has been
carried out, and that it was carried out by a named independent and suitably qualified valuer if
that was the case, on the appropriate basis, will be able, for all practical purposes, to rely on
protection from a later discovery assessment, provided those statements are true.
Most taxpayers will be able to gain finality with exceptional items in accounts. An example
might be a deduction in the accounts under Repairs. If an entry in the Additional Information
space points out that a programme of work has been carried out that included repairs,
improvements and new building work and that the total cost has been allocated to revenue and
capital on a particular basis, the inspector should not enquire after the closure of the enquiry
period unless he becomes aware that the statement was patently untrue or unreasonable.
Taxpayers who adopt a different view of the law from that published as the Revenues view can
protect against a discovery assessment after the enquiry period. The Return would have to
indicate that a different view had been adopted by entering in the Additional Information space
comments to the effect that they have not followed Revenue guidance on the issue or that no
adjustment has been made to take account of it.
This Statement does not cover cases where a self assessment is insufficient due to fraudulent or
negligent conduct by or on behalf of the taxpayer.
This Statement applies to the two main areas of self assessment:
Income Tax and Capital Gains Tax (IT)
Corporation Tax (CT)
This statement of practice applies to the following for the years specified:
Individuals for returns from 1996/97
Partnerships for returns from 1996/97

For bodies within the charge to Corporation Tax accounting periods ending on or after
1 July 1999
Background
1.
Prior to the introduction of self assessment, discovery assessments were subject to statute,
case law and practice. Cases of particular relevance were Cenlon Finance Co Ltd v Ellwood (40
TC 176) and Scorer v Olin Energy Systems Ltd (58 TC 592). Statement of Practice 8/91
explained how the provisions were applied.
2.
When IT self assessment (ITSA) was introduced by FA 1994, new S29 TMA 1970 was
intended to reproduce the mix of law and practice on discovery set out in SP8/91. The Self
Assessment Legal Framework issued in 1995 explained that the redrafting of S29 TMA 1970 was
to ensure
that a taxpayer who has made a full disclosure in the return has absolute finality twelve
months after the filing date. This will be the case if the return is subsequently found to be
incorrect, unless it was incorrect because of fraudulent or negligent conduct. In any case
where there was incomplete disclosure or fraudulent or negligent conduct the Revenue
will still have the power to remedy any loss of tax.
The intention was to offer finality, but there was also a recognition that there would be
circumstances, even without fraud or neglect, that could still result in a discovery assessment. The
equivalent legislation for CT self assessment (CTSA) is at Paras 41 to 49 Sch 18 FA 1998.
3.
The Court of Appeal in the case of Langham v Veltema, [2004] STC 544, considered
when disclosure was incomplete. It concluded that information made available, as defined in
statute, must make an Inspector aware of an actual insufficiency in the assessment for that
information to be complete enough to prevent the making of a discovery assessment. That
conclusion gave rise to two concerns:
the lack of finality for the taxpayer at the close of the enquiry window; and
the inherent difficulty of complying with the law as expounded in the Court of Appeal.
4.
Guidance was issued in December 2004 to help ITSA taxpayers achieve finality when
completing their 2004 returns. This Statement of Practice confirms the position in respect of
ITSA and extends it to CTSA. The circumstances in which HMRC will regard a taxpayer as
having made a full disclosure are set out and assurance of finality is given in particular situations.
Discovery Powers
5.
The authority to make a discovery assessment is given by S29 TMA 1970 (ITSA), Para
41 Sch 19 FA 1998 (CTSA). In all cases, the relevant requirement for the purposes of this
Statement is a discovery that an assessment to tax is or has become insufficient. Mere suspicion
that an assessment may be insufficient is not adequate grounds for making a discovery
assessment.
6.
Where there has not been fraudulent or negligent conduct, discovery can only take place
where HMRC could not have been reasonably expected, on the basis of information made
available before that time, to be aware of the insufficiency in the assessment [S29 (5) TMA
1970; Para 44(1) Sch 18 FA 1998].
7.
Information made available is defined at S29 (6) TMA 1970 (ITSA), Para 44(2) Sch 18
FA 1998 (CTSA). Relevant information includes that contained in documents accompanying the
return.
8.
The requirement that HMRC must discover that an assessment is insufficient restricts the
opportunity for using discovery powers to make an assessment. If HMRC considers that an
assessment may be insufficient, it may seek more information using S20 TMA 1970 to establish
whether the assessment is insufficient. However, where there is no reason to suspect fraud, the
taxpayer will be told about the use of Section 20 and will have the opportunity to make
representations to an independent Commissioner. The ability of HMRC to enquire after the
closure of the enquiry window is therefore subject to external oversight.
Discovery in Practice
9.
A taxpayer can further restrict the opportunity for discovery by providing enough
information for an HMRC officer to realise within the enquiry period that the self assessment is
insufficient. However taxpayers are encouraged to submit the minimum necessary to make
disclosure of an insufficiency. The Veltema judgement does not require the provision of enough
information to quantify the effect on the assessment. Information will not be treated as being
made available where the total amount supplied is so extensive that an officer could not have
been reasonably expected to be aware of the significance of particular information and the
officer's attention has not been drawn to it by the taxpayer or taxpayer's representative.
10.
HMRC recognises that a taxpayer, unless acting fraudulently or negligently, will consider
his return to be correct and complete with no insufficiency. Most figures entered on a return will
be absolute, however some will be open to interpretation or uncertain. In these circumstances, the
taxpayer will have made a judgement as to the correct figure to enter. HMRC may regard this
figure as insufficient. Where the taxpayer has fully alerted HMRC to the full circumstances of
such an entry on the return, then the HMRC officer is in a position to determine whether or not
there is an insufficiency, the conditions set by the Court of Appeal in Langham v Veltema have
been met and the assessment will not be open to discovery on that point.
The following examples illustrate common situations.
Examples of Common Situations
Valuation Cases
11.
Some entries on tax returns depend on the valuation of an asset. For example, if a
company transfers a property to a director at less than market value, both the company and the
director will need to use the market value in calculating the capital gain and benefit respectively.
There is no obligation on the director to do any more than enter the resulting benefit in the
relevant box on his return. However, the Court of Appeal decided in Langham v Veltema that the
figure on the return does not give HMRC the level of information that is necessary to prevent a
later discovery assessment.
12.
Most taxpayers who state that a valuation has been used, by whom it has been carried out,
and that it was carried out by a named independent and suitably qualified valuer if that was the
case, on the appropriate basis, will be able, for all practical purposes, to rely on protection from a
later discovery assessment, provided those statements are true.
13.
The main exception will be where, as in the example of a property transferred to a
director, the same transaction is the subject of an agreed valuation in a related tax return, that of
the company. It may then come to light that the directors return was insufficient and a discovery
assessment raised. It is also likely that the insufficiency can be quantified without further enquiry.
For this purpose, a related tax return is that of another party to the same transaction, rather than
another transaction involving a similar or identical asset. The returns of several parties disposing
of a jointly owned asset or shareholders disposing of all the shares in the same company in a
single transaction, for example, may be related for this purpose.
Where taxpayers interests in an asset or assets are similar, but not the same, any valuations
agreed would not necessarily bind other taxpayers.
14.
Information about the valuation may be provided in the Additional Information space
(ITSA) or in accompanying documents (ITSA and CTSA). The return of capital gains for ITSA
purposes requires an entry to indicate that a valuation has been used and asks for a copy of any
valuation received. If these provide the information mentioned above the taxpayer can rely on
protection from a later discovery assessment.
Other Judgemental Issues
15.
There are many items such as reserves, provisions and stock valuation that are routinely
included in accounts, as well as some exceptional items such as capital/revenue expenditure in
repairs, which require an element of judgement on the part of the taxpayer or representative. Prior
to the introduction of self assessment it was customary to provide details of such items in the
accounts or computations and many taxpayers have continued to do so.
16.
It is difficult to see how HMRC might come to the conclusion that an assessment is
insufficient because of one of these items without making an enquiry. There will be instances in
which it becomes clear from an in-year enquiry that previous years figures were incorrect. The
decision in the Veltema case does not alter that situation.
17.
It may be possible to gain finality with the more exceptional items. An example might be
a deduction in the accounts under Repairs. If an entry in the Additional Information space or
accompanying documentation points out that a programme of work has been carried out that
included repairs, improvements and new building work and that the total cost has been allocated
to revenue and capital on a particular basis, the HMRC officer will not use discovery powers after
the closure of the enquiry period unless he becomes aware that the statement was patently untrue
or the basis of allocation was so unreasonable as to be negligent.
Taking a Different View
18.
It is open to a taxpayer properly informed or advised to adopt a different view of the law
from that published as HMRCs view. To protect against a discovery assessment after the enquiry
period, the return or accompanying documents would have to indicate that a different view had
been adopted. This might be done by comments to the effect that the taxpayer has not followed
HMRC guidance on the issue or that no adjustment has been made to take account of it. This
would offer an opportunity to HMRC to take up the return for enquiry. It is not necessary to
provide all the documentation that HMRC might need to quantify that insufficiency if an enquiry
into the Return is made.
19.
Provided the point at issue is clearly identified and the stance adopted is not wholly
unreasonable, the existence of an under-assessment or insufficiency is demonstrated by the
statement that a different view of the law has been followed. In these circumstances the taxpayer
achieves finality if no enquiry is opened within the statutory time limit.
SP2/06

Venturing Scheme and Enterprise Management Incentives (supersedes SP2/00)
VALUE OF "GROSS ASSETS"

The "gross assets" rule.
1.
Paragraph 8, Schedule 28B, ICTA 88 provides that a Venture Capital Trust's holding of
shares, or of shares and securities, in a company cannot be part of its qualifying holdings for the
purposes of section 842AA ICTA 88 if the value of that company's gross assets exceeds
7 million immediately before the issue of the holding in question; or
8 million immediately afterwards.
2.
Section 293(6A) ICTA 88 provides that a company cannot be a qualifying company for
the purposes of the Enterprise Investment Scheme in relation to an issue of eligible shares if the
value of its gross assets exceeds
7 million immediately before the issue of the shares; or

3.
Paragraph 22, Schedule 15 FA 2000 provides that a company cannot be a qualifying
company for the purposes of the Corporate Venturing Scheme in relation to any shares if the
value of its gross assets exceeds
7 million immediately before the issue of the shares; or

4.
The limits set out above apply with effect from 6 April 2006. Before that date the gross
assets limits were 15 million immediately before the issue of the shares and 16 million
immediately after. The previous gross assets limits continue to apply in relation to investments
made out of money raised by a Venture Capital Trust prior to 6 April 2006 or out of money
derived from that money.
5.
Paragraph 12 of Schedule 5 ITEPA 2003 provides that a company cannot be a qualifying
company for the purposes of the Enterprise Management Incentives scheme, if the value of its
gross assets exceeds
30 million at the date the option is granted (15 million up to 1 January

2002).
6.
Where the company is a member of a group of companies, the limits set out in the
preceding paragraphs apply to the aggregate value of the gross assets of all the companies in the
group. For this purpose, no account is taken of
any assets which consist in rights against another company in the group, or
any shares in, or securities of, another such company.
VALUATION OF ASSETS
7.
In applying these rules, HM Revenue and Custom's general approach is that the value of
a company's gross assets at any time is the aggregate of the values of the company's gross assets
as shown in its balance sheet if the company were to draw one up at that time. "Gross assets",
means all the assets which would be shown on that balance sheet, without any deduction in
respect of liabilities. This approach is subject to the proviso that the balance sheet would be
drawn up on a basis consistent with that used in the accounts for preceding periods (if any), and
in accordance with generally accepted accounting practice. (This is referred to later in this
Statement as "the accounting practice proviso".) This general approach is also subject to what is
said in paragraphs 11 and 12 below.
8.
So if the shares or securities in question were issued, or as the case may be, the option
was granted, immediately after the date to which the company's accounts were drawn up, the
value of the company's gross assets immediately before the issue, or grant, would be the value
shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 11 and
12 below). And if the shares or securities were issued, or the option was granted, immediately
before the date to which the company's accounts were drawn up, the value of the company's gross
assets immediately after the issue, or grant, would be the value shown in the balance sheet
(subject to the accounting practice proviso and to paragraphs 10 and 11 below).
9.
Where shares or securities are issued, or options are granted, at other times, the values
will, in the first instance, be based on the values given in the company's latest available balance
sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below). However,
these values should be updated as precisely as is practicable, taking into account all the relevant
information available to the company (and, where applicable, to its subsidiaries). For example,
where a company is able to ascertain the amount of trade debts owed to it at any given time, it
would be reasonable to take the aggregate amount of such debts outstanding at the time of the
issue or grant.
10.
When accounts covering
the accounting period in which the issue was made or the option was granted,
and
if they were not available at the time of the issue or grant, those for the
immediately preceding accounting period,
become available, the values arrived at in the way described in paragraph 9 above may need
to be reviewed in the light of the information contained in those accounts.
PAYMENTS IN RESPECT OF SHARES OR SECURITIES
11.
HM Revenue and Customs will not regard the assets of a company immediately before
the issue of the shares or securities in question as including any advance payment received by the
company in respect of that issue.
12.
Where shares or securities are issued partly paid, the right to the unpaid portion will be
regarded as an asset of the company. That asset will be taken into account for the purpose of
deciding whether the relevant gross assets rule is satisfied, whether it is shown in the company's
balance sheet or not.
SP1/07
VAT Strategy: Input Tax deduction without a valid VAT invoice
1.
This Statement of Practice explains and clarifies HMRCs policy in respect of claims for
input tax supported by invalid VAT invoices. It also explains why amendments were made to
section 24(6)(a) and paragraph 4(1) of Schedule 11 to the Value Added Tax Act 1994 (VATA),
and regulation 29(2) of the Value Added Tax Regulations 1995 to introduce new measures. These
changes were effective from 16 April 2003 and apply to supplies made on or after this date. The
statement of practice was first issued in July 2003 and has now been revised to provide clearer
guidance and the updated legal position. This guidance does not apply to situations where HMRC
may deny recovery of input tax for other reasons such as abuse of the right to deduct.
Why were changes needed?
2.
These changes were made to address the increasing threat to VAT receipts by the use of
invalid VAT invoices and are part of the Government's strategy to address fraud, avoidance and
non-compliance in the VAT system. They are a proportionate and necessary response to a
systematic and widespread attack on the VAT system, where the use of invalid VAT invoices is
becoming an increasing pressure on revenue receipts, particularly in those business sectors
involved in the supply of the goods listed at Appendix 2. In addition to the revenue loss, this has
led to distortion of competition.
3.
For the vast majority of business there will be no change, and for businesses trading
within the targeted sectors the measure will only impact if you have an invalid invoice. If you are
a VAT registered business, and you have been issued with an invoice that is invalid, you should
be able to return to your supplier and ask them for a valid VAT invoice that complies with the
legislation. If for some reason you cannot, this Statement of Practice sets out whether or not you
may be entitled to input tax recovery. In most cases, provided businesses continue to undertake
normal commercial checks to ensure their supplier and the supplies they receive are 'bona fide'
prior to doing any trade, it is likely they will be able to satisfy HMRC that the input tax is
deductible.
The 'right to deduct' principles
4.
The basic principle of EU and UK law underlying input tax recovery is that of neutrality.
In practice, this means that any business that makes taxable supplies has the right to deduct the
VAT incurred on goods or services that form a cost component of those supplies. EU and UK law
also provides for rules governing the exercise of the right to deduct VAT. These fundamental
VAT principles governing the recovery of VAT are not being changed.
5.
A business has incurred input tax if the following conditions are met:
there has actually been a supply of goods or services;
that supply takes place in the UK;
it is taxable at a positive rate of VAT;
the supplier is a taxable person, i.e. someone either registered for VAT in the UK, or
required to be registered;
the supply is made to the person claiming the deduction;
the recipient is a taxable person at the time the tax was incurred; and
the recipient intends to use the goods or services for his business purposes.
6.
If you are a taxable person, in order to exercise your basic right to deduct input tax, you
must hold a valid VAT invoice. Without a valid VAT invoice, there is no right to deduct input
tax. However, in the absence of such an invoice, you may still be able to make claims for input
tax, but these claims are subject to HMRCs discretion. This of course assumes that a taxable
supply has taken place. Where HMRC question the fact that an underlying supply has taken
place, these provisions do not apply.
What legislative changes have been made?
7.
The change to section 24(6)(a), VATA permits HMRC to consider evidence other than
that contained in documents when exercising their discretion (paragraph 4(1) of schedule 11 is
merely a consequential amendment to this change). Before this change, regulation 29(2)
permitted HMRC to accept alternative documentary evidence to support input tax deduction
without a valid VAT invoice. The amendment to regulation 29(2) simply permits HMRC, in
applying their discretion, to consider evidence other than just documents.
What constitutes a valid VAT invoice?
8.
A valid VAT invoice is one that meets the full legal requirements as set out in regulations
13 & 14 of the Value Added Tax Regulations 1995 (Statutory Instrument 1995/2518). The
contents of a valid VAT invoice should show the following information (as set out in regulation
14(1)):
a. an identifying number;
b. the time of the supply;
c. the date of the issue of the document;
d. the name, address and registration number of the supplier;

e. the name and address of the person to whom the goods or services are supplied;
f.
[Omitted by SI 2003/3220, reg. 7(a)]
g. a description sufficient to identify the goods or services supplied

h. for each description, the quantity of the goods or the extent of the services, and the rate of
VAT and the amount payable excluding VAT, expressed in any currency;
i.
the gross total amount payable, excluding VAT, expressed in any currency
j.
the rate of any cash discount offered;
k. [ Omitted by SI 2003/3220, reg. 7(a).]

l.
the total amount of VAT chargeable, expressed in sterling.
m. the Unit Price

A self-billed invoice is not a valid invoice unless the recipient meets the conditions for selfbilling in Reg 13 (3A) and (3B). The conditions for self-billing are also set out in Notice
700/62 - Self Billing.
9.
A taxable person may issue either a less detailed tax invoice where the charge made for
an individual supply is 250 or less including VAT, or a modified tax invoice with the agreement
of customer. If this is the case, not all of the above information is required. Information about less
detailed and modified tax invoices can be found in Section 16.6 of Public Notice 700 (The VAT
Guide). Copies can be obtained from the National Advice Service on 0845 010 9000 or
downloaded from HMRCs web site.
What is an invalid VAT invoice?
10.
An invoice that falls short of any of the requirements laid down in Reg 14(1) of SI
1995/2518 is an invalid invoice - see Paragraph 8 above. This includes situations where some or
all of the details do not relate to the person/business that made the supply or the details shown are
those of a company that has gone into liquidation or is missing at the time the supply is made.
What do I do if I have an invalid VAT invoice?
11.
The simplest thing is to ask your supplier to issue a valid VAT invoice (suppliers are
legally obliged to do this). If a taxable supply has taken place but a revised invoice cannot be
obtained, HMRC may apply their discretion to allow recovery of input tax.
How do I know I have an invalid VAT invoice?
12.
The first step is to ensure that you hold an invoice that contains all the right information.
It is difficult to spot an invalid invoice where a false name, address or VAT number has been
used. HMRC have established a team who can confirm that supplied VAT registration details are
current, valid and match information held by HMRC. This is not authorisation of a transaction
with that VAT registration, but can help, along with other checks to verify the legitimacy of your
supplier. Such information can be obtained by telephoning 01737 734 then 516, 577, 612 or 761.
Invalid Invoice and HMRCs Discretion
13.
A proper exercise of HMRCs discretion can only be undertaken when there is sufficient
evidence to satisfy the Commissioners that a supply has taken place. Where a supply has taken
place, but the invoice to support this is invalid, the Commissioners may exercise their discretion
and allow a claim for input tax credit.
14.
For Supplies/transactions involving goods stated in Appendix 2 HMRC will need to be
satisfied that:
o
The supply as stated on the invoice did take place
There is other evidence to show that the supply/transaction occurred
The supply made is in furtherance of the traders business
The trader has undertaken normal commercial checks to establish the bona fide of the
supply and supplier
Normal commercial arrangements are in place- this can include payment arrangements
and how the relationship between the supplier/buyer was established
What do I do if my checks indicate that a fraud exists?

15.
If your checks indicate that there may be a fraud you should consider whether you wish
to continue with the transaction. You may also wish to inform HMRC Confidential on 0800 595
000.
I have an invalid VAT invoice; can I still recover input tax?
16.
Not automatically. However, HMRC may apply their discretion and still allow recovery.
How will HMRC apply their discretion?
17.
For supplies of goods not listed at Appendix 2, claimants will need to be able to answer
most of the questions at Appendix 1 satisfactorily. In most cases, this will be little more than
providing alternative evidence to show that the supply of goods or services has been made (this
has always been HMRCs policy).
18.
For supplies of goods listed at Appendix 2, claimants will be expected to be able to
answer questions relating to the supply in question including all or nearly all of the questions at
Appendix 1. In addition, they are likely to be asked further questions by HMRC in order to test
whether they took reasonable care in respect of transactions to ensure that their supplier and the
supply were 'bona fide'.
19.
As long as the claimant can provide satisfactory answers to the questions at Appendix 1
and to any additional questions that may be asked, input tax deduction will be permitted.
20.
Decisions on when to disallow VAT claims will only be made after an independent
central review of the case has been carried out.
Can I appeal against HMRCs decision?
21.
If HMRC refuse to allow deduction of input tax under this Statement of Practice,
unsuccessful claimants can first ask for a reconsideration of the decision. Should that be
unsuccessful, they will then be able to appeal against HMRCs decision to the VAT & Duties
Tribunal.
Decision Flowchart.
VAT Strategy: Input Tax deduction without a valid VAT invoice: Appendix 1
Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice
1. Do you have alternative documentary evidence other than an invoice (e.g. supplier
statement)?
2. Do you have evidence of receipt of a taxable supply on which VAT has been charged?
3. Do you have evidence of payment?
4. Do you have evidence of how the goods/services have been consumed within your business
or their onward supply?
5. How did you know that the supplier existed?
6. How was your relationship with the supplier established? For example:
o
How was contact made?
Do you know where the supplier operates from (have you been there)?
How do you contact them?
How do you know they can supply the goods or services?
If goods, how do you know the goods are not stolen?
How do you return faulty supplies?
*This list is not exhaustive and additional questions may be asked in individual circumstances
VAT Strategy: Input Tax deduction without a valid VAT invoice: Appendix 2
Supplies of goods subject to widespread fraud and abuse
a. Computers and any other equipment, including parts, accessories and software, made or
adapted for use in connection with computers or computer systems.
b. Telephones and any other equipment, including parts and accessories, made or adapted
for use in connection with telephones or telecommunications.
c. Alcohol - those alcoholic liquors liable to excise duty, which are defined by section 1 of
the Alcoholic Liquor Duties Act 1979 or in any regulations made under that Act (e.g.
spirits, wines and fortified wines, made-wines, beer, cider and perry).
d. Oils - all oils that are held out for sale as road fuel.
SP2/07
Advance Agreements Unit superceded by SP2/12.
SP3/07
Double taxation relief: Status of the UK's double taxation conventions with the
former Socialist Federal Republic of Yugoslavia
Introduction
This statement of practice replaces and supersedes SP3/04, which made public the UKs
understanding, at that time (2004), of the status of the UK/Yugoslavia Double Taxation
Convention in relation to those former Yugoslav republics that had been recognised by the United
Kingdom as independent sovereign states. SP3/04 itself updated an earlier statement of practice
(SP6/93).
What SP3/04 said
SP3/04 confirmed that the provisions of the UK/Yugoslavia convention would remain in force for
Bosnia-Herzegovina, Croatia, Macedonia, Serbia and Montenegro and Slovenia until such time as
new bilateral agreements were made with those republics.
Announcement
The UK has now agreed a new bilateral agreement with Macedonia. The agreement entered into
force on 08 August 2007. It will be effective in the United Kingdom from 1 April 2008 for
corporation tax and from 6 April 2008 for income tax and capital gains tax.
Accordingly, with effect from 1 April / 6 April 2008:
The provisions of the United Kingdom/Yugoslavia Double Taxation Convention will be treated
as remaining in force between the United Kingdom and respectively, Bosnia-Herzegovina,
Croatia, Montenegro, Serbia and Slovenia.
Agreement has been reached at official level on a new double taxation convention with Slovenia.
Negotiations are continuing with Croatia and Serbia.
SP4/07

superceded by SP1/12
SP1/09
Employees resident but not ordinarily resident in the UK: General earnings
chargeable under Sections 15 and 26 Income Tax (Earnings and Pensions) Act
2003 (ITEPA) and application of the mixed fund rule under Sections 809Q
onwards of the Income Tax Act 2007 (ITA)
Overview
1.
Section 25 and Schedule 7 Finance Act 2008 introduced changes to the remittance basis
affecting the taxation of employment income where the employee is resident but not ordinarily
resident in the United Kingdom. Amongst other issues, they introduced rules to determine the
kind and amount of income or chargeable gains remitted to the United Kingdom where a transfer
is made out of a mixed fund.
2.
This statement of practice sets out how HM Revenue and Customs (HMRC) will treat
transfers made from an offshore account holding only the income or gains relating to a single
employment and the apportionment of earnings where an employee is taxed on the remittance
basis.
3.
Statement of Practice 5/84 (SP5/84) is withdrawn and incorporated as part of this new
statement of practice with effect from 6 April 2009.
Detail of statement of practice
Transfers made from an offshore account holding only the income or gains relating to a
single employment
4.
Sections 809Q ITA onwards set out rules to determine the kinds and amount of income or
chargeable gains remitted to the United Kingdom from a fund containing more than one kind of
income and capital, or income, or capital of more than one tax year. Such a fund is defined in
sections 809Q and 809R as a mixed fund. Where amounts are transferred to the United
Kingdom out of a mixed fund, Section 809Q(3) requires that the individuals tax liability is
calculated by reference to each individual transfer. This transfer by transfer approach is referred
to below as the mixed fund rule. This is a change to HMRCs previous practice, with respect to
employees to whom SP5/84 applied, which was to allow the tax liability to be calculated by
reference to the total amount transferred to the UK during the tax year as a whole.
5.
In the circumstances outlined in this statement of practice, HMRC will accept that certain
individuals who are resident but not ordinarily resident in the United Kingdom do not have to
apply the mixed fund rule and can continue to calculate their tax liability by reference to the total
amount transferred out of a mixed fund during the tax year as a whole, rather than by reference to
individual transfers.
6.
Employees who are resident but not ordinarily resident in the UK and who perform duties
of an office or employment both inside and outside the UK, do not have to apply the mixed fund
rule in respect of transfers from a particular account where:
The mixed fund is an account held solely by the employee; and
The account only contains employment income from a single employment plus:
o
Any interest arising only on that account, and
o
Any gains arising from foreign exchange transactions in respect of the funds in
that account
o
Any gains arising on employee share scheme related transactions
o
Any proceeds from employee share scheme related transactions, not otherwise
covered at paragraph 7, in respect of amounts paid by the employee in acquiring
the shares.
7.
The employment income from that employment may include:

Employment income (subsection 809Q(4)(a))
Relevant foreign earnings (subsection 809Q(4)(b))
Foreign specific employment income (including termination payments and the proceeds
from employee share schemes) (subsection 809Q(4)(c)), and
Employment income subject to a foreign tax (subsection 809Q(4)(f)).
8.
Employees who are resident but not ordinarily resident in the UK may also choose not to
apply the mixed fund rule if the account contains only income or gains of a kind listed at
paragraphs 6 and 7 above, but for more than one tax year. Where this is the case, the ordering
rules at section 809Q(3) shall be applied i.e. on a last in first out basis.
9.
Where the employee applies this statement of practice, amounts transferred out of the
account to the United Kingdom will be treated as comprising the kinds of income and gains in the
order set out in section 809Q(4) for the tax year as a whole.
10.
Accounts containing income or gains of more than one employment are not covered by
this statement of practice.
11.
Accounts containing income or gains of more than one individual are not covered by this
statement of practice
Apportionment of earnings
12.
Employees who are resident but not ordinarily resident in the United Kingdom are
chargeable to United Kingdom tax under Sections 15 ITEPA on general earnings wherever
received for duties performed in the United Kingdom. They are also chargeable under Section 26
ITEPA on general earnings for duties performed outside the United Kingdom but only to the
extent that the earnings are remitted to the United Kingdom.
13.
Where the duties of a single office or employment are performed both in and outside the
United Kingdom, an apportionment is required to determine how much of the general earnings
are attributable to the United Kingdom duties. Apportionment of general earnings is essentially a
question of fact, but for many years HMRC has accepted time apportionment, based on the
number of days worked abroad and in the United Kingdom, except where this would clearly be
inappropriate. For example, in the case of an employee with 200 working days in the United
Kingdom and 50 working days outside the United Kingdom, the proportion of general earnings
attributable to United Kingdom duties would be 200/250. This practice does not, of course, apply
where the charge arises under Section 15 ITEPA and relief is due under Part 5 Chapter 6 ITEPA
(Deductions from seafarers' earnings).
14.
Where an employee resident but not ordinarily resident in the United Kingdom performs
the duties of a single office or employment both in and outside the United Kingdom and is
remunerated wholly abroad, he is permitted, by a broad interpretation of the decision in the case
of Sterling Trust Ltd v CIR (12 TC 868), to say that any remittances made to the United Kingdom
are made primarily out of general earnings for that year in respect of duties performed in the
United Kingdom assessable under Section 15, and only any balance out of general earnings
chargeable under Section 26 on remittance.
15.
However, where part of the general earnings are remitted to the United Kingdom, it was
the practice of HMRC to regard the proportion of the earnings remitted to the United Kingdom,
as being in respect of duties performed both in and outside the United Kingdom, and to treat that
proportion of such earnings as were attributable to duties performed outside the United Kingdom
as remitted to the United Kingdom for the purposes of Section 26.
16.
The practice changed with effect from 6 April 1983 when HMRC introduced a simplified
procedure for employees who:
are resident but not ordinarily resident in the United Kingdom;
perform duties of a single employment both in and outside the United Kingdom, so that
they are potentially chargeable under both Sections 15 and 26 ITEPA 2003 in respect of
general earnings from that employment; and
receive part of their general earnings in the United Kingdom and part abroad.
17.
In such cases, provided the general earnings chargeable under Section 15 are arrived at in
a reasonable manner (i.e. in the absence of special facts, the proportion of the general earnings,
including benefits in kind, relating to UK duties is arrived at on a time basis by reference to
working days), HMRC is prepared to accept that a charge under Section 26 will arise only where
the aggregate of general earnings remitted to the United Kingdom exceeds the amount chargeable
under Section 15 for that year; and to restrict the charge under Section 26 to the excess of the
aggregate over the charge under Section 15.
SP1/10
Business by telephone HMRC Taxes Contact Centres
This Statement of Practice sets out the expanded services which are now available from Taxes
Contact Centres which deal with the tax affairs of individuals. It supersedes Statement of Practice
1/05.
Security and confidentiality
HM Revenue & Customs is committed to ensuring the information it receives is accurate and that
the privacy of customers' affairs is protected. For the services described in this Statement of
Practice:
Callers will only be able to supply or amend information concerning individuals tax
affairs.
We will take steps to check the identity of the caller before discussing a customers tax
affairs.
Callers who fail to satisfy the identity checks will be asked to put their enquiry in writing.
We will check that we have the customers consent before we discuss their affairs with
their agent or other person calling on their behalf.
Calls to our Contact Centres will be recorded for training and quality assurance purposes
and will be available in case of any disagreement as to what was said.
Services available by telephone from HMRC Contact Centres
The services described below are available to individual customers calling HMRC Taxes Contact
Centres about their own direct tax liabilities, and to agents or other persons acting on behalf of the
customer providing that we can satisfactorily check the identity of the caller.
The directions by the Commissioners for HMRC under section 118 FA 1998 which provide for
these services are at Annex B.
In most cases nothing more than a telephone call will be needed, although the call may lead to
further action by HM Revenue & Customs (for example, sending out a revised PAYE coding
notice). Where business cannot be completed by telephone we will send customers any forms or
other information they need and explain what they need to do next.
Agents and other personal representatives
Some people prefer to ask another person, such as an agent or family member, to deal with their
tax affairs for them. We will accept some types of information from agents and other
representatives providing that:
we have been able to check the identity of the agent or representative, and
we hold evidence that the customer has given their consent for that agent or
representative to act on their behalf
Customer consent will usually be required in writing but customers using our Contact Centres can
give verbal consent for a third party to act on their behalf for the duration of the call. Customers
who want us to deal with third parties in this way will need to provide verbal consent each time
they call with a third party present.
Customers who want a third party to act on their behalf in calls when the customer cannot be
present will need to give their written consent.
We recognise that there will be some occasions when customers cannot be present to give their
verbal consent for a third party to act on their behalf. In such instances, we will accept (but not
provide) some specific information from the third party on a provisional basis and then contact
the customer by post to confirm the information.
Matters that can be dealt with by telephone
The information, claims and requests that may be accepted, from individuals or their
representatives, over the telephone are set out at Annex A.
We will also provide certain information we hold about the customer by telephone. The main
exceptions will be:
personal details such as Name, Address, Date of Birth, National Insurance Number etc.,
pay and tax details,
information contained in a Self Assessment Return (if customers require this information,
to make the amendments or corrections to their return, we will provide details in writing).
Checking amendments notified by telephone

Amendments to Self Assessment returns made by telephone will be checked in the same way as
amendments made in writing and in some cases we may enquire into the amendment.
Time limits
The same time limits apply to claims and amendments made by telephone as when they are made
in writing.
Where a claim is made by telephone, it will be treated as made at the time of the call provided all
the relevant information can be provided by the customer during that call. And a claim by
telephone will, of course, be subject to the same conditions and checks as if it were made on
paper.
Where a claim cannot be dealt with by telephone, for example, because the caller does not have
all the necessary information, the customer may be asked to make the claim in writing. The
written claim must still be made within the usual time limits.
Guidance and assistance
In addition to the services above, Contact Centres will provide the normal range of help and
advice by telephone on general tax matters including:
general questions about income tax and capital gains tax for individuals,
help with completing returns and other HM Revenue & Customs forms, and
requests for leaflets, forms, schedules and other HM Revenue & Customs information.
Annex A
Information that will be accepted
We will accept the following information, claims and requests over the telephone.
N.B. Some notifications will require completion of Self Assessment Returns. See HMRC
website for details.
Personal Details
Changes to name, address, post
code and telephone number
First notification or changes in
personal circumstances such as
marriage, civil partnerships,
separation, divorce, date of birth,
date of death.
Notification that an Agent is no
longer acting.
Notification that a Payable Order
has not been received.
Employment Details
Details of a customers new
employer and the date when the
employment began
A customers works or payroll
number.
Details of earlier employments
Notes
We will accept notification of date of death from nonmandated third parties providing that we can verify their
identity.
We will require written notification of the appointment of

any new agent.
We will not issue a replacement until we have confirmed
that the payable order has not already been cashed or
returned to us.
Notes
These details will usually only be accepted from Employers
but we will accept them from customers in exceptional
cases.
These details will usually only be accepted from Employers
but we will accept them from customers in exceptional
cases.
Claims to Personal Allowances

Personal Allowance
Subject to time limits.
Notes
Married Couples Allowance
The level of a persons income affects their entitlement to

the age related allowances. We will accept new estimates of
income by telephone and using the figures provided, we will
advise whether the amount of the customers allowances
will change.
If you were married before 5 December 2005

If you are married and living together and at least one
spouse was born before 6 April 1935, the husband can claim
Married Couples Allowance.
If you married on or after 5 December 2005 or are in

a civil partnership
If you are married or in a civil partnership and living
together and at least one spouse or partner was born before 6
April 1935, the person with the higher income can claim
Married Couples Allowance.
Blind Persons Allowance
Expenses
Fixed or Flat Rate Expenses
Other Job Expenses
The level of the claimants income affects their entitlement

to the age related Married Couples Allowance. We will
accept new estimates of income by telephone and using the
figures provided, we will advise whether the amount of the
customers allowances will change.
Notes
Fixed or Flat rate expenses are fixed amounts we have
agreed for certain categories of employees to save them
having to make claims for deductions individually.
2008/09 and subsequent years.
We will accept notifications up to 1000.
2008/09 and all subsequent years.
We will only accept claims for deductions for other job
expenses where entitlement has already been established in
principle. First time notifications will need to be made in
writing.
Where a form P87 has been issued, we will require
completion of that form and will not accept a telephone
Subscriptions to professional
bodies
Notification of Payments
Gift Aid Payments
claim for the deductions even if the amount claimed is less

than 1000.
Notes
We will accept notifications up to 5,000.
Tax relief for Gift Aid payments is only available to Higher
Rate taxpayers. Occasionally, pensioners who are not in
receipt of full age related allowances, and who are not
required to make a tax return, may also wish to notify Gift
Aid payments as they may increase entitlement to age
related allowances.
All claims to carry back relief must be made in writing.
Pension Plans you pay into
We will accept notifications up to 5,000.

Additional relief will only be due for Higher Rate taxpayers.
All claims to carry back must be made in writing.
Retirement Annuity Payments

We will only accept telephone notifications where
entitlement to relief has already been established in
principle. New claims and claims to carry back relief must
be made in writing.
Notifications of Benefits in
Kind
Any benefits in kind not just
the most common ones such as
car and fuel benefits
Notes
No monetary limits to amounts of notification
In some circumstances, for example if a benefit is partly
paid for work purposes or a benefit is shared with other
employees, we may ask for the details to be put in writing
Notification of Earnings
Part time or earnings other than
from main income.
Notes
Commission

Tips

Notification of Other Income

Interest without tax taken off
(gross interest)
Taxed Savings and Investment
Income.
Notes
Information will be recorded in all instances but is most
likely to affect tax liability where the customer is a higher
rate taxpayer.
It may also affect entitlement to age related allowances.
State Pension
Pensions other than State

Pensions
Incapacity Benefit
Job Seekers Allowance

Income from renting your own
home.
(Income received as a result of
renting your home for periods of
time when you are temporarily
not resident)
Income from Rent a Room
Scheme
(Income received from letting a
furnished room(s) within your
home in which you reside)
Other property income
Other taxable income (excluding

earnings)

Incapacity Benefit paid at the short term lower rate for the
first 28 weeks is non-taxable.


Other Notifications
Objection to coding out of nonPAYE income.
Current and later year
Claims for revenue delay under

Extra Statutory Concession A19
Current year and previous four years only.
Amendments to Self
Assessment Returns
Amendments to Personal
Allowances within the range
described above.
Correction of Personal or
Employment details
On the Employment Pages of
the Return:
Amendments to claims for
deductions or expenses which fall
within the range of services
described above;
Amendments to employment
income or employee benefits;
Correction of provisional or
incorrect figures (other than tax)
Amendments to a return to
correct the figure of interest
received where capital from
investments has been incorrectly
included as interest, or where the
full interest from a joint account
has been entered rather than an
individuals share.
Amendments to a return to
correct figures of pensions or
state pensions and benefits
Amendments to a return where
there is an entry for qualifying
pension payments or retirement
annuity paid but relief has not
been claimed
Notes
Any amendment must be made within 12 months of the
filing date for the return. The filing date will usually be 31
January after the end of the year to which the return relates.
Self Assessment Notifications

Commencement of Selfemployment
Notes
Notification must be made to the Newly Self-Employed
Helpline
Cessation of self-employment
Self Assessment Requests

Requests to repay tax overpaid
for the year
Requests to include tax payable
in PAYE Code for forthcoming
year
Requests to Reduce Payments on
Account
Notes
Subject to time limits
Annex B
Conduct of Income Tax Business by Telephone Directions
The Commissioners for Her Majestys Revenue and Customs make the following directions in
exercise of the powers conferred by section 118 Finance Act 1998.
Commencement
1.
These directions have effect from 26 April 2010.
Interpretation
2.
In these directionsFA 2004 means the Finance Act 2004,
ITEPA means the Income Tax (Earnings and Pensions) Act 2003,
ITTOIA means the Income Tax (Trading and Other Income) Act 2005,
ITA means the Income Tax Act 2007,
TMA means the Taxes Management Act 1970, and
caller means the party to the telephone call other than the HM Revenue and Customs
Taxes Contact Centre.
Individuals in respect of whom business may be conducted by telephone
3.
These directions apply to an individual who wishes to
(a)
make a claim or election, or to notify HM Revenue and Customs of income or
benefits, or withdraw such a claim, election or notification, and who
(i)
is not required to make a self assessment return for a year under section
8(1) of the TMA, or
(ii)
has made a self assessment return but the time specified in section 9ZA
of the TMA for amending a return has expired; or
(b)
amend a self-assessment for any tax year under section 9ZA of the TMA, if the
time to do so specified in that section has not expired.
Matters to which these directions apply

4.
These directions apply only to those matters specified in Parts 2 to 4 of the Schedule.
Circumstances in which matters may be notified, etc by telephone
5.
1) The matters specified in the Schedule may be validly made, notified or withdrawn by
telephone if the following conditions are met.
(2) The first condition is that the telephone call is made to or from a HM Revenue and
Customs Taxes Contact Centre.
(3) The second condition is that the caller is
(a)
an individual acting on his or her own behalf, or
(b)
where an individual has notified HM Revenue and Customs that a third party is
authorised to act on his or her behalf (and that notification has not been revoked)
that third party.
(4) The third condition is that the caller provides all the information which HM Revenue
and Customs request during the telephone call.
Restrictions on the application of these directions
6.
(1) The application of these directions is subject to any monetary limit or other restriction
noted in the Schedule.
(2) These directions do not apply to an individual acting in the capacity of trustee, partner
or personal representative, or to a third party authorised to act on behalf of an individual
acting in such a capacity.
(3) If, during a call to which these dir ections apply, the caller f ails to meet the third
condition specified in paragraph 5(4)
a bove, these directions do not appl y t o any
subsequent attempt to establish or withdraw the same amendment, claim, or el ection, or
notify or withdraw a previous notification of the same income or benefits.
(4) Nothing in these directions varies an y requirement under an enact ment as to the
period within which an amendment, claim, election, or notification may be made.
Date claim, etc made
7.
An amendment, claim, election, notification or withdrawal made in accordance with these
directions will be treated as made on the date the telephone call is made.
Revocation of previous directions
8.
The directions relating to business by telephone published in April 2005 in Statement of
Practice 1/05 are revoked.
26 March 2010
Dave Hartnett
Bernadette Kenny
Two of the Commissioners for Her Majestys Revenue and Customs
SCHEDULE
Matters to which these directions apply
Part 1 - Interpretation
1. In this Schedule current year means the year of assessment in which the claim, election or
notification is treated as being made under these directions.
2. In Part 2 references to claims or elections include references to an amendment to a return to
make a claim or election and to an amendment to a claim or election made in the original
return.
Part 2 - Claims and Elections

3. A claim or election in respect of:
(a) personal allowance under section 35, 36 or 37 of ITA;
(b) tax reduction for married couples or civil partners under Chapter 3 of Part 3 of ITA;
(c) blind persons allowance under s38 or s39 of ITA.
4. A claim to make any of the following deductions from income in respect of expenses for
2008/09 and all subsequent years, subject to the monetary limit or other conditions specified:
Deduction
Monetary limit
Deductions for professional membership fees under section 343

ITEPA
2500
Deductions for annual subscriptions under section 344 ITEPA
2500
Fixed sum deductions for repairing or maintaining work

equipment under section 367 of ITEPA
No limit
Any other deduction for expenses permitted under Chapter 2

Part 5 ITEPA, provided that the same class of expense has been
claimed for 2008/09 and all subsequent years.
1000
5. A claim to any of the following income tax reductions for 2008/09 and all subsequent years,,
subject to the monetary limit or other conditions specified:
Income Tax reduction
Monetary Limit
Relief for gift aid payments under section 414 ITA
5000
Relief for contributions to a pension scheme under section 193 or

194 of the FA 2004
5000
Relief for contributions to a retirement annuity contract under

section 194 of the FA 2004, provided that relief has been given
for contributions to the same retirement annuity contract for
2500
Part 3 Income and Benefits

6. Notification of any taxable benefit within the meaning of Part 3 of ITEPA for 2008/09 and all
subsequent years, an amendment to such a notification made in the original return.
7. Where an employer has made a PAYE return in respect of the individual, notification of the
following types of income:
(a) commission or tips received from that employment, and
(b) any earnings from employment other than that employment,
for 2008/09 and all subsequent years.
8. Amendment to return details of any income omitted from the employment pages of the
original return for 2008/09 and all subsequent years.
9. Notification of, the following income:

(a) interest and investment income (whether received gross or after deduction of
tax),
(b) state pension,
(c) pensions other than state pension,
(d) incapacity benefit,
(e) job seekers allowance,
(f) income from renting the individuals own home, including income to which Part
1 Chapter 7 ITTOIA (rent-a-room relief) applies,
(g) other property income, and
(h) other taxable income other than earnings,
for 2008/09 and all subsequent years..
10. Amendment to a return to correct a figure of interest which is incorrect because
(a) capital from investments has been entered as interest, or
(b) full interest from a joint account has been entered (rather than the individuals
share).
11. Amendment to a return to correct figures of state pensions, pensions other than state pensions,
incapacity benefit or employment support allowance.
Part 4 - Other Amendments
12. Correction of a provisional figure in the employment pages of the original return to a final
figure.
13. Correction of an incorrect figure in the employment pages of the original return.
SP2/10 Advance Pricing Agreements
GENERAL INTRODUCTION
This Statement of Practice (SP) updates an earlier Statement on Advance Pricing Agreements
(APAs), published in 1999. The legislation that relates to APAs, formerly found at Section 85,
Finance Act 1999, now appears at Sections 218 -230 of the Taxation (International and Other
Provisions) Act 2010 (TIOPA 2010). This SP is intended to provide guidance about how H.M.
Revenue and Customs (HMRC) interprets the APA legislation and applies it in practice.
Key Paragraphs in this SP
What is an APA? - para 1

What issues can be covered? - para 3
Unilateral and bilateral APAs distinguished - para 8
Who may apply? - para 13
Criteria for acceptance in the UK APA Programme - para 14
Importance of Expressions of Interest - para 18
Anonymised approaches - para 23

Length of APA term and Roll-back - para 25
The application - para 29
Reaching Agreement, and timelines - para 36
Revising and renewing APAs - para 47
APAs WHAT ARE THEY AND WHEN MIGHT BUSINESSES CONSIDER ONE?
1. An APA is a written agreement between a business and the Commissioners of HMRC
which determines a method for resolving transfer pricing issues in advance of a return
being made. When the terms of the agreement are complied with, it provides assurance to
the business that the treatment of those transfer pricing issues will be accepted by HMRC
for the period covered by the agreement. A bilateral APA as discussed below will
provide a similar assurance in respect of the tax administration (Administration)
dealing with the entity at the other end of the transaction.
2. An APA enables businesses to achieve certainty that the transfer pricing issues covered
by the agreement will not be part of any enquiry into their self-assessment tax returns for
the relevant period and so provides greater certainty over their tax liabilities. HMRC has
also found that where there is considerable difficulty or doubt in determining the method
by which the arms length principle should be applied, the transfer pricing issues can be
more efficiently dealt with in real time as they arise rather than retrospectively years later
when, for example, key personnel in the business may have moved on.
3. Sub-section 218(2), TIOPA 2010, sets out the transfer pricing issues which can be the
subject matter of an APA. An APA can be used to resolve questions relating to the
following broad situations giving rise to transfer pricing issues:
a. Transfer pricing between separate business enterprises where questions may arise
as to the determination of the arms length provision under the rules in Part 4
TIOPA 2010.
b. Attribution of income or profit between parts of a business enterprise which
operates in more than one country where questions may arise as to the taxable
income to be recognised in any such part. (Note this is conceptually a similar
problem to transfer pricing and any references to transfer pricing issues in the
remainder of this document should be read as including such attribution issues.)
c. Across the UK oil-related ring-fence.
4. The potential scope of an APA is flexible. It may relate to all the transfer pricing issues of
the business or be limited to one or more specific issues although Thin Capitalisation
issues will generally be dealt with via a separate Advance Thin Capitalisation Agreement
(ATCA). There is no requirement that the commencement of an APA should coincide
with the commencement of the arrangements which it addresses so it may apply to preexisting issues.
5. The APA legislation does not specifically provide for a determination that a permanent
establishment (PE) does not exist however it may be possible for the APA to include a
determination that the income to be attributed to a potential PE is nil.
6. HMRCs Business International Directorate (BI) has responsibility for all applications
except enterprises operating in the North Sea (for which the Large Business Services Oil
and Gas Sector is responsible). Otherwise, BI will involve such specialists and delegated
competent authority officials as is necessary, and will ensure the business Customer
Relationship Manager (CRM) is involved.
7. HMRC do not levy any charge on the business for their assistance during the APA
process but potential applicants need to be aware that some other Administrations may
do. HMRC can advise on this at the Expression of Interest stage (see below).
UNILATERAL, BILATERAL or MULTILATERAL AGREEMENT
8. A binding agreement between a UK business and HMRC in accordance with Section 218,
TIOPA 2010, is referred to as a unilateral APA. Although this agreement confirms the
tax treatment in the UK, it does not determine how the issues are to be resolved in any
other country involved. Consequently, it does not normally eliminate the risk of double
taxation in relation to the transfer pricing issues it addresses. In order to achieve that
comprehensively in the case of cross-border transfer pricing issues where a Double
Taxation Agreement (DTA) exists between the UK and the other country containing a
Mutual Agreement Procedure article, HMRC would have to reach agreement also with
the Administration of the other country: this is referred to as a bilateral APA.
9. Businesses operating in several countries may wish to seek APAs that involve all the
relevant Administrations affected by the transfer pricing issues. The term, multilateral
APA, has been used to describe such agreements, but there is no discrete mechanism for
reaching multilateral agreements, and multilateral APAs are strictly multiple and
complementary bilateral APAs.
10. Multilateral agreements may be more appropriate where there is essentially only one
activity, but several enterprises or parts of enterprises contribute to it. For example, where
an enterprise of the UK is engaged in global financial trading through branches in
countries X and Y, it may be appropriate for similar agreements to be reached between
HMRC and country X and HMRC and country Y in order to determine how the profits
from the activity are to be allocated to each of the three countries in order to eliminate
double taxation. In such a situation HMRC will adapt the bilateral framework in order to
reach agreement on a trilateral basis, subject to the acquiescence of the other
Administrations and any constraints on exchanging information imposed by the relevant
DTAs.
11. HMRC generally recommends that APA applications are bilateral rather than unilateral
except where:
a. Applicants are able to persuade HMRC that the extension to a bilateral APA would
unnecessarily complicate and delay the process; or
b. The other party to the transaction is resident in a jurisdiction with which HMRC
has no treaty or where HMRC is aware that the treaty partner has no APA process;
or
c. There is considered to be little extra to be gained by seeking a bilateral agreement.
For example where the UK is at the hub of arrangements with associated
enterprises in many different countries and where the trade flows involved with any
one particular country are relatively modest in scale.
12. Where there is an appropriate DTA in place, and HMRC considers that a bilateral APA
would be more appropriate, HMRC may communicate with the other Administration if a
unilateral is sought, to ascertain whether that Administration would consider entering into
a bilateral APA process. Alternatively, (see Section 229(2), TIOPA 2010), HMRCs
ability to give effect to a mutual agreement reached with a treaty partner to eliminate
double taxation under the terms of a treaty will not be restricted by the terms of a
unilateral APA.
WHO MAY APPLY FOR AN APA?
13. An APA may be requested by

a. any UK business, including a partnership, with transactions to which the provisions
of Part 4 TIOPA 2010 apply;
b. any non-resident trading in the UK through a Permanent Establishment;
c. any UK resident trading through a Permanent Establishment outside the UK.
14. Every APA request will be considered on the basis of its particular facts and features, but
generally HMRC will be looking for one or more of the following characteristics:
a. The transfer pricing issues are complex rather than straightforward. To HMRC
complex means there is doubt as to how the arms length standard should be
applied. Conversely, where reliable market comparables can be readily identified
for the transaction(s) in point, that should enable transfer pricing methods to be
employed in accordance with the OECD Transfer Pricing Guidelines, and HMRC
is likely to regard such a situation as straightforward.
b. Without an APA, it is likely that the taxpayers transfer pricing policies or issues
would not be regarded as low risk and/or there is a high likelihood of double
taxation.
c. The taxpayer seeks to implement a method which is highly tailored to its own
particular circumstances. HMRC will be willing to consider an innovative proposal
providing it is compliant with OECD Guidelines, and not one that HMRC
considers Treaty Partners would regard as being overtly tax aggressive.
15. APAs will not be declined solely by reference to the size of the transactions giving rise to
the transfer pricing issues because HMRC recognises that complex transfer pricing issues
can be encountered by smaller businesses as well as by large multinationals. However
many small and medium enterprises are exempt from the UK transfer pricing legislation
by virtue of Section 166 TIOPA 2010 and so there may be limited occasions where the
APA process will be appropriate for smaller businesses.
16. Since April 2004 UK-to-UK transactions have been subject to transfer pricing legislation:
but, HMRC does not generally see such transactions as likely to warrant an APA.
However some UK-to-UK transactions, for example oil-related ring fenced trades, are
specifically provided for in legislation.
17. When a UK business does obtain an APA and the provision in question is made or
imposed with a related UK business Section 222 TIOPA 2010 enables the other UK
business to claim to have their profits adjusted in line with the APA where they are
disadvantaged. However, HMRC seeks to avoid such issues by encouraging the business
to agree wherever possible that the transfer pricing methodology will determine the
commercial charge for the provision as well as the charge for tax purposes.
THE INITIAL CONTACT THE EXPRESSION OF INTEREST PROCESS
18. The APA process is initiated by the business but HMRC always strongly recommend that
an enterprise interested in applying for an APA contacts it first to informally discuss its
plans before presenting a formal application. This is to ensure that the resources of the
business are not wasted on an unsuitable application and to ensure that the detailed work
that will need to be undertaken by the business in finalising its application is focused on
relevant issues. It also gives HMRC an opportunity to outline a realistic anticipated
timetable for agreeing an APA based on past experience, or to discuss other practical
process issues with the business.
19. The contact details for an Expression of Interest in an APA and for making an APA
application in all cases except those involving oil taxation, is:
APA Co-ordinator (Ian Wood)
Business International
3rd Floor, 100 Parliament Street, London SW1A 2BQ
Telephone: 0207 147 2715
Fax: 0207 147 2649
e-mail: ian.wood.@hmrc.gsi.gov.uk
20. For APAs involving North Sea and other offshore operations, the contact address is:
Competent Authority, Large Business Service Oil and Gas (Susan New)
3rd Floor, 22 Kingsway, London WC2B 6NR
Telephone 0207 438 7570
Fax 0207 438 6910
e-mail: susan.new@hmrc.gsi.gov.uk
21. Any business uncertain as to which contact point is appropriate in their circumstances is
welcome to approach either.
22. The Expression of Interest should generally cover:
a. The nature of the transfer pricing issues intended to be covered by an APA.
b. Details of the tax residence of the parties involved and the importance to the wider
business of the transactions intended to be covered.
c. If decided upon, a description of the proposed transfer pricing method.
d. An indication of the nature of any current transfer pricing enquiries, competent
authority claims, and any other relevant issues that the business is aware of in the
context of the suggested APA.
HMRCs experience is that discussion of these issues at a meeting is much speedier and
more productive than correspondence.
23. An Expression of Interest can best be evaluated where the identity of the business is
known. However, if a business wishes to preserve anonymity until a decision in principle
is made to proceed with the application, HMRC will be prepared to enter discussions
without knowing the identity of the business providing all other information relevant to
the proper evaluation of the request is supplied. However, HMRC will not make any
commitment over acceptance into the APA Programme until the identity of the business
is known. Otherwise, HMRC is usually able to indicate at the conclusion of an
Expression of Interest discussion whether it will be prepared to consider an application
for an APA.
24. In the event that HMRC considers that an application should not be admitted into the
APA Programme, HMRC will advise the business of the reasons why HMRC takes that
view, and will allow the business the opportunity to make further representations.
TERM OF THE AGREEMENT AND ROLL-BACK
25. An APA will be operative for a specified period from the date of entry into force as set
out in the agreement. The business should propose an initial term for the APA taking into
account the period over which it is reasonable to assume that the method for dealing with
the relevant transfer pricing issues will remain appropriate. Typically the term is from
three to five years.
26. It is possible that a chargeable period to which the APA relates may have ended before
agreement is reached. Section 224, TIOPA 2010, allows the APA to be effective for that
chargeable period and the agreement may set out any adjustments to be made for tax
purposes as a consequence of the agreement.
27. The agreed transfer pricing methodology may be relevant for an earlier period and to the
resolution of any transfer pricing enquiries raised for earlier periods if the particular facts
and circumstances surrounding those years are substantially the same. Consequently, in
such circumstances, the business may wish to consider using the agreement as a basis for
amending a self assessment return or to request that the method for dealing with transfer
pricing issues contained in the APA should be considered for resolving any transfer
pricing enquiries to which it is relevant for earlier years. HMRC may also suggest that the
roll-back of the APA is an appropriate means of a resolving a transfer pricing issue in
earlier years although, in bilateral or multilateral cases, the possibility of doing so will
also be dependent on the ability or willingness of the Administration of the other country
or countries involved to do so.
28. Except where roll-back is being considered, the request for an APA in respect of future
years will not in itself affect any transfer pricing enquiry into earlier years. However, to
the extent such an approach is appropriate and feasible, HMRC will co-ordinate the APA
request in respect of future years with any transfer pricing enquiry in respect of prior
years in order to improve overall efficiency and reduce duplication of enquiries.
THE FORMAL APA APPLICATION
29. Where, following HMRCs indication that it is willing to consider the APA proposal, the
business wishes to proceed, it should submit a formal written application. This APA
application should also be copied to the business primary business contact at HMRC
usually the business Customer Relationship Manager.
30. Annex 1 to this document contains full details of the information that should generally be
incorporated in the formal application. HMRC may, in practice, be flexible with such
requirements where the circumstances of the particular case mean that a different
approach will make for a better process. In a bilateral case, HMRC is often able to agree
to work from the same format application as is mandated by the other Administrations
procedures. These are issues best discussed with HMRC at the Expression of Interest
stage. Annex 2 contains a diagram showing a timeline of the typical APA process for a
bilateral case.
31. The application should ideally be made before the start of the first chargeable period
proposed to be covered by the APA, but HMRC may exercise discretion over this, for
instance, when a bilateral is sought and the other Administration is prepared to allow the
business more time to lodge its application.
32. In the case of a bilateral APA the business will be asked to ensure that all information
provided in the application supplied to one Administration is made available at the same
time to the other Administration involved.
33. APA information is subject to the same rules of confidentiality as any other information
about taxpayers. Information exchanged with treaty partnersfor instance, in the course
of reaching agreement on bilateral APAsis also protected from disclosure by the terms
of the Exchange of Information Article in the relevant DTA.
EVALUATION
34. On receipt of an application HMRC will evaluate its contents and will seek clarification
and further information from the business as necessary. The examination of the
application should be a co-operative process in which the transfer pricing issues are
discussed openly and access to relevant supporting information and documentation is
made available. Lack of co-operation in these respects may result in HMRC declining to
give any further consideration to the application.
35. Where a bilateral APA is being sought, HMRC will expect the business to continue to
make relevant information available at the same time to each Administration involved,
and in turn will itself keep the treaty partner informed about the progress of its
examination of the APA request, will seek to discuss with the treaty partner key issues
arising at the earliest opportunity and will keep the business informed about the progress
of the bilateral process. Whilst the finalising of a bilateral agreement with a treaty partner
is a government-to-government process, HMRC is generally prepared to participate in
joint meetings involving the business and the other Administration(s) to assist in the
exploration and evaluation of key factual issues.
REACHING AGREEMENT
36. The agreement between HMRC and the business will be made subject to its terms being
observed. The terms will include:
a.
a commitment from the business to demonstrate adherence to the agreed method

for dealing with the transfer pricing issues during the term of the APA in the form
of a regular compliance report (an Annual Report) as required by Section 228
TIOPA 2010 and
b. the identification of Critical Assumptions bearing materially on the reliability of

the method and which, if subject to change, may render the agreement invalid.
37. A sample plain vanilla agreement is included as an annex to this Statement (Annex 3).
Normally the person responsible for signing the agreement on behalf of the business
would be the person responsible for signing a tax return, subject to that person having
authority within the multinational group to commit the group to the terms of the APA.
38. HMRC aims to complete the APA process within 18-21 months from the date of the
formal submission. It may well be possible to complete unilateral APAs much more
quickly than that. This objective is dependent on the complexity of the case and, in the
case of bilateral or multilateral applications, may be dependent on the working practice of
the Administration(s) in the other country or countries. It is also, of course, dependent on
co-operation from the applicant. HMRC may view significant and repeated delay on the
part of the business as indicative of a lack of co-operation and may then terminate the
APA process as a result.
39. HMRC expects the business to facilitate an efficient process by providing timeously all
the information necessary to consider the application properly and reach agreement. This
extends to the enterprises co-operation in ensuring that the formal APA agreement and
any associated procedural paperwork are finalised shortly after the finalisation of the
transfer pricing method and/or, in a bilateral or multilateral process, the concluding of
agreements with treaty partner(s).
40. If agreement on the terms of an APA cannot be reached with the business, HMRC will
issue a formal statement recording the reasons. HMRC does not consider it has any
obligation to continue discussion beyond the point at which it has determined that
agreement cannot be reached.
41. A business may withdraw an APA request at any time before final agreement is reached.
APA MONITORING AND REVIEW - ANNUAL REPORTS
42. The Annual Report will generally accompany the business tax return. The report should
be sent to the HMRC office responsible for the business tax affairs.
43. The particular requirements of each report will be set out in the finalised agreement and
will focus narrowly on the issue covered by the APA. The broad intention is that Annual
Reports should demonstrate in a concise format whether the business has complied with
the terms and conditions of the APA.
NULLIFYING AND REVOKING APAs AND PENALTIES
44. In accordance with Section 225, TIOPA 2010, an APA may be revoked by HMRC in
accordance with its terms, where the business does not comply with the terms and
conditions of the agreement, or where the identified critical assumptions cease to be
valid. In practice, when considering nullifying or cancelling a bilateral APA HMRC will
consult with the business and with the Competent Authority of the treaty partner
involved. In some cases, a change in the agreement may be possible see also Paragraph
47 below.
45. Where false or misleading information is supplied fraudulently, or negligently, in
connection with an application for, or in the process of monitoring, an APA, penalties
may be applied, and the APA might be nullified (see Sections 226 and 227 TIOPA).
46. In accordance with existing appeal procedures, the business has the right to appeal against
the amount of any additions to profits arising as a result of the revocation or cancellation
of an APA.
REVISING AND RENEWING APAs
47. In some cases the APA may provide for modification of its terms in specific
circumstances; for example, a particular agreement may provide that where there has
been a change which makes the agreed methodology difficult to apply, but which does
not go as far as to invalidate a critical assumption, the agreement may be modified with
the consent of the parties to resolve that difficulty. In such cases the APA may be revised
in accordance with Section 225, TIOPA 2010 after consultations between the business
and HMRC and, in the case of bilateral agreements, the Competent Authority of the other
country involved.
48. The business may request renewal of an APA ideally not later than six months before the
expiry of its current term, but HMRC will not rule as out of time requests made before
the end of the first chargeable period affected by the renewal or, in the case of bilateral
cases, later, if the other Administration is prepared to allow further time. The renewal
application should expressly consider any changes or anticipated changes in facts and
circumstances since the existing agreement was reached, whether any amendments are
required to the agreement on renewal as a result, and should demonstrate that the
proposed methodology is, or is still, appropriate.
49. HMRC will conduct a review of the renewal application, taking into account whatever
revisions to the existing APA are necessary and appropriate in the light of any changed
facts and circumstances. Where it is agreed that the transfer pricing issues under
consideration remain the same and the existing transfer pricing methodology can
continue as before but with details updated to ensure continued adherence to the arms
length principle, the agreement will simply be amended and extended for a further term.
Where, however, the transfer pricing issues have changed, or a different method is being
proposed, the business will be required to make a fresh APA application. A fresh
application may also be necessary in a bilateral context where the processes of the other
Administration require that.
THE BACKGROUND TO THIS SP
50. HMRC has run an APA Programme since 1999 to assist businesses in identifying
solutions for complex transfer pricing issues.
51. This Statement updates the original SP on APAs (SP3/99) and is intended as general
guidance as to how HMRC interprets the APA legislation and how HMRC operates the
UK APA Programme. HMRC is taking the opportunity to incorporate best practice
identified since SP3/99 was published, but the publication of this Statement does not
mark a material change in HMRCs approach to APAs.
52. Although the same legislation is used as the basis for Advance Thin Capitalisation
Agreements (ATCAs) HMRC has published a separate document, SP 04/07, to provide
detailed guidance about its practice in reaching advance agreements over thin
capitalisation issues. These cases have their own distinctive features and are therefore
negotiated under an entirely separate process. This Statement consequently has no impact
on the existing guidance on ATCAs in SP 04/07.
ANNEX 1 INFORMATION TO SET OUT IN THE FORMAL APPLICATION
1. The application should fulfil the requirements of Section 223, TIOPA 2010 and set out:
a. the applicants understanding of the effect of the relevant legislation including
the effect of any DTA in relation to the transfer pricing issues under consideration;
b. the areas where, because of the difficulty of the transfer pricing issues, clarification
of that effect is required; and
c. a proposal for clarifying the effect of the legislation in accordance with the
applicants understanding.
2. The intention is to ensure that any agreement about the practical treatment of specified
transfer pricing issues is formed from a proper understanding of the relevant principles of
the Taxes Acts. Thus, where the transfer pricing issue concerns, for example, pricing
between associated enterprises, the application might include an explanation of why the
transfer pricing rules at Part 4 TIOPA 2010 are applicable, and would acknowledge that
the effect of those rules, which are to be construed in accordance with OECD Transfer
Pricing Guidelines, is to require the substitution of the arms length provision for tax
purposes. The application might then go on to explain in what ways the establishing of
the arms length provision requires clarification, and submit a proposal for establishing
the arms length provision in accordance with the requirements of the effective
provisions. This guidance should be adapted to attribution issues involving Permanent
Establishments (where OECD has latterly issued separate guidance in the form of Parts 14 of the Report on the Attribution of Profits to Permanent Establishments) in accordance
with the general intention of ensuring that there is a proper understanding of the relevant
principles of the applicable law from which an agreement about the practical treatment of
a specified issue can be formed.
3. The centre-piece of the proposal will be a description of the method by which it is

proposed to determine the transfer pricing issues in accordance with the arms length
principle, and an analysis demonstrating how the application of that method satisfies the
terms of the UKs legislation, including the effect of any DTA, and is consistent with the
OECD Transfer Pricing Guidelines. The nature of the detailed information supporting the
proposal should be tailored to the specific features of the business and of the transfer
pricing issues and should take into account discussions with HMRC at the Expression of
Interest stage.
4. All proposals will also generally need to be supported by the following information:
a. the identification of the parties and recent accounts (generally for the previous 3
years);
b. a description of the transfer pricing issues proposed to be covered in the APA and
analysis of the functions and risks of the parties and actual and projected financial
data of the parties in relation to the issues;
c. a description of the world-wide organisational structure, ownership, and business
operations of the group to which the company in question belongs, the place or
places where such operations are conducted, and all the major categories of
transaction flows of the parties to whom the APA is intended to apply;
d. a description of the records which will be maintained to support the transfer pricing
method proposed for adoption in the APA and the information which it is proposed
will be supplied each year to demonstrate that the tax return conforms to the terms
of the APA;
e. a description of any current tax enquiries or competent authority claims that are
relevant to the issues covered by the proposed APA;
f. the chargeable periods to be covered by the APA;
g. the identification of assumptions made in developing the proposed transfer pricing
method which are critical to the reliability of its application under the arms length
standard; and
h. where appropriate, a request for competent authority assistance in reaching a
bilateral or multilateral APA.
5. The formal proposal should identify the assumptions made in proposing the method for
dealing with the transfer pricing issues and which are critical to the reliability of that
method. The method should be sufficiently robust to accommodate some changes in the
commercial and economic climate from that reasonably foreseeable when the proposals
were made and still be capable of replicating an arms length outcome. However, the
accuracy of the method is likely to be predicated on assumptions in respect of particular
factors fundamental to its application, such as the continuing nature of the functions
performed, accounting policies and practices, the terms of contractual agreements
impacting upon the covered transactions, or levels of market share. Critical assumptions
are designed to protect both the business and the HMRC from the risk that the agreement
may become inappropriate, but they should not be so tightly drawn that the certainty
provided by the agreement is jeopardised. Setting parameters for acceptable divergence
for some assumptions can help to retain flexibility. Where there is a change, or a change
greater than any relevant parameters set, to circumstances that both parties have identified
as critical to the agreement, a reconsideration of the agreement is then activated and may
lead to its cancellation or modification depending on the terms of the agreement.
ANNEX 2 A TYPICAL BILATERAL APA TIMELINE:
Pre Application
Scoping Discussions
Researching & Testing

Taxpayer Proposal
The Detail
Resolution
Closing Paperwork
CASETEAM
COMPETENT AUTHORITY
0 Months
9 Months
12 Months
18 Months
21 Months
OTHER ADMINISTRATION(S)
Key
Application in
First engagement
between administrations
Closing agreements
Negotiation between
administrations
Intensive
activity
Less intensive
activity
No substantial
involvement
ANNEX 3 SAMPLE AGREEMENT

ADVANCE PRICING AGREEMENT
Between
TAXPAYER
And
H.M. REVENUE AND CUSTOMS
This Advance Pricing Agreement (APA) is made between
Taxpayer, and
HM Revenue and Customs acting through Business International Directorate (HMRC)
The Taxpayer and HMRC (collectively The Parties) wish to enter into an APA, and to include
in it an appropriate Transfer Pricing Methodology (TPM) to be applied to the transactions
between the Taxpayer and the related party (or parties) identified below.
(This agreement replicates under UK statute on Advance Pricing Agreements the terms of a
bilateral/multilateral agreement reached under the Mutual Agreement Procedure Article of the
relevant Tax Treaty covering the same transactions between HMRC and (fisc(s))
1. Identifying Information
Taxpayer (typically - a company registered in (country) , under registration number
XXXXXXXX, Resident in (country), having a tax reference YYYYY YYYYY, (with a
Permanent Establishment in (country)) and a Registered Office at (address) (or place of business
at (address))
Related Party (similar information as for the taxpayer above there may be a number of related
parties)
Set out relationship between Taxpayer and Related Party e.g. one a subsidiary of the other or
both companies members of the multi-national group Z headquartered in (country)
2. Covered Transactions
The transaction(s) covered by this APA (the Covered Transactions) comprise (succinct
explanation of all Covered Transactions)
3. Legal Effect
This APA is made pursuant to and for the purposes of S218 Taxation (International and Other
Provisions) Act 2010 (TIOPA 2010) and binds the Parties, for the term of this APA, to
determine questions relating to the transfer pricing (or branch or PE attribution) matters covered
by the APA in accordance with its terms.
If the Taxpayer complies with the terms and conditions of this APA then HMRC will not contest
the application of the TPM (as defined in Appendix A) to the Covered Transactions and will not
make or propose any reallocation or adjustment that would be necessary in order for effect to be
given to the provisions of Part 4 TIOPA 2010 with respect to the Taxpayer concerning the
transfer prices for the APA term (this will have to be amended or extended if we are/are also
looking at a PE issue.and also refer to Rollback years if relevant).
If, for any year during the APA term, the Taxpayer does not comply with the terms and
conditions of this APA, or the Critical Assumptions (as defined in Clause 6 below) cease to be
valid, HMRC may (subject to clause 9 below) revoke this APA and S.221 TIOPA 2010 shall
apply.
(The terms and conditions of this APA may also be modified or amended upon the agreement of
the Parties, subject also to the terms of any bilateral/multilateral agreement)
4. Term
Term of APA.
(Rollback period if relevant)
5. Financial Statements and APA Records
(typically in accordance with S 228 TIOPA 2010 - the taxpayer is required to provide, in
addition to Corporation Tax Returns and Audited Financial Statements: Submission of APA
information set out by Clause 6 and 7 below.
Compliance with this will constitute compliance with the record maintenance provisions of
Section 12B Taxes Management Act 1970 and paragraph 21, Schedule 18 Finance Act 1998 with
respect to the Covered Transactions during the APA term.)
6. Critical Assumptions
(with respect to the Covered Transactions are set out in Appendix B)
7. Annual Reports
(unless this requirement can be very simply put are typically set out in a separate Appendix C.
Note that some bilateral or multilateral agreements may require a standard report to be sent to
all involved tax Administrations and in that case Appendix C may have to cover the same ground
and also any specific information - e.g. (say) conversion into UK currency or UK accounts
standards so that the HMRC tax team can readily track the numbers through the relevant UK tax
computations.)
8. Disclosure
This APA and the information, data and documents related to this APA, are subject to the same
rules of confidentiality as any other taxpayers information provided to HMRC, and any
unauthorised disclosure of information by HMRC will be a breach of those rules.
9. Revocation
HMRC will not revoke this APA unless and until it has explained in detail to the Taxpayer why
and from when it is considered the taxpayer is in breach of the terms and conditions of this APA
and the taxpayer has been given a reasonable opportunity to rectify any breach.
(Note - this clause may need to be aligned with any relevant requirements in a bilateral or
multilateral agreement. In a multilateral for instance the possibility of the taxpayer no longer
being felt to satisfy the terms of the APA in one territory only may be considered. Or, similarly,
the consequences for the agreement between the other Administrations of there no longer being
Covered Transactions in one territory may be tackled. HMRC may also want to emphasise that it
will be working from the standpoint of seeking the continuance of the APA in the event of any
such difficulty.)
10. Treatment of Allocations under the TPM
(typically this may cover the treatment of ongoing or end-of-year adjustments which may be
required under the TRM to align the results on Covered Transaction business with the APA
terms.
11. Professional Fees
(as relevant deductibility)
12. Tax Laws
(typically general statement along the lines of notwithstanding any statement in this APA
agreement, the taxpayer remains subject to all applicable taxation laws not directly affected by
this APA. The Taxpayer is entitled to any benefits or relief otherwise available under all such
laws).
13. Governing Law and Effective Date
(typically - laws of England and effective from the later date below)
Signatories
Responsible Officer or Director on behalf of Taxpayer, and dated.
Except in Oil cases (when it will usually be signed by the Competent Authority at Large Business
Service Oil and Gas), usually Deputy Director responsible for APA Programme, or APA Coordinator, BID, HMRC, and dated.
Notes
Appendix A (the TPM) see paragraph 3 - is the core of the APA. This section may need to be
detailed, but it will always be highly tailored to the taxpayers particular circumstances. HMRC
will try and ensure where there is a bilateral or multilateral agreement that Appendix A is
expressed in wording which is identical or near-identical with the wording of the transfer pricing
methodology in that agreement. If that is not possible, Appendix A will be operated as if it were
expressed in identical terms to the methodology set out in the bilateral or multilateral agreement.
Appendix B (Critical Assumptions) see paragraph 6 - will generally have a clause to the effect
that there should be no major commercial changes governing the Covered Transactions. In
volatile, dynamic or cyclical businesses this may need some elaboration. Similarly, in cases
involving trading or managing portfolios of Financial Products, consideration may be needed at
the time of negotiating the agreement as to how it will be clear that new generation Products
are or are not covered by the APA. In these kinds of situations there will generally be a
requirement for relevant information to be automatically reported in Annual Reports, see below.
In practice, other Critical Assumptions that have on occasion been agreed with taxpayers have
included clauses relating to changes of control, the possibility that acquisitions might impact upon
the APA, to profit share and competition issues, and those involving Regulation, or arising from
Government Policy or Laws.
Appendix C (Annual Reports) see paragraph 7. Ideally Annual Reports will include, in addition
to any required or mandated information on the Covered Transactions (see, for instance, comment
above) a one or two sheet or spreadsheet proof document demonstrating that all the conditions
of the APA have been met for the Covered Transactions. Where it is agreed that such a proof
will be provided, its format should be set out in the APA agreement.
SP1/11
Transfer pricing, mutual agreement procedure and arbitration
1.
This statement describes the UKs practice in relation to methods for reducing or
preventing double taxation and supersedes Tax Bulletins 25 and 31 which previously provided
guidance in this area.
2.
The statement considers the use of mutual agreement procedure (MAP) under the
relevant UK Double Taxation Convention and/or the EU Arbitration Convention and also
describes the UKs approach to the use of arbitration where MAP is unsuccessful. It has
particular relevance to transfer pricing and multinational enterprises.
INTRODUCTION
OECD Model Convention and UK Tax Treaties
3.
Chapter IV of the OECD Transfer Pricing Guidelines for Multinational Enterprises and
Tax Administrations (The Guidelines) contains details of administrative approaches to avoiding
and resolving transfer pricing disputes. One approach to which it refers is that provided for under
MAP, which is described and authorised by Article 25 of the OECD Model Convention (the
OECD Convention) and is discussed in the Commentary on Article 25 of the OECD Convention.
Article 25(1) has broad application and provides for MAP where a taxpayer considers he has been
or will be taxed other than in accordance with the Convention, for example in a way contrary to
Article 24, the Non-Discrimination Article. Article 25(3) may be used to resolve any difficulties
or doubts arising as to the interpretation of the OECD Convention and for the elimination of
double taxation in cases not provided for by the Convention. More specifically, to eliminate
double taxation in transfer pricing cases, tax administrations may consider requests for
corresponding adjustments as described in paragraph 2 Article 9 of the OECD Convention. That
paragraph recommends that the competent authorities of treaty partner states consult each other if
necessary to determine corresponding adjustments. This demonstrates that the MAP of Article 25
of the OECD Convention may be used to consider corresponding adjustment requests. In 2010
the OECD introduced a new version of Article 7 to the OECD Convention. This Article deals
with the attribution of profits to permanent establishments and the new version includes an
avenue for entering MAP similar to that in Article 9 of the OECD Convention.
4.
The UK has tax treaties with over 100 countries. These treaties seek to protect taxpayers
from double taxation, provide for the appropriate allocation of taxing rights in relation to profits
from cross-border economic activities, and prevent fiscal discrimination by their signatories. The
UK seeks to encourage and maintain an international consensus on international tax treatment of
cross-border activity, and plays an important role in this field through its membership of the
OECD. Accordingly, where the other signatory is agreeable the UK frequently adopts the terms
of the OECD Convention into its own tax treaties and is guided in its interpretation of those tax
treaties by the Commentary on the OECD Convention (The Commentary).
5.
In this respect MAP performs an important function, establishing a process by which the
UK competent authority and the competent authorities of tax treaty partners to our conventions
can consult each other to resolve matters relating to the application of our tax treaties. As part of
its work on improving the resolution of cross-border tax disputes the OECD has published a
Manual on Effective Mutual Agreement Procedures (MEMAP) which highlights the best
practices of the competent authorities of OECD Member countries in relation to MAP.
European Arbitration Convention
6.
The European Union Convention on the elimination of double taxation in connection
with the adjustment of profits of associated enterprises 90/463/EEC (the Arbitration
Convention), may provide an alternative to the MAP procedure under the UKs tax treaties
where residents of EU member states are potentially subject to double taxation. The UK and
other member states are signatories to the Arbitration Convention which came into force on 1
January 1995. MAP may be invoked under one of the UKs tax treaties, under the Arbitration
Convention or under both simultaneously.
ADMINISTRATION
7.
Presentation of cases to invoke MAP in relation to transfer pricing adjustments, under
both the UKs tax treaties and the Arbitration Convention, are dealt with by Business
International with the exception of cases presented by enterprises in the North Sea sector which
are dealt with by Large Business Service Oil & Gas Sector.
8.
The MAP provided for in most of the UKs tax treaties and the Arbitration Convention
empower the competent authorities of the two tax treaty partners to consult each other when an
enterprise claims that it is being taxed otherwise than in accordance with the convention as a
result of the actions of one or both of the relevant fiscal authorities. MAP is a process of
consultation, not litigation, between the two competent authorities. The taxpayer is not a formal
party to those consultations as such, but may be invited to participate informally at the discretion
of the competent authorities. Where it considers such participation likely to be useful the UK will
press for, but cannot guarantee it; the position of the competent authorities of the UKs treaty
partners in this respect is outside the UKs control.
9.
In the UK the Commissioners for Her Majestys HM Revenue & Customs (HMRC), or
their authorised representatives, are the competent authority. For cases under MAP the
Commissioners have authorised to represent them:
for matters relating to transfer pricing generally
Judith Knott
for matters relating to transfer pricing in the oil and gas industries
Susan New
10.
An enterprise may initiate MAP by presenting a case that it is subject to taxation,
otherwise than in accordance with the tax treaty or the principles of the Arbitration Convention,
to the competent authority for the country of which it is a resident or, in some cases, a national.
In a transfer pricing case, a case might be presented by the enterprise which has had, or will have,
an adjustment made to the price of goods or services transferred to or from a related party in
another country. The enterprise may request that the competent authority of the first country
reduce or withdraw the adjustment and/or that the competent authority of the second country
allow a corresponding adjustment to the income of the related party to prevent economic double
taxation. The UK is ready to receive the presentation of a case whether it is the state which has
made a transfer pricing adjustment or whether it is the state being asked to make a corresponding
adjustment for a transfer pricing adjustment made by its treaty partner. Treaty partners, however,
may have their own practice and/or regulations regarding which competent authority should
receive presentation of a case and taxpayers need to ensure compliance with those requirements.
11.
The Arbitration Convention requires that at the same time an enterprise presents a case
to the competent authority of the State of which it is resident or in which it has a permanent
establishment, it must at the same time notify the competent authority of any other States which
may be concerned in the case. As a matter of good practice, the UK advises that a presentation of
a case should also be copied to the competent authority of the other State in a MAP case even if it
is outside the Arbitration Convention.
12.
In the UK there is no set form of presentation. Specific treaties, however, may state that
certain information must be provided before it is accepted that a case has been presented for the
purposes of starting the period after which arbitration may be invoked. Other countries may also
have more extensive domestic information requirements. It is therefore advisable to consult the
relevant treaty and any public guidance on the matter provided by the UKs treaty partner if
presenting a case to that partner.
13.
Otherwise, UK taxpayers may present their cases in writing to the person and the address
set out at the conclusion of this Statement. A presentation should specify the year(s) concerned,
the nature of the action giving rise, or expected to give rise, to taxation not in accordance with the
convention, and the full names and addresses of the parties to which the MAP relates, including
the UK enterprises tax office and reference number.
SCOPE FOR GRANTING RELIEF
14.
The terms of the Article establishing MAP in UK tax treaties and the Arbitration
Convention circumscribe the competent authorities freedom of action. The Article provides no
guarantee of relief from double taxation via MAP, although in the future some UK tax treaties
will provide for arbitration. The Arbitration Convention (where it applies - see Arbitration
Stage below), of course also provides for arbitration. However, the competent authorities are
enjoined to consult each other and to endeavour to resolve each case with a view to the avoidance
of double taxation. In the UK, MAP has proved very effective in doing this in cases involving
transfer pricing adjustments.
15.
On considering the case presented to it, the UK competent authority may conclude that
the taxation of relevant transactions proposed or applied by a tax treaty partner is in accordance
with the tax treaty and may grant relief on a unilateral basis at this point. This might be the case
even if the treaty partner is unwilling to enter MAP or is unable to do so because it is unable to
derogate from a decision reached in its domestic courts. Similarly, the competent authority of the
tax treaty partner might decide to relieve unilaterally transfer pricing adjustments made by
HMRC.
16.
In respect of adjustments made by the UKs tax treaty partners there are issues on which
they and the UK hold different views. Some partners do not consider that the level of
capitalisation of a corporate borrower, as opposed to the rate of interest paid on its debt, is an
issue involving the arms length principle prescribed by the OECD and Arbitration Conventions.
Because it does not view thin capitalisation as a transfer pricing issue, the tax treaty partner may
be reluctant, or refuse, to enter MAP in respect of such adjustments. Conversely the UK takes the
view that thin capitalisation is an issue requiring application of the arms length principle in order
to achieve a correct transfer pricing result. To the extent therefore that the cost of funding in
question exceeds what the UK considers to be an arms length amount the UK is prepared to enter
MAP in respect of adjustments made by the tax treaty partner and will consider whether it is
appropriate to give relief unilaterally for any disallowance of interest in excess of an arms length
amount. One purpose of tax treaties is the elimination of fiscal evasion and in its considerations
the UK will take into account all circumstances surrounding the decision of the treaty partner to
make an adjustment, including issues such as the commercial purpose, or otherwise, of the
funding provided.
17.
If the UK considers that the adjustment does not accord with the provisions of the tax
treaty, for example because it does not accept that a transfer pricing adjustment complies with the
arms length principle, the UK competent authority will take up the matter with its counterpart in
the treaty partner state. If negotiations between the competent authorities provide adequate
evidence to satisfy the UK competent authority that an adjustment made by a tax treaty partner is
in accordance with the tax treaty, and was required in order to comply with the arms length
principle, there will normally be no difficulty in granting a corresponding adjustment. In many
cases, the competent authorities can establish that the primary adjustment was in an excessive
amount and agree a course whereby the primary adjustment is reduced and the remaining
adjustment is relieved in an amount that reflects an arms length result. If, however, the UK
remains dissatisfied, there is no obligation on it to grant relief and at the taxpayers request the
matter may progress to arbitration if the Arbitration Convention is applicable or if the relevant
treaty contains an arbitration article.
18.
Experience has shown that it is advantageous for taxpayers involved in transfer pricing
enquiries to present a case early to invoke MAP because early action by the competent authority
can sometimes help to ensure that unrelievable double taxation does not arise from the actions of
one fiscal authority. This might be the case, for example, where the UKs treaty partner is
adopting an inappropriate transfer pricing methodology during the course of an audit and the UK
is able to persuade it to use the most appropriate methodology. As noted above, the taxpayer is
not directly involved in the negotiations between the competent authorities but, as happens in the
UK, it may participate indirectly through discussions with the competent authority of the state of
residence/nationality. As is also stated above, the approach of the tax treaty partner in these
matters is not at the discretion of the UK.
19.
It is important to note that even though the competent authorities may begin discussions
before a transfer pricing enquiry is completed, MAP is not an alternative to the normal enquiry
process. MAP will seek to determine in principle how the double taxation of profits will be
relieved by the tax treaty partners once the quantum of profits has been established by the transfer
pricing enquiry. The competent authorities will not, however, conduct a transfer pricing enquiry
as part of the MAP and MAP will not suspend or replace an enquiry. Equally, presenting a case
for MAP should not of itself give rise to the opening of a transfer pricing enquiry, and it will not
remove any of the UKs protections surrounding the opening of such enquiries. It may, however,
be necessary for the UK to seek information from the taxpayer in order to determine whether a
transfer pricing adjustment made by a tax treaty partner conforms to the arms length principle.
Normally such information will exist as a result of the transfer pricing enquiry and/or be reflected
in the case presented for MAP, but clarification of fact and /or economic analysis may be required
as MAP negotiations develop.
20.
Where a case has been settled under the UKs judicial process before it is presented for
MAP, the UK competent authority would expect, on request, to take the matter up under MAP.
The UK considers that both a court and a tribunal form part of the judicial process.
21.
MAP does not, however, provide a parallel avenue to the domestic appeals process,
though early entry into MAP may be useful in helping a taxpayer determine whether the appeals
process needs to operate. The UK follows the approach adopted by most countries and described
in the Commentary on Article 25 at Paragraph 76. Under this approach a person cannot pursue
simultaneously the MAP and domestic legal remedies. Thus a case may be presented and
accepted for MAP while the domestic remedies are still available. In such cases, the UK
competent authority will generally require that the taxpayer agrees to the suspension of these
remedies or, if the taxpayer does not agree, will delay the MAP until these remedies are
exhausted. Where the adjustment giving rise to MAP has been made in the other state the UK
competent authority does recognise that whilst a taxpayer may be willing to suspend domestic
legal remedies, the other fiscal authority may be unwilling to do so. Similarly, the UK
competent authority may recognise that pursuit of domestic legal remedies in another state may
take a considerable amount of time. In such cases the UK competent authority may be willing to
continue the MAP while the domestic legal process continues, but of course cannot guarantee that
the other competent authority will be willing to do so.
22.
Where the MAP is first pursued and a mutual agreement has been reached, the taxpayer
and other persons directly affected are offered the possibility to reject the agreement and pursue
the domestic remedies that had been suspended. In such a case, the UK would consider that the
efforts of the competent authorities to resolve the case by MAP to have been exhausted.
TIME LIMITS
23.
In order to invoke MAP under a UK tax treaty it is necessary for a person to present a
case showing why taxation has arisen that is not in accordance with the terms of the treaty
(S124(1) TIOPA 2010, formerly S815AA(1) ICTA 1988). To invoke MAP under the Arbitration
Convention it is similarly necessary to present a case showing that the arms length transfer
pricing principles set out in Article 4 of that Convention have not been observed.
24.
Where MAP is invoked under one of the UKs tax treaties, such a case must be presented
before the expiration of:
the period of six years following the end of the chargeable period to which the case
relates; or
such longer period as may be specified in the tax treaty for claims after 27 July 2000.
See S125(3) TIOPA 2010, formerly S815AA(6) ICTA 1988.

25.
The time limit for invoking MAP will therefore depend upon the specific terms of the
particular UK tax treaty under which MAP is invoked. In older UK tax treaties the time limit
for presenting a case invoking MAP is not addressed, so that the domestic limit of six years
following the end of the chargeable period to which the case relates applies. More recent treaties
do address the issue. In every case, the relevant tax treaty should be consulted, but generally UK
tax treaties follow Article 25 of the OECD Convention. This provides that an enterprise must
present its case within three years of the first notification of the action which results or is likely
to result in double taxation (first notification). Because the first notification may occur after the
expiry of six years following the chargeable period to which the claim relates, the relevant tax
treaty article may thus extend the basic six year time limit.
26.
Where MAP is invoked under the Arbitration Convention, the time limit for presenting a
case is determined by Article 6(1) of the Arbitration Convention. This uses wording similar to
Article 25 of the OECD Convention and therefore also provides that a case must be presented
within three years of the first notification of the action which results or is likely to result in double
taxation.
27.
It should be noted that in the presentation of a case under UK tax treaties and the
Arbitration Convention the time limit is interpreted to the advantage of the taxpayer. That is, the
time limit of three years only commences once first notification has been given. It is not
necessary to await the first notification before presenting a case to invoke MAP.
28.
This is made clear in the Commentary on the OECD Convention which the UK follows
when interpreting its own tax treaties. In discussing Article 25, the Commentary states:
at Paragraph 14 It should be noted that the mutual agreement procedure can be

set in motion by a taxpayer without waiting until the taxation considered by him to
be not in accordance with the Convention has been charged against or notified to
him. To be able to set the procedure in motion, he must, and it is sufficient if he
does, establish that the actions of one or both of the Contracting States will result
in such taxation.
at Paragraph 21 The provision fixing the starting point of the three year time limit
as the date of the first notification of the action resulting in taxation not in
accordance with the provision of the Convention should be interpreted in the way
most favourable to the taxpayer Since a taxpayer has the right to present a case as
soon as the taxpayer considers that taxation will result in taxation not in accordance
with the provisions of the Convention, whilst the three-year limit only begins when
that result has materialised, there will be cases where the taxpayer will have the right
to initiate the mutual agreement procedure before the three year time limit begins ...
at Paragraph 23 There may, however, be cases where there is no notice of a liability

or the like. In such cases, the relevant time of notification would be the time when
the taxpayer would, in the normal course of events, be regarded as having been made
aware of the taxation that is in fact not in accordance with the Convention.
FIRST NOTIFICATION
29.
Clearly the UK cannot leave itself exposed indefinitely to requests to enter MAP. For
the purposes of both a UK tax treaty or the Arbitration Convention, HMRC will therefore regard
the first notification as being the finalisation of a transfer pricing enquiry which gives rise to
double taxation. This stage will be marked by the determination of the quantum of the additional
profits arising from a transfer pricing adjustment such as the issue of a closure notice, or the
amendment of a return during an enquiry (Paragraphs 30/31 Schedule 18 FA1998). HMRC
considers that at this point, the taxpayer must be aware of the possibility that double taxation may
arise and should therefore present a case to protect its position.
30.
Because HMRC will admit a case to MAP prior to first notification, it may be that at the
time the case is presented it is not certain that a transfer pricing adjustment will be made or that
double taxation will arise. In particular, it may not be possible to gauge the quantum of profits
that might be subject to double taxation. In such cases, HMRC may well defer MAP negotiations
with the competent authority of the treaty partner until it becomes clear that such negotiations are
likely to prove meaningful and effective in avoiding double taxation. Nevertheless, in cases of
doubt, HMRC will contact the other state or states involved to explain why it does not consider it
appropriate to commence MAP negotiations at that point and to seek the agreement of the other
state as to the point at which negotiations should commence.
31.
However, it should be noted that even if the UK is prepared to commence MAP
negotiations, its treaty partner may not be and the UK has no power to compel it to enter
negotiations.
OECD GUIDANCE
32.
In determining whether taxation of relevant transactions will satisfy the arms length
principle and thus result in taxation in accordance with the provisions of a tax treaty, the UK will
be guided by the OECD Transfer Pricing Guidelines, the OECD Report on the Attribution of
Profits to Permanent Establishments and the Commentary on the OECD Convention. These
documents represent the consensus view of OECD Member Countries on the application of the
arms length principle and are also expected to be influential outside OECD Member Countries.
ARBITRATION STAGE
33.
The Arbitration Convention obviously provides for arbitration in certain circumstances,
but the OECD Convention and Commentary thereon also contemplates the inclusion of
arbitration provisions within tax treaties. The UK is now beginning to incorporate provision for
arbitration in some of its tax treaties.
34.
It will be necessary in every case to have regard to the relevant tax treaty, but generally
for treaties with an arbitration provision, where a person has presented a case and the competent
authorities are unable to reach an agreement to resolve that case within two years from the
presentation, the person can request that any unresolved issues be submitted to arbitration.
35.
The relevant provision in the OECD Convention precludes the availability of arbitration
where a decision on these issues has already been rendered by a court or administrative tribunal
of either treaty partner state. However, where possible the UK will seek when agreeing treaties
to have terms more favourable to the taxpayer included in the treaty.
36.
Unless a person directly affected by the case does not accept the mutual agreement that
implements the arbitration decision, it shall be binding and shall be implemented notwithstanding
any time limit in the domestic law of either treaty partner state.
37.
The competent authorities will decide the mode of application of the arbitration
provision. This will include matters such as the form of the request for arbitration, the
information that must have been provided to both competent authorities when the case for MAP
was presented, terms of reference and the selection of arbitrators.
38.
For MAP cases within the Arbitration Convention, Article 7(1) provides that if the
competent authorities fail to reach an agreement that eliminates double taxation within two years
from the date on which the case was first submitted they shall set up an advisory commission to
deliver its opinion on the matter. Article 7(4) provides that the competent authorities may, with
the agreement of the associated enterprises concerned, waive the two year time limit. Where the
UK competent authority considers that continuation of the MAP is likely to result in earlier
resolution of a case than referral to an advisory commission, it will assume the tacit agreement of
the other competent authorities and the associated enterprises to waiving of the time limit. MAP
will therefore proceed accordingly.
39.
The associated enterprises, of course, retain the right to invoke the two year time limit
when it expires. If the enterprises, or the other competent authority, notify the UK competent
authority of their wish to invoke the time limit, the UK will cooperate fully in establishing an
advisory commission. Similarly, when the UK competent authority does not consider that MAP
will result in earlier resolution of the case, it will ask the other competent authority to cooperate
in setting up an advisory commission.
40.
The two-year time limit before a case proceeds to the second stage may also be extended
where the case is still under appeal through domestic procedures in one of the treaty partner
states.
41.
The submission of a case to the advisory commission does not prevent a Contracting
State from initiating or continuing judicial proceedings or proceedings for administrative
penalties in relation to the same matters (Article 7(2)).
42.
Article 7(3) provides that, where the domestic law of a Contracting State does not permit
the competent authorities of that State to derogate from the decisions of their judicial bodies, the
second stage will not commence until the time provided for appeal has expired without an appeal
having been made, or the taxpayer has withdrawn the appeal or settled it by agreement. This
might effectively present the taxpayer with a choice between pursuit under the domestic appeals
process or arbitration. Although the UK has previously decided to apply Article 7(3) it no longer
sees the need to do so. For the purposes of the Arbitration Convention the UK will be prepared
to consider reference of a case to an advisory commission notwithstanding a prior decision within
the UK judicial process.
43.
The UK will adopt a similar approach where arbitration is provided for under its treaties
unless the relevant treaty prevents it.
44.
The advisory commission, constituted in accordance with Article 9 of the Arbitration
Convention and before which the taxpayer may appear (Article 10(2)), must deliver within six
months a decision which will eliminate the double taxation (Article 11). The competent
authorities must then act within six months in accordance with the decision, unless they agree to
eliminate the double taxation by some other means (Article 12).
45.
Article 8 of the Arbitration Convention provides that the competent authority of a
Contracting State is not obliged to initiate either of the two stages, MAP or advisory commission,
where one of the enterprises involved is liable to a serious penalty. The UK has declared that it
will interpret the term serious penalty as comprising criminal sanctions and administrative
sanctions in respect of the fraudulent or negligent delivery of incorrect accounts, claims or returns
for tax purposes.
46.
The UKs domestic provisions on penalties for inaccuracies were revised in Finance Act
2007, replacing the terms fraudulent or negligent with deliberate or careless. In the light of
its experience since 1990 the UK will, in practice, only exercise its discretion under Article 8 in
cases involving the imposition of penalties for deliberate inaccuracy. In considering whether to
proceed under the Arbitration Convention the UK will take into account the facts and
circumstances which have led to the taxpayer becoming liable to such a sanction. There is no
provision equivalent to Article 8 of the Arbitration Convention affecting MAP or arbitration in
the OECD Model on which the UK seeks to base its tax treaties.
47.
The UK and other EU Member States subscribe to the Code of Conduct for the effective
administration of the Arbitration Convention (90/436/EEC and revised by 2009/C 322/01). The
Code provides that the two years period from the presentation of the taxpayers case to the time at
which arbitration can be invoked is started when the competent authorities receive certain
information from the taxpayer. This includes identification of the enterprise concerned, details of
the relevant facts and circumstances of the case, identification of the relevant tax periods, copies
of any assessments, tax audit reports or similar giving rise to double taxation, details of any
appeals and litigation initiated by the enterprise or other parties to the relevant transactions, an
explanation of why the principles of the Convention are considered not to have been observed.
The enterprise must also undertake to respond completely and quickly to requests by the
competent authority for further information.
48.
Although the Arbitration Convention is regularly invoked, it has generally been possible
for States to arrive at agreement under MAP without proceeding to the secondary stage of the
advisory commission. Enquiries about the provisions, or about presenting a case, should be
addressed to the people named at the end of this statement.
METHODS OF GIVING RELIEF
49.
Where a solution or mutual agreement is reached under the terms of a UK tax treaty, it
will be given effect notwithstanding anything in any enactment in accordance with S124(2)
TIOPA 2010, formerly S815AA(2) ICTA 1988. Where normal time limits may have expired
before a solution or mutual agreement is reached, a claim for relief consequential to that solution
or mutual agreement, for example to losses, group relief, capital allowances etc., must be made
within twelve months following the notification of the solution or mutual agreement (S124(4)
TIOPA 2010, formerly S815AA(3) ICTA 1988).
50.
Where a claim for relief is made in pursuance of an agreement or opinion reached under
the Arbitration Convention, normal time limits for claiming relief under the Taxes Acts do not
apply so there is no time limit for claiming the appropriate relief (S127(5) TIOPA 2010, formerly
S815B(3) ICTA 1988).
51.
The manner in which relief is granted by the UK depends on the facts and circumstances
of the particular case. Relief may be granted either by deduction against UK profits or by tax
credit. Following agreement between the competent authorities, the UK taxpayer will usually be
invited to submit revised computations reflecting the agreed relief.
52.
The UK does not accept that it is permissible for a taxpayer to make, unilaterally, an
adjustment through its accounts and return to obtain corresponding relief for an adjustment which
reduces its UK tax liability either when self-assessing or in response to an adjustment imposed by
another jurisdiction. The only avenue to relief is presentation of a case invoking MAP.
SECONDARY ADJUSTMENTS
53.
Secondary adjustments are discussed in Chapter IV of the Guidelines. Complexities
sometimes arise where an overseas jurisdiction makes a secondary adjustment following a
transfer pricing settlement. Secondary adjustments may be defined as adjustments that are
intended to restore the financial situation of the associated enterprises which have entered into the
transactions giving rise to the transfer pricing adjustment to that which would have existed had
the transactions been conducted on arms length terms. Such secondary adjustments recognise
that while the primary transfer pricing adjustment is to the taxable profits of the associated
enterprises, it does not rectify the situation where one enterprise actually retains funds that it
would not have held had the transactions in question been conducted on arms length terms. A
secondary adjustment seeks to rectify this, most commonly by assuming that a constructive
dividend, constructive equity contribution or constructive interest-bearing loan has been made in
an amount equal to the transfer pricing adjustment. For example, a jurisdiction making a primary
adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the
hands of the foreign parent as having been transferred as a dividend, in which case it may
consider that withholding tax should be levied.
54.
A secondary adjustment, however, may itself give rise to double taxation unless a
corresponding credit or some other form of relief is provided by the other country for the
additional tax liability resulting from the secondary adjustment. The UK will consider the merits
of claims to deduct interest relating to the deeming of a constructive loan by a treaty partner
following a transfer pricing adjustment. The issue would, however, be subject to the arms length
principle and would be considered in the light of any relevant provisions relating to payments of
interests. Where a treaty partner applies a secondary adjustment by deeming a distribution to
have been made, the UK neither taxes the deemed distribution nor grants relief for tax suffered on
the distribution in the other jurisdiction.
ADVANCE PRICING AGREEMENTS
55.
An Advance Pricing Agreement (APA) is a written agreement that determines, for a
fixed period, a method for resolving transfer pricing issues in advance of a return being made.
Guidance on APAs may be found at SP2/10 Advance Pricing Agreements issued on
17 December 2010.
FURTHER INFORMATION
Requests for further information should be addressed to:
General cases
Douglas Jones
HMRC, Business International
3rd Floor,
100 Parliament Street,
London SW1A 2BQ
douglas.jones@hmrc.gsi.gov.uk
Telephone 00 44 (0)207 147 2686
Financial cases
Richard Clayton
HMRC, Business International
3rd Floor,
100 Parliament Street,
London SW1A 2BQ
rick.clayton@hmrc.gsi.gov.uk
Telephone 00 44 (0)207 147 2738
Oil & Gas cases
Susan New
HMRC
Large Business Service Oil & Gas Sector
22 Kingsway,
London WC2B 6NR
susan.new@hmrc.gsi.gov.uk
Telephone 00 44 (0)207 438 7570
Issues regarding individuals
Ed Stuart
HMRC
CAR Personal Tax International Advisory
Ferrers House,
Castle Meadow Road,
Nottingham,
NG2 1BB
ed.stuart@hmrc.gsi.gov.uk
Telephone 00 44 (0)115 974 2563
SP1/12
General
1.
This Statement of Practice replaces SP 04/07, which introduced the practice of providing
Advance Thin Capitalisation Agreements (ATCAs) under the Advance Pricing Agreement
legislation. It updates the legislative references, largely to the Taxation (International & Other
Provisions) Act (TIOPA) 2010, and reflects HMRCs current practice.
2.
The practice is intended to determine in advance the transfer pricing of financial
transactions within Part 4 of TIOPA 2010. The legal basis for ATCAs is provided by the
legislation at S218-230 TIOPA 2010 (formerly at S85-87 Finance Act 1999), which provides for
Advance Pricing Agreements (APAs) in relation to transfer pricing more broadly. Detailed
guidance on interpretation and practice is in HMRCs International Manual (INTM), available
online at http://www.hmrc.gov.uk/manuals/intmanual/index.htm
3.
The ATCA process is initiated by the business, in accordance with S223 TIOPA 2010, as
an application for clarification by agreement of the effect of applying the arms length principle
to the financial provisions between the business and any lender.
4.
Thin capitalisation is a complex area of transfer pricing. Because transfer pricing is
particularly fact-sensitive, it is helpful to be able to discuss the issues as close to real time as
possible.
Confidentiality
5.
Information supplied by the business in relation to an ATCA request will be kept
confidential in accordance with Section 18 of the Commissioners for Revenue and Customs Act
2005. However, such information will contribute to the pool of information held by HMRC about
that business and no undertaking can be given that it will be taken into account only in relation to
the ATCA.
Scope of ATCAs
6.
Agreements under this Statement of Practice will be restricted to matters within
S218(2)(d) TIOPA 2010: that is, the tax treatment of any provision made or imposed between the
taxpayer and an associate. As this Statement of Practice relates to thin capitalisation the
provisions involved will be financing provisions.
7.
An ATCA covers the transfer pricing treatment of a particular borrower, or may extend to
other issues in appropriate cases, such as interest imputation and the taxation of finance and
treasury companies, subject to the usual criteria such as risk and complexity. There are currently
no selection criteria for ATCA applications and none are planned. Smaller cases are more likely
to be accepted where the information is comprehensive, clearly presented and accompanied by a
draft agreement. Companies submitting incomplete applications may be asked to resubmit.
8.
Funding arrangements suitable for ATCAs include, but are not restricted to, intra-group
loans, quoted Eurobonds, and cases of indirect participation (acting together).
9.
ATCAs will normally be for future (and possibly current) periods, depending on the
timing of the application, but may also extend to periods which have ended, if the facts and
circumstances are sufficiently similar. S224 TIOPA 2010 allows the agreement to have effect for
periods which have ended before the agreement is made. Self-assessment returns may be
amended and enquiries into earlier years resolved on the basis of an agreement. HMRC will not
apply hindsight in doing so, but will consider the similarity of the circumstances prevailing
during these earlier periods.
Applications for an Advance Thin Capitalisation Agreement
10.
An ATCA may be requested by a business which is, or will be, undertaking provisions of
a financial nature within the meaning of Ss147(1) and 152(1) of TIOPA 2010, as extended by
Ss158-162. Application for an ATCA is at the discretion of the business, though there may be
circumstances where HMRC encourages businesses to apply, for example during an enquiry.
11.
The process is designed to help resolve financial transfer pricing issues which have a
significant commercial impact on an enterprises results, where the issues would be unlikely to be
regarded as low risk by HMRC, or where the arms length provision is a matter of doubt.
Making the application
12.
An approach may be made to the Customer Relationship Manager (CRM) or Customer
Contact (CC) to discuss making an application. The application when made must clearly include
a request for an agreement under S218 TIOPA 2010, together with the applicants proposed
treatment of the provisions in question. It will also need to include a diagram of the group
structure for the time at which the provision occurred, background material providing a working
knowledge of the business of the company or group under consideration, and details of the
finance in question (see for guidance the chapter starting at INTM5750000).
13.
The application must also have due regard to the requirements of S223, which states,
regarding, an application by a person (A), that:
3)
It must set out As understanding of what would in As case be the effect, in the
absence of any agreement, of the provisions in relation to which clarification is
sought.
4)
It must set out the respects in which it appears to A that clarification is required
in relation to those provisions.
5)
It must set out how A proposes that matters should be clarified in a manner
consistent with the understanding mentioned in subsection (3).
14.
Applications may be made before transactions are carried out, but HMRC will only enter
discussions for an ATCA if the terms of the proposed transactions have been finalised, such that
the steps involved are clear and the debt has been quantified and priced. HMRC will suspend or
cease discussions if the plans turn out to be tentative in any significant respect.
15.
Emailed applications and documents in electronic form are welcome: however, for
practical reasons, where there is extensive supplementary documentation it may be better for this
to be provided once the identity of the caseworker is known.
Term
16.
HMRC regards five years as the maximum period for which it is reasonable to assume
that the method agreed for dealing with the relevant issues will remain appropriate, so ATCAs
will typically be agreed for between three and five years, depending on the circumstances. If
funding renewal is imminent at the end of that time, and the ATCA has proved durable, a shortterm ATCA may at that stage be available on the same or similar terms without the need for the
full process, to enable the applicant to have an HMRC agreement coterminous with the actual
funding timetable.
Using the Model ATCA
17.
HMRCs purpose in making such a model available is to try to ensure greater consistency
between agreements and to shorten the period of time it takes to reach agreement.
18.
HMRC has updated the model ATCA, which provides a possible template for agreements
under this Statement of Practice. The model presents a fairly straightforward outline of commonly
used criteria and definitions, together with examples of the sort of terms which HMRC is likely to
find acceptable. The inclusion of a complete draft ATCA with the application is likely to help
progress and resolution of the discussion process. The Model is attached as an Annex 1 to this
document, together with a Commentary and will be incorporated into the International Manual in
due course.
19.
It is recognised that the model will not be appropriate for all applications, but it should
provide a useful framework for adapting to the particular needs of the applicant.
Progressing the application
20.
HMRC will endeavour to respond to the initial contact within 28 working days.
21.
Unless the application is acceptable as proposed, or is subject to only minor adjustments,
meetings between HMRC and the applicant will inevitably play an important part in the ATCA
process, with initial contact probably by phone. However it is important that HMRC has an
opportunity to consider a well-prepared briefing in the form of the written application before a
meeting is arranged. HMRC will seek to agree a rolling action plan and update it regularly.
HMRC will then consider the application in accordance with existing guidance (see INTM542000
onwards and INTM570000 onwards).
Agreement
22.
In accordance with S218 TIOPA 2010, an ATCA between the business and HMRC
represents a binding undertaking on the parties that the treatment of the transfer pricing issues
covered by the agreement will for a specified period be determined in accordance with the
agreement.
23.
All ATCAs will include specific reporting obligations, including a requirement that the
applicant demonstrates whether it has satisfied all covenants and other conditions, and if not,
what action it has taken to rectify the position in accordance with the agreement. This report will
normally be included with the tax computations for the period. The wording of any reporting
requirement should be incorporated into the ATCA, in compliance with S228 TIOPA 2010. Best
practice suggests including as an appendix to the agreement a template of the basis of any
calculations which are to be included in the report.
24.
However, an ATCA shall cease to have effect if its terms are not observed and the
provisions leading to revocation, nullification, revision or mutual agreement are triggered.
25.
In form, the agreement between HMRC and the business will be based on the approach
described at INTM582010 and will therefore include terms and conditions which may be familiar
from thin capitalisation enquiry work. Comments below about interaction with other legislation
and clearance procedures should be noted. The agreement will require a declaration under S218
that it has been made for the purposes of that section.
26.
The ATCA should where appropriate include wording to provide guidance and allow
flexibility for potential revisions, for example where there are issues which might merit the option
of a periodic review, without necessarily interfering with the continuation of the agreement. This
would probably only arise if there was a significant but manageable area of uncertainty for the
future, and has limited application.
Withdrawing from the ATCA process
27.
HMRC may withdraw from the ATCA process if the business is not co-operating in
providing the information necessary to consider the application properly, or where the proposals
are too tentative (as described in para 14). In cases where agreement cannot be reached with the
business, HMRC will issue a formal statement recording the reasons. HMRC does not have any
obligation to continue discussion beyond the point at which it has determined that agreement
cannot be reached. Any withdrawal from the ATCA process will be monitored centrally by
CTIAA Business International.
28.
A business may withdraw from the ATCA application at any time before final agreement
is reached, but it would be helpful if HMRC was informed of the decision.
Interaction with the Obligation to Deduct Withholding Tax
29.
ATCA applications are very often received from UK companies borrowing from overseas
lenders. This means that while the ATCA application will be made by a UK resident borrower,
any related application for clearance for interest to be paid at a rate in accordance with a double
taxation agreement will be made by the non-UK resident interest recipient. The two processes are
entirely distinct. An ATCA does not remove the withholding obligation imposed by S874 Income
Tax Act 2007 on the payer of UK source interest to account for income tax on the payments. The
payer is obliged to withhold income tax at the basic rate until advised by HMRC to do otherwise.
HMRC will only issue such a notice following a valid application by the overseas lender under
the relevant DTA.
30.
Guidance on applications for treaty clearance, including the Treaty Passport Scheme
introduced in 2010, may be found on the HMRC website - see
http://www.hmrc.gov.uk/cnr/app_dtt.htm.
Interaction with other legislation and clearance procedures

31.
An ATCA will only cover financing provisions within the scope of S218(2) TIOPA
2010, and the only part of that subsection relevant to thin capitalisation is 2(e), which relates to
the treatment for tax purposes of any provision made or imposed, whether before or after the
date of the agreement, as between A and any associate. The definition of associate in S219 is
the same as the participation condition for transfer pricing in S148. This means that an ATCA
can only apply to the transfer pricing of debt. All other provisions in the Taxes Acts will continue
to apply. For example, compliance with the terms of an ATCA would not prevent restriction of
interest under the unallowable purpose rule at Sections 441-442 CTA 2009 (formerly Para 13 Sch
9 FA 1996). Details of other clearance procedures provided by HMRC can be found at
http://www.hmrc.gov.uk/cap/ .
Nullifying and Revoking ATCAs
32.
Where HMRC believes that the business entering into the agreement has fraudulently or
negligently provided false or misleading information in connection with the making of the
agreement or otherwise in the preparation of the agreement, S226 TIOPA 2010 gives HMRC the
power to annul the ATCA i.e. to treat it as if it had never been made. When considering using
this power HMRC will take into account the extent to which the terms of the agreement would
have been different in the absence of the misrepresentation. S227 includes details of the penalty
for misrepresentation.
33.
In accordance with S221 TIOPA 2010, a pre-return agreement is only valid as long as its
terms are met. Therefore HMRC may revoke an ATCA if the business does not comply with its
terms and conditions. The legislation refers to a failure in relation to a significant provision of
the agreement. A provision is significant if it is a condition of the agreement having effect. This
should be clear from the terms of the actual agreement in question. In practice, ATCAs frequently
have alternative courses of action to revocation, including ways of rectifying a breach. In the
event of nullification or revocation, HMRC would be obliged to reconsider any treaty clearance
provided in respect of related financing provisions.
Penalties
34.
Because an ATCA is an agreement between HMRC and a business which decides how
certain issues will be determined for the purposes of the Taxes Acts, a return made on any other
basis in relation to those matters during the currency of an ATCA will constitute an incorrect
return, with possible penalty consequences.
35.
A penalty not exceeding 10,000 may be imposed where false or misleading information
is supplied fraudulently or negligently in connection with an application for, or the monitoring of
an ATCA, and the agreement may be nullified (see S226 and S227 TIOPA 2010).
Appeals
36.
In accordance with normal appeal procedures, the business has the right to appeal against
the amount of any additions to profits that arise following the revocation or cancellation of an
ATCA.
37.
Where there is a mutual agreement made under and for the purposes of any double
taxation agreements which is not consistent with the terms of the ATCA, it shall be the duty of
HMRC to modify the ATCA to give effect to the mutual agreement reached with a treaty partner,
in accord with S229 TIOPA 2010.
Contacts within HMRC
38.
CTIAA Business International has oversight of the ATCA process.
39.
The first contact for information about advance thin capitalisation agreements under this
Statement of Practice should be the CRM of the business concerned or its CC, and they will
engage the assistance of a transfer pricing specialist. If there is no known CRM or CC, the
application may be sent to the local Transfer Pricing team leader or, in cases where it is unclear
where the company will be dealt with, to CTIAA Business International. For assistance in
locating the appropriate recipient, contact Ashley Culpin (ashley.culpin@hmrc.gsi.gov.uk) at
Business International.
An email postbox will be made available for submission of Local Compliance cases.
40.
CTIAA Business Internationals involvement in issues relating to individual ATCAs is
for the most part in a supporting or advisory role. It will retain oversight of the process, and direct
policy in relation to ATCA work.
For assistance on issues relating to policy matters, and comments on the process generally,
contact Miles Nelson (milesc.nelson@hmrc.gsi.gov.uk) on intra-group funding cases and Tony
Clark (anthony.x.clark@hmrc.gsi.gov.uk) on private equity buy outs.
Annex 1 Model ATCA

Business Name
Reference
Advance Thin Capitalisation Agreement under section 218 TIOPA 2010
Section 1 Preamble
This is an agreement made between the parties identified below for the purposes of section 218
TIOPA 2010 in accordance with Statement of Practice 01/12. The agreement determines the tax
treatment of the interest arising on the financial provisions identified below for the purposes of
Chapter 1 Part 4 of TIOPA 2010.
In accordance with section 229 TIOPA 2010, this agreement may be modified as necessary to
enable effect to be given to a mutual agreement made under and for the purposes of any double
taxation arrangements.
Section 2 - Parties
This agreement is made between [name of business or businesses] and HM Revenue and
Customs.
Section 3 Financial provisions covered by the agreement
[details of financial provisions]
Section 4 Term of the Agreement
This agreement will apply to chargeable periods of the [business or businesses] ending between
[xxx] and [xxx].
Section 5 Definition of terms used in financial conditions
Unless otherwise stated the terms defined below are to be measured by reference to the
consolidated results of the UK group. Where the UK group does not produce consolidated
financial statements, an informal statement of consolidated results will be provided.
Debt means any financial indebtedness of the group calculated on a consolidated basis.
Financial indebtedness includes any indebtedness in relation to;
money borrowed (including any overdraft);
any debenture, bond, note or loan stock;
any finance lease, hire purchase, credit sale or conditional purchase agreement to
the extent that it is treated as debt on the balance sheet;
the capital element of any amount raised under any other transaction having, as a
primary and not as an incidental effect, the commercial effect of borrowing;
but excludes trade creditors unless their term is of sufficient length to be interest-bearing.
Net Debt means Debt as defined above, less cash and cash equivalents. Cash may be
reduced by an agreed amount set aside as working capital.
Total Interest means interest and amounts in the nature of interest (such as discounts and
the interest element on items included in Debt above) of [the UK Group], whether paid or
accrued.
Net Interest means Total Interest less interest receivable and amounts in the nature of
interest receivable by [the UK Group].
EBIT means the consolidated earnings of the UK Group before the deduction of interest
and tax and exceptional items disclosed as such in the in the financial statements.
EBITA means the earnings of [the UK Group] before the deduction of interest, tax,
amortisation and exceptional items disclosed as such in the financial statements.
EBITDA means the earnings of [the UK Group] before the deduction of interest, tax,
depreciation, amortisation and exceptional items disclosed as such in the financial
statements.
Equity includes called-up share capital together with any associated share premium,
reserves (including revaluation and capital redemption reserve reserves), retained profits
and any amounts acting as equity such as interest-free loans and capital contributions.
Loan to Value (LTV) means the ratio of outstanding debt (as defined above) to the
value of the assets on which it is secured.
UK Group is defined as [name of borrower] and all its subsidiaries including any entity
that is treated as a subsidiary under applicable accounting principles.
Section 6 Financial conditions
Interest Cover Ratio -The [UK Group] agrees to maintain an interest cover ratio:
[e.g. EBITDA/EBITA/EBIT to Total Interest/Net Interest] for each chargeable period during the
Term of the agreement of at least the ratios set out in Appendix 1.
Gearing Ratio
The [UK Group] agrees to maintain a gearing ratio
[e.g. debt to EBITDA or debt to equity or LTV]
for each accounting period during the Term of the agreement not exceeding the ratios set out in
Appendix 2.
Section 7 Monitoring of financial conditions
For the period of the agreement, the corporation tax computations of [the borrower] will include a
schedule demonstrating whether the Group has complied with the financial benchmarks and how
any consequences have been dealt with; any other affected companies will reflect resultant
adjustments in their computations.
The schedule will also detail any adjustment required to the [UK Groups] consolidated accounts
to arrive at the defined terms (e.g. applying a Frozen GAAP approach subsequent to the
adoption of International Financial Reporting Standards).
Section 8 Consequences of meeting the financial conditions
If both the financial conditions above are satisfied the Total Interest will not be subject to
disallowance under Chapter 1 Part 4 TIOPA 2010.
This agreement does not relieve any party to it of an obligation to deduct income tax from
payments within section 874 ITA 2007, nor does it prevent the application of any other provision
of the Taxes Acts.
Section 9 Consequences of not meeting the financial conditions

If the Interest Cover Ratio is lower than the ratio set out in appendix 1 or if the Gearing Ratio is
higher than the ratio set out in appendix 2 then a financial condition has not been met.
Where a financial condition has not been met then a failure arises under the terms of this
agreement
A failure under this agreement should be remedied by a disallowance of interest in the chargeable
period in which the failure occurred. The disallowance will be calculated in accordance with the
methods set out in either appendix 1 or 2, depending on which condition has not been met.
Where neither of the financial conditions are met, any disallowance applied to correct the failure
will be the larger of the two calculated according to the method laid out in the appendices.
Section 10 Circumstances in which this Agreement may be revised
Where the parties agree to a revision

If the agreement is no longer considered appropriate to the facts and
circumstances of the company, either the company or HMRC may seek to
renegotiate the agreement for future periods.
Section 11 Circumstances where the application of section 9 above may be modified

[The list below is illustrative, but the changes must be substantial. The reader is
referred to the International Manual at INTM582070.]
Where the sole or principal reason for a company failing to meet a condition of
the agreement is a wholly exceptional event not anticipated by the [UK Group] at
the time the agreement was entered into, such as:
(a)
a catastrophic or unusual disruptive event, which may be external or

internal to the group, temporarily affecting the business of the [UK
Group], such as a prolonged impairment to its income-producing
capacity; or
(b)
a large acquisition or disposal; or a significant restructuring of the

funding arrangements in relation to which the ATCA was agreed, or
(c)
an unexpected event such as a one-off accountancy provision that, while

it has significant impact on the profit & loss account, does not affect the
ability of the company to service the debt
then the [UK Group] will not be in breach, to the extent that the failure is due to
the exceptional event.
Signatures in agreement
For [The Group]
Name ..
Signature
Date ..
Official Position ..
For HMRC
Name: ....................
Signature ..
Date ..
Official Position: Transfer Pricing Specialist
Commentary on Model ATCA

Section 1
1. This section establishes that this is an agreement under section 218 TIOPA 2010. In many
cases the purpose of the agreement will be simply to determine the transfer pricing treatment
of a particular loan, subject to modification under any mutual agreement procedure.
2. Where the situation is more complex it may be more appropriate to refer to an appendix
containing the relevant factual information.
Section 2
3. For illustrative purposes the model ATCA assumes that the applicant is a group of companies.
The parties to the agreement will typically include the UK holding company and those of its
subsidiaries which may be claiming a deduction for the interest arising on the financial
provisions covered by the agreement.
4. In some situations the applicants may not be regarded as a group for the purposes of other parts
of the Taxes Acts.
Section 3
5. The financial provisions covered by the agreement will need to be identified, but again this
might be by reference to a factual appendix.
Section 4
6. The ATCA must specify the period it covers. This will typically be between three and five
years.
Section 5
7. The definitions included here are intended to cover the majority of situations. The intention is
that the applicant should choose the relevant financial conditions and use the standard
definitions provided. However these may need to be amended, for example to specify the
treatment of payments made to make good a pension deficit.
8. In some cases it may be appropriate to define the reference enterprise using a list of businesses
in an appendix.
Section 6
9. HMRCs view is that ATCAs should include financial conditions monitoring both the level of
debt and the capacity of the enterprise to service its debt obligations.
Section 7
10. It may be appropriate to include specific conditions for monitoring the agreement. For
example section 7 could commit the applicant to providing details of any adjustments made
to arrive at the defined terms following the adoption of International Financial Reporting
Standard similar to the Frozen GAAP approach in lending agreements.
Section 8
11. Where both the financial conditions are satisfied the UK group has certainty that Total
Interest costs will not be subject to Part 4 TIOPA 2010.
Section 9
12. Although the UK legislation designed to deal with thin capitalisation is based upon the
position of an independent, third-party lender, it is impossible for HM Revenue & Customs to
put itself precisely in the position of such a lender when a breach takes place. In accordance
with INTM583010, an ATCA is therefore designed to give both HMRC and the other party to
the agreement a degree of certainty.
Section 10
13. It is impossible to give an exhaustive list of circumstances that should be ignored, but in
general they include the sort of things that might be expected to invoke some sympathy in a
third-party lender, such as a catastrophic or unusual event.
Appendix 1
Accounting Period Ended
EBITDA/EBIT/EBITA: Total/Net Interest

ratio
X:1
X:1
X:1
X:1
X:1
X:1
Calculation of Disallowance
The disallowance will be calculated by reference to the ratio shown above for the relevant period
(the required ratio) and the interest cover ratio calculated using the actual results of the UK
Group (the actual ratio).
The allowable interest can be calculated using the following formula:
Actual ratio
Required ratio
Interest
Illustrative calculation for period ending 31 December 2011

Assume that the interest charge is z. This gives an actual ratio of EBITDA, EBITA or EBIT to
interest of X : 1 which is lower than the required ratio of Y : 1. Applying the above formula gives
the following result:
X
Y
z = m
This would result in a allowable interest of m and the ratio of EBITDA, EBITA or EBIT to
allowable interest is reduces to Y : 1, the required ratio.
Short Accounting Period

For short accounting periods, see Appendix 3
Appendix 2
Accounting Period Ended
Debt : EBITDA / LTV ratio

Y:1
Y:1
Y:1
Y:1
Y:1
Y:1
Calculation of Disallowance
The disallowance will be calculated by reference to the ratio shown above for the relevant period
(the required ratio) and the gearing ratio calculated using the actual results of the UK Group
(the actual ratio).
When considering the ratio of Debt to EBITDA or the LTV ratio in measuring gearing, the
allowable interest can be derived from the following formula which calculates the amount of
allowable debt:
Required ratio (expressed as a whole number)
Actual ratio (expressed as a whole number)
Debt

Assume that debts total d. This gives an actual ratio of Debt to EBITDA or LTV ratio of Y : 1.
This exceeds the required ratio of X : 1. Applying the above formula gives the following result:
Y
X
d = m
This identifies m of arms length debt and at this level of debt the ratio of debt to either
EBITDA or LTV reduces to X : 1, the required ratio.
When considering the ratio of Debt (d) to Equity (E) in measuring gearing, the allowable interest
can be derived from the following formula which calculates the amount of allowable debt:
Debt + Equity
Debt + Equity_____________________________
[Required ratio (expressed as a whole number) +1]

Assume that debts total d. This gives an actual ratio of Debt to Equity of Y : 1. This exceeds the
required ratio of X : 1. Applying the above formula gives the following result:
d + E - d + E = n
(X+1)
This identifies n of arms length debt and at this level of debt the ratio of debt to Equity reduces
to X : 1, the required ratio.

For short accounting periods, see Appendix 3
Appendix 3
The X accounting period runs from X to X. The calculation of the gearing ratio will need to take
account of this. The EBITDA for this should be increased pro rata on a monthly or daily basis to
reflect a full years profits.
The interest cover calculation does not need to be similarly adjusted as the accrued interest and
EBITDA will both reflect the short period.
SP2/12
INTRODUCTION
This Statement of Practice (SP) replaces an earlier Statement on Inward Investment and
Corporate Reconstruction (SP2/07), published in 2007. It explains the support that HMRC will
give to non resident businesses who are thinking about investing in the UK.
PROVIDING CLARITY ABOUT UK TAX
1.
HMRC can help businesses based outside the UK by providing certainty about the tax
implications of a significant investment in the UK. Please note that we will not comment on the
structure of the investment.
2.
Inward Investment Support (IIS) is a service offered by HMRC to businesses which are
not resident in the UK and have no existing relationship with HMRC. IIS aims to give clarity and
certainty by providing written confirmation of how HMRC will apply UK tax law to specific
transactions.
3.
HMRC will view an investment as significant if the amount to be invested is intended
to be 30million or more, but it will also assist on smaller investments which it agrees may be of
importance to the national or regional economy.
HOW IIS CAN HELP

4.
IIS will provide written confirmation of how HMRC will apply UK tax law to specific
transactions or events. Businesses should supply as much information as possible about the
proposed investment, including:
The name, address and country of residence of the businesses
The nature and size of the projected transaction(s), the tax(es) involved and the chronology or
proposed chronology of the transaction(s)
The commercial background describing the reasons why the business is considering the
transaction
Any specific legal points which are known or believed to arise. The points at issue should be
outlined. If written legal advice is available, supplying a copy of it may enable HMRC to
respond sooner
The reasons why the investment is believed to be of importance to the national or regional
economy
5.
Any information provided to HMRC will be treated in the strictest confidence. HMRC
officers are bound by a statutory duty of confidentiality.
6.
IIS will respond within 28 days, drawing on HMRCs network of technical tax
specialists. If a full response cannot be provided within that time, an explanation will be
supplied. There is more detail about HMRCs service standards in the guidance document
When you can rely on information or advice provided by HM Revenue & Customs which is
available on the HMRC website.
CONTACTING IIS
7.
The HMRC contact point is::
Colin Miller
HM Revenue & Customs
CTIAA Business International,
100 Parliament Street
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F4. Statement of Practice: artificial separation of business activities

Introduction
This Statement of Practice sets out how HMRC will apply the updated provisions aimed at
countering the artificial separation of businesses to enable them to trade below the VAT
registration threshold. The purpose of this statement is solely to clarify HMRC policy in this area.
It does not qualify the relevant legislation, nor does it affect a taxpayers right of appeal to an
independent tribunal. You can find information on the tribunal on the Tribunals Service website
at www.tribunals.gov.uk or by phoning them on 0845 223 8080.
Why the legislation is required
The measures were originally designed to counter avoidance in circumstances in which a business
is artificially separated, so that one or more of its parts trades below the VAT registration
threshold.
The impetus was twofold:
firstly, unfair competition results from artificial separation because the

split businesses, trading below the threshold, do not have to charge VAT
on their supplies and may therefore be able to charge lower prices than
their registered competitors, and
secondly, tax loss accrues to the Exchequer because, in the absence of

separation, the whole business would be trading above the registration
threshold and liable to register.
The new legislation became necessary because the existing measures proved ineffective and this
type of avoidance remained widespread. Having to establish the intention of the parties proved
difficult, as businesses were able to offer apparently legitimate reasons for the separation, which
were, in fact, secondary to the real reason, which was the avoidance of registration.
The legislation
The provisions, which were contained in the Finance Act 1997, section 31, make the following
main changes:
Paragraph 1A is inserted into Schedule 1 to the Value Added Tax Act

1994. It clearly states that the purpose of paragraph 2 is to counter any
artificial separation of business activities resulting in an avoidance of
VAT. In determining whether or not any separation is artificial the extent
to which the parties involved are closely bound to one another by
financial, economic and organisational links must be taken into account.
Paragraph 2(2) (d) of Schedule 1 is repealed. It prevented the

Commissioners taking action unless they were satisfied (amongst other
things) that one of the main reasons for the separation was the avoidance
of registration.
The purposive clause is an over-arching provision against which a direction made under this
legislation must be tested. Its inclusion is a conscious attempt to indicate Parliaments aims in
passing the legislation, and to encourage tribunals and Courts, when considering appeals, to test
not only the legal technicalities but also whether the disaggregated business arrangements result
in a VAT loss.
How the new measures will be applied

Whilst it is true that the new measures focus on the effect rather than the reason for the
separation, it must be stressed that their purpose is to counter artificial separation, which results in
an avoidance of VAT. HMRC will therefore not aggregate businesses unless they are satisfied
that the separation is artificial.
Under the new measures HMRC may only make a direction when:
the separation is artificial
the separation results in an avoidance of VAT
the parties involved are closely bound by financial, economic and

organisational links, and
the other legal requirements are satisfied.
What HMRC will consider to be artificial separation

HMRC will be concerned with separations, which are a contrived device set up to circumvent the
normal VAT registration rules. Whether any particular separation will be considered artificial
will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to
provide an exhaustive list of all the types of separations that HMRC will view as artificial.
However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered
customers and the unregistered part supplies unregistered customers.
Same equipment/premises used by different entities on a regular

basis
In this type of situation, a series of entities operates the same equipment
and/or premises for a set period in any one-week or month. Generally the
premises and/or equipment is owned by one of the parties who charges
rent to the others. This situation may occur in launderettes and takeaways
such as fish and chip shops or mobile catering equipment such as ice
cream vans.
Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where
one entity supplies the bed and another the breakfast. Another is in the
livery trade where one entity supplies the stabling and another, the hay to
feed the animals.
Artificially separated businesses which maintain the appearance of a

single business
This type of separation includes pubs in which the bar and catering may
be artificially separated. In most cases the customer will consider the
food and the drinks as bought from the pub and not from two
independent businesses. The relationship between the parties in such
circumstances will be important here as truly franchised 'shop within a
shop' arrangements will not normally be considered artificial.
One person has a controlling influence in a number of entities which

all make the same type of supply in diverse locations
In this type of separation a number of outlets which make the same type
of supplies are run by separate companies which are under the control of
the same person. Although this is not as frequently encountered as some
of the other situations, the resulting tax loss may be significant.
The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the
types of factors indicative of the necessary links, although there will be many others:
Financial links
financial support given by one part to another part
one part would not be financially viable without support from another
part
common financial interest in the proceeds of the business.

Economic links
seeking to realise the same economic objective
the activities of one part benefit the other part
supplying the same circle of customers.

Organisational links
common management
common employees
common premises
common equipment.
How the measure will apply in particular circumstances
Franchised businesses
HMRC do not expect this measure to affect genuine, as opposed to
artificial, franchising.
Hairdressers
The existing agreement between the National Hairdressers Federation
and HMRC is used to determine whether or not a stylist working in a
salon is an employee or a self-employed person. The new measure
applies only to self-employed persons. HMRC will amalgamate those
self-employed stylists who are artificially separated provided that the
legal criteria are met.
Self-employed taxi drivers

The ways in which taxi firms operate can vary. Only those firms which
operate in such a way that the legal criteria are met, will be registered by
HMRC as a single business.
Businesses already registered for VAT

The measures enable HMRC to register businesses which otherwise
would not be registered for VAT. Consequently HMRC will not use their
powers to amalgamate when all of the parties involved are already VAT
registered. However, where the powers are invoked, existing registrations
will be cancelled from a current date and the newly amalgamated
businesses will be registered with a new number.
Registration date for amalgamated businesses

When HMRC invoke the measures, the liability to be registered as a
single business will take effect from the date of the direction, or such
later date as may be specified in the direction.
Penalties
The new measures do not introduce any fresh penalty provisions.
However, should artificial separation continue as a means of avoiding
VAT, the position on penalties will be reconsidered.
Appeals
Businesses which disagree with HMRCs decision will be able to appeal
to the tribunal.
The basis of the Tribunals decision will continue to be whether HMRC
could reasonably have been satisfied that there were grounds for treating
all the separated parts as a single taxable person, given the legal criteria
and the purpose of the legislation.
Advice on proposed separations

It is a matter for the parties concerned, after due consideration of all the relevant factors, to
determine how to structure their business activities. Accordingly, HMRC will not advise on the
VAT consequences of any proposed structure but we will give a decision when faced with an
actual situation.
Responsibility for issuing directions
Responsibility for issuing directions will remain with local offices, which should be contacted if
you have any enquiries.
These notes are for guidance only and reflect the position at the time of writing. They do not
affect any right of appeal.
Issued by HMRC
Crown Copyright 2012
30 January 2012

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Statements of Practice

Issued up to 30 January 2012

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Part I Index of Statements

Airline pilots - Residence - Incidental duties

Approved savings-related share option schemes

Benefits in kind - Scholarship for employee's children

Benefits in kind and VAT

Benefits in kind: Cheap loans: Advances for expenses

Business by telephone Services for non contact centre customers

Business by telephone - Inland Revenue contact centres

Business by telephone Customs & Revenue Contact Centres

Business by telephone HMRC Taxes Contact Centres

Business Expansion Scheme, Enterprise Investment Scheme, CGT

Capital allowances on machinery and plant: amendment of claim by

Case V Schedule D Losses - Reclassified as ESC B25

Close companies: Income tax relief for interest on loans applied in

Correspondence with married women

Covenants in favour of charities: repayment procedure

Deceased persons' estates: Discretionary interests in residue

Deceased persons' estates: Income received during the

Delay in rendering tax returns: Interest charge and penalties

Delay in rendering tax returns: Interest on overdue tax

Delay in rendering tax returns: Interest on overdue tax (TMA 1970,

Employees resident but not ordinarily resident in the UK: General

Employees resident but not ordinarily resident in the UK: General

Employment Protection Act 1975: Maternity pay

Employment Income VAT

Enhanced stock dividends received by trustees of interest in possession

Enterprise Investment Scheme and Venture Capital Trust Scheme:

Enterprise Investment Scheme. Venture Capital Trusts, Capital Gains

Enterprise Investment Scheme. Venture Capital Trusts, Capital

Exchange rate fluctuations

Exchange rate fluctuations Now SP2/02

Ex-gratia awards made on termination of an office or employment by

Flat rate expenses for manual and certain other employees

Flat rate expenses for manual and certain other employees

Foreign earnings deduction

Goods taken by traders for personal consumption

Individuals coming to the UK: Ordinary residence

Informal end-of-year adjustments

Investigation settlements: Inclusion of interest clause in letters or

Investigation settlements: Retirement annuity relief