Corporation Tax: Amendments to Part 8C of the Corporation Tax Act 2010, Tax on Refund Interest Payments

1. Who is likely to be affected

Businesses who have made a claim against HM Revenue and Customs (HMRC) for, or who have received restitution interest from, HMRC.

2. General description of the measure

The measure will amend Part 8C of the Corporations Tax Act 2010 (CTA 2010) to remove charitable corporations and the income of policyholders from for-profit funds from the scope of the 45% rules. They will bring within the scope of the rules a beneficiary legal person, beneficiary of the interest in restitution claimed in its name.

An anti-avoidance provision is extended to include a non-resident company which carries on business in the UK through a permanent establishment in the UK. New rules are introduced so that a charge at the rate of 45%, which had remained payable by the selling company under the anti-avoidance provision, is transferred to a related group company in the event of liquidation or dissolution of the transferor company.

Changes are also made to clarify the self-assessment obligations and with whom any appeal against the withholding of the 45% tax must be lodged.

3. Political objective

The measure will ensure that the rules do not apply to claimants who, disregarding available reliefs, deductions and allowances, would not have received a windfall if the award of restitution interest had been imposed at the rate of current corporate taxation due to statutory tax exemptions that were applied during the period of the claim. The measure also ensures that anti-avoidance provisions are strong and clarifies procedural requirements.

4. Context of the measure

The Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations 2017 were tabled in the House of Commons on 13 March 2017 as part of the positive proceedings.

5. Detailed proposal

5.1 Effective date

Amendments concern certain companies subject to the special corporate tax rate of 45% on refund interest, in particular charitable companies and life insurance companies with policyholders of “for-profit” funds; companies subject to corporation tax which have sold their rights to a person outside the scope of corporation tax and companies benefiting from a claim for restitution made by a third party. In addition, changes have an impact on the calculation of tax payable. These should take effect from 21 October 2015.

There are also other minor changes which will affect all companies subject to the special corporate tax rate of 45% on refund interest and these take effect from the date of entry into force of the regulations. .

5.2 Current law

The current law is contained in Sections 357YA to 357YW of Part 8C of the Corporations Tax Act 2010.

5.3 Proposed revisions

The wording of Condition A in Section 357YC is amended to ensure that a company that is the beneficiary of a restitution claim also falls within the scope of the rules where that claim has been made on its behalf by a third party and the restitution interest is then transferred. directly to this beneficiary without the amount of the refund being recognized in the financial statements of the third party.

Sections 357YA and 357YB are amended to exclude restitution claims made by or on behalf of a charitable corporation from the scope of the rules. A new section 357YDA is inserted which will exclude from the scope of Part 8C of the CTA 2010 income attributable to a policyholder of a participating fund while leaving income belonging to the shareholder of the participating fund insurance within the scope. The new section provides rules for determining the amount of the policyholder’s income, the sum of which will then not be treated as restitution interest.

In addition to applying to UK resident companies, the anti-avoidance provision of Section 357YM is extended to apply to non-resident companies that carry on business in the UK through a permanent establishment in the UK. New sections 357YNA and 357YNB are inserted to reinforce the anti-avoidance provision in section 357YM. Section 357YNA provides that notice must be given to a related corporation that restitution interest which is to be treated as arising from the transferor corporation under Section 357YM shall be treated as arising from the related corporation in situations where the transferring company enters into a winding-up or dissolution agreement. Section 357YNB defines the meaning of a related corporation.

The wording of section 357YP is amended to clarify that any tax withheld from the refund by HM Revenue and Customs will be used to satisfy corporation tax due on the refund interest where included in the self-assessment of the applicant.

Section 357YS is amended to clarify that any written notice of appeal against deduction of withholding tax must be given to HM Revenue and Customs.

Various changes have been made to sections 357YC, 357YP and 357YR so that “Commissioners” will now read “Commissioners for Her Majesty’s Revenue and Customs”. Sections 357YH and 357YJ make minor changes to existing wording to clarify that these sections relate to any tax benefit and not just the “restitution” tax benefit.

5.4 Summary of impacts

Impact on Treasury (£m)

The Office for Budget Responsibility will include the impact of this measure in its fall 2017 forecast.

Economic impact

This measure is not expected to have significant macroeconomic implications.

Impact on individuals, households and families

The measure will have no impact on individuals or households since the special corporate tax rate of 45% only applies to companies that have made a claim for a refund based on an error by right. The measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

It is not expected that a group with protected characteristics will be adversely affected by this measure.

Impact on businesses, including civil society organizations

Charities and life insurance companies that have made a claim for error of law will benefit from this measure. A claim brought by a charity will now be excluded from the scope of the special corporation tax rate of 45% on refund interest. The amount of restitution interest resulting from a claim by a life insurance company which is attributable to a policyholder of a participating fund will also be outside the scope.

This measure is expected to have a negligible impact on businesses and civil society organizations. Businesses and organizations that fall within the scope of the rules under these regulations will face one-time costs of familiarizing themselves with the new rules and applying the new 45% rate on refund interest rather than on the general corporate tax rate. There should be no ongoing charges. Nor will there be an increase in the administrative burden for applicant companies that already fall within the scope of the rules.

Operational impact (£m) (HMRC Or other)

Operational impact for HMRC should be negligible for this measure.

Other impacts

Other impacts were taken into account and none were identified.

6. Monitoring and evaluation

The measure will be monitored through information collected from refund requests as they are finally determined.

seven. Additional tips

If you have any questions about this measure, please contact Susan Gardner on telephone: 03000 563815 or email: susan.m.gardner@hmrc.gsi.gov.uk.

8. Statement

Jane Ellison, MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.