Finance Act 1965

• (3) In subsection (7) for the words from " in a management expenses claim " to " may be made " there shall be substituted the words " by notice in writing to the inspector ", and for the words from " effect " to " business " there shall be substituted the words " an assessment in respect of the business for that or a subsequent chargeable period has been finally determined without such an election ".

• (4) In subsection (8) for the words " on a management expenses claim ", where first occurring, there shall be substituted " under section 56(8) of the Finance Act 1965 " and for the words " any management expenses claim or assessment under Case VIII of Schedule D " there shall be substituted the words " any assessment to tax ".

• (5) In subsection (11) for the words " on a management expenses claim in respect of the business " there shall be substituted the words " within the meaning of section 57 of the Finance Act 1965 ".

PART IV — Mines, Oil-Wells, etc.

16

In section 307(3) of the Income Tax Act 1952 (which makes special provision about the amount of annual allowances for the last six years of working a mine etc., or of a foreign concession) for the reference to the year of assessment in which the event occurs and each of the five previous years of assessment there shall be substituted a reference to any chargeable period beginning within the six years which end with the date of the event.

17

• (1) Section 22 of the Finance Act 1952 (contributions by mining concerns to public services etc., outside the United Kingdom) shall be amended in accordance with the following sub-paragraphs.

• (2) In subsection (1) for the words from " for each of the ten relevant years of assessment" onwards there shall be substituted the words " writing-down allowances shall be made to him in respect of that expenditure during a writing-down period of ten years beginning with the chargeable period related to the expenditure " ; and subsection (5) shall be omitted.

• (3) In subsection (3) (which provides in effect that on a sale of the relevant mine etc., any remaining allowances shall be transferred from the vendor to the purchaser) for paragraph (b) there shall be substituted—

(b) for the part of the writing-down period remaining at the beginning of the last chargeable period for which an allowance is made to the first-mentioned person, allowances shall be made to the second-mentioned person as if he had incurred the expenditure for the purposes of the said trade, but so that the allowance for a chargeable period not wholly comprised in that part of the writing-down period shall be proportionately reduced

.

18

• (1) In section 37(1) of the Finance Act 1963 (which provides for the making of annual allowances for mineral depletion in the United Kingdom) for the words " any year of assessment the basis period for which ends after the incurring of the expenditure " there shall be substituted the words " the chargeable period related to the expenditure and subsequent chargeable periods ".

• (2) Paragraph 3 of this Schedule shall not apply to fractions mentioned in section 37(2) of the Finance Act 1963 so as to reduce writing-down allowances under that section.

PART V — Agricultural Land and Buildings.

19

• (1) Section 314 of the Income Tax Act 1952 (allowances for capital expenditure on farm buildings and works) shall be amended in accordance with the following sub-paragraphs.

• (2) In subsection (1) the words " the year preceding any year of assessment" shall be omitted, and for the words from " he shall be entitled " onwards there shall be substituted the words " writing-down allowances shall be made to him in respect of that expenditure during a writing-down period of ten years beginning with the chargeable period related to that expenditure ".

• (3) In subsection (4) for paragraphs (a) and (b) there shall be substituted—

for the part of the writing-down period falling after the date of the transfer the person to whom the interest is transferred shall, to the exclusion of the person from whom it is transferred, be entitled to the allowances (any allowance to either of them for a chargeable period falling partly before and partly within that part of the writing-down period being reduced accordingly): Provided that, where the interest transferred is in part only of the land, this subsection shall apply to so much of the allowance as is properly referable to that part of the land as if it were a separate allowance

.

• (4) In subsection (7) for the words "In this section, references to the year preceding the year of assessment shall be construed as references to " there shall be substituted the words " For the purposes of this section the basis period of a chargeable period is " (the words " that chargeable period " being also substituted for the words " that year " ).

PART VI — Patents.

20

• (1) Section 316 of the Income Tax Act 1952 (annual allowances for capital expenditure on purchase of patent rights) shall be amended as follows:—

• (a) in subsection (1) for the words from "for each of the relevant years of assessment" down to (but excluding) the proviso there shall be substituted the words " writing-down allowances in respect of that expenditure during the writing-down period as hereinafter defined ", and for the words " income tax " in proviso (b) there shall be substituted the word " tax ";

• (b) in subsection (2) for the words preceding the proviso there shall be substituted the words " The writing-down period shall be the seventeen years beginning with the chargeable period related to the expenditure ";

• (c) subsection (3) shall be omitted.

• (2) In section 317 of that Act for any reference to the relevant years of assessment there shall be substituted a reference to the writing-down period under section 316, but so that in subsection (4)(b) for " the number of the relevant years of assessment " there shall be substituted " the number of complete years of the writing-down period ".

21

• (1) In section 318 of the Income Tax Act 1952 (charges on capital sums received for sale of patent rights) for the words in subsection (1) from " for the year of assessment" down to (but excluding) the proviso there shall be substituted the words " for the chargeable period in which the sum is received by him and successive chargeable periods, being charged in each period on the same fraction of the sum as the period is of six years (or such less fraction as has not already been charged). "

• (2) In section 318(2) of that Act the word "tax" shall mean income tax, unless the seller of the patent rights, being a company, would be within the charge to corporation tax in respect of any proceeds of the sale not consisting of a capital sum; and where the subsection applies to charge a company to corporation tax in respect of a sum paid to it, the proviso shall not apply, but the company may, by notice in writing given to the Board not later than two years after the end of the accounting period in which the sum is paid, elect that the sum shall be treated as arising rateably in the accounting periods ending not later than six years from the beginning of that in which the sum is paid (being accounting periods during which the company remains within the charge to corporation tax as aforesaid), and there shall be made all such layments of tax and assessments to tax as are necessary to give :t to any such election.

PART VII — Scientific Research.

22

In section 335 of the Income Tax Act 1952 for the words " income tax " there shall be substituted the word " tax ".

23

• (1) In section 336 of the Income Tax Act 1952 there shall (except as regards expenditure incurred before 6th November 1962) be added at the end as subsection (6):—

(6) Subsections (2) to (5) of this section shall apply only for purposes of income tax, and the relevant chargeable period for purposes of corporation tax shall be that in which the expenditure is incurred or, if it is incurred before the setting up and commencement of the trade, the chargeable period beginning when the trade is set up and commenced.

• (2) If, in the case of expenditure incurred by a company before 6th November 1962, the five years of assessment referred to in section 336(1) of the Income Tax Act 1952, have not expired at or before the end of the year 1965-66, allowances under that section shall be made for successive accounting periods without restriction of number, but so that—

• (a) the allowance for an accounting period of less than a year shall be proportionately reduced; and

• (b) the aggregate of the allowances in respect of any expenditure (whether for years of assessment or for accounting periods) shall not exceed the amount of the expenditure.

• (3) Accordingly in section 268(4) of the Income Tax Act 1952, after the words " section 336 of this Act" there shall be inserted the words " as at the end of the chargeable period or, if it is a year of assessment ".

PART VIII — Miscellaneous.

24

• (1) In Chapter VI (miscellaneous and general) of Part X of the Income Tax Act 1952—

• (a) sections 323, 324 and 325 (making of allowances and charges, and meaning of " basis period "), except section 323(3), shall not have effect in relation to corporation tax, and accordingly shall not be amended in accordance with paragraph 2 of this Schedule;

• (b) in section 329(1) (procedure on apportionments etc. affecting the liability to income tax of different persons) for the words " liability to income tax (for whatever year of assessment) " there shall be substituted the words " liability to tax (for whatever period) ";

• (c) in section 330(1)(a) (under which a person incurring expenditure may not treat it as capital expenditure if it is deductible in computing trading income for purposes of income tax) for the words " income tax " there shall be substituted the word " tax ".

• (2) Section 339(2) of the Income Tax Act 1952 shall not have effect in relation to corporation tax in so far as it applies section 323(2) for purposes of Part XI of that Act.

• (3) Schedule 15 to the Income Tax Act 1952 (allowances for contributions to another's capital expenditure) shall be amended as follows:—

• (a) in paragraph 2(a) for the words from " the annual allowance " onwards there shall be substituted the words " writing-down allowances for chargeable periods ending after the date of transfer shall be made " to the transferee, and shall not be made to the transferor " ; and

• (b) in paragraph 3(1) for the words from " the annual allowance " to " interest in the land" there shall be substituted the words " a writing-down allowance shall be made to a person for a chargeable period if at the end of that period he is entitled to the contributor's interest in the land. "

25

In relation to the following enactments, that is to say.—

• (a) section 25 of the Finance Act 1953 (postponement of capital allowances to secure double taxation relief);

• (b) section 16 of the Finance Act 1954 and Schedule 2 to that Act (investment allowances);

• (c) section 16 of the Finance Act 1956 (expenditure on cutting, tunnelling etc.);

• (d) section 42(2) of the Transport Act 1962 (adjustment of Railways Board's capital allowances in connection with the Board's suspended debt);

paragraph 2 of this Schedule shall apply as if those enactments were included in Part X of the Income Tax Act 1952 ; and in section 25(1) of the Finance Act 1953 for the words " income tax " there shall be substituted the word " tax ".

PART IX — Transitional.

26

The amendments made by this Schedule shall not have effect in relation to income tax for the year 1965-66 or any earlier year of assessment, except in so far as it is affected by their operation in relation to corporation tax; but any computation falling to be made for the purposes of income tax for any such year of assessment shall, where necessary, proceed from a computation made in accordance with those amendments (and in particular a computation of the residue of expenditure under section 268(5) of the Income Tax Act 1952).

27

• (1) In connection with the transition for companies from income tax to corporation tax the enactments amended by this Schedule and any other provision of the Income Tax Acts relevant thereto shall have effect with such modifications as are necessary to preserve the continuity of the system of allowances and charges thereunder, so that in particular—

• (a) references to a previous chargeable period or to a subsequent chargeable period, or to a time before, or a time after, a chargeable period, shall have effect in relation to a company as if the year 1965-66 or any earlier year of assessment preceded that company's first accounting period for corporation tax;

• (b) in a case where an event gives rise to any allowance or charge as taking place in a chargeable period, an event taking place in the year 1964-65 or 1965-66 at a time falling also in a company's accounting period for corporation tax shall be taken into account as happening in that year and shall not be again taken into account, so as to duplicate the allowance or charge, as happening in the accounting period.

• (2) Where it is provided that writing-down allowances are to be made for a specified period, allowances may be made for accounting periods of a company falling wholly or partly within the year 1964-65 or 1965-66, notwithstanding that allowances are also made for that year and, in reckoning the period for which allowances are to be made, the periods for which allowances are so made shall be added together, notwithstanding that the same time is (according to the calendar) counted twice; and similarly with section 323(3) of the Income Tax Act 1952 (allowances on cessation of working of a source of mineral deposits).

• (3) Subject to sub-paragraph (2) above, this paragraph shall not be taken to require any time to be counted twice in reckoning duration.

28

Without prejudice to the generality of paragraph 27 above, such part of any allowances falling to be made to a company in taxing a trade as but for this Act might have been carried forward to the year 1966-67 under section 323(2) of the Income Tax Act 1952 may be dealt with under section 56(1) of this Act as if it were an allowance for the first accounting period for which the company is within the charge to corporation tax in respect of the trade (but shall be disregarded for purposes of section 58(2)); and allowances which might have been carried forward to that year under section 324(1) of that Act may be dealt with under section 56 of this Act as if carried forward under section 56(5).

SCHEDULE 15

PART I — Application and Adaptation of Enactments.

The Income Tax Act 1952.

1

In section 125 of the Income Tax Act 1952 (woodlands) the references in subsection (2) to the year of assessment shall, in relation to corporation tax, be construed as references to the accounting period.

2

Section 202 of the Income Tax Act 1952 (which provides for the issue of funding bonds to be treated as payment of the interest) shall have effect for purposes of corporation tax.

3

In section 203(1) of the Income Tax Act 1952 (sale and repurchase of securities) paragraph (ii) shall in relation to corporation tax apply (subject to the provisions of this Act about distributions) to any interest within the meaning of that section, whether or not the securities are of such a character that the interest may be paid without deduction of tax ; and section 416(3) of that Act shall apply in like manner, and with the omission of the proviso.

4

• (1) Section 440 of the Income Tax Act 1952 shall be amended—

• (a) by adding at the end of subsection (1) (exemptions for friendly societies) the words " and any such unregistered or registered friendly society shall be entitled to exemption from tax in respect of chargeable gains "; and

• (b) by inserting in subsection (2) (exemptions for trade unions) at the end of the first paragraph the words " and to exemption from tax in respect of chargeable gains which are applicable and applied for the purpose of provident benefits ".

• (2) Section 449 of the Income Tax Act 1952 (exemptions for scientific research associations) shall be amended by inserting in subsection (1) immediately before the proviso the words " and exemption from tax in respect of chargeable gains ".

• (3) Section 451 of the Income Tax Act 1952 (exemption of British Museum) shall be amended by adding at the end of subsection (1) the words " and exemption from tax in respect of chargeable gains ".

• (4) Section 460 of the Income Tax Act 1952 (Central Banks of India and Pakistan) shall be amended by inserting after the word " 1947 " the words " including chargeable gains so arising or accruing ".

5

In section 468 of the Income Tax Act 1952 (removal of company or company's business overseas etc.) for the proviso to subsection (6) there shall be substituted, in relation to offences committed in or after the year 1966-67:—

Provided that where the person in question is a body corporate which is or was resident in the United Kingdom, the maximum amount of the fine shall be three times the corporation tax, profits tax, capital gains tax and income tax paid or payable which is attributable to the income, profits or gains (including chargeable gains) arising in the thirty-six months immediately preceding the commission of the offence, or ten thousand pounds, whichever is the greater

;

and in subsection (7) the reference to an income tax purpose shall include a corporation tax purpose.

6

Sections 482 to 484 of the Income Tax Act 1952 (which relate to nationalised industries) shall have effect for corporation tax as for income tax; and references to years of assessment, to charging the profits or gains of a trade, and to any provision of the Income Tax Act 1952, shall have effect accordingly as if they were or included references to accounting periods, to taxing a trade, and to the relevant provision of Part IV of this Act; but in section 484 there shall be omitted (as being spent) the references to the owner of the assets before the date of vesting.

7

• (1) As from the beginning of the year 1966-67, sections 491 and 492 of the Income Tax Act 1952 (which provide for adjusting under-deductions and over-deductions of income tax from certain payments made before the passing of an annual Act imposing the tax) shall be amended in accordance with the following sub-paragraphs.

• (2) For section 491(3)(a) (by virtue of which section 491(2) has effect where too little tax is deducted under section 184 from preference dividends) there shall be substituted:—

(a) any preference dividend within the meaning of Part IV of the Finance Act 1965 from which a deduction of tax may be made under the said Part IV ; and

.

• (3) In section 492 (over-deductions by bodies corporate under section 169 from interest payments on securities or under section 184 from preference dividends)—

• (a) after the words " section 169 " there shall be inserted the words " or section 170 "; and

• (b) for the words " section 184 of this Act " there shall be substituted the words " Part IV of the Finance Act 1965 "; and

• (c) at the end of the section there shall be added—

In this section ' preference dividend ' has the same meaning as in Part IV of the Finance Act 1965, and ' share' includes stock.

8

Sections 495 to 497 of the Income Tax Act 1952 (interest on overdue tax) shall have effect for corporation tax as for income tax, references to accounting periods being substituted for references to years of assessment.

9

In Schedule 20 to the Income Tax Act 1952 (assessment on the herd basis) the references in paragraph 2 to years of assessment shall, in relation to corporation tax, be construed as references to accounting periods.

The Finance Act 1953.

10

• (1) Section 20 of the Finance Act 1953 (subvention payments) shall have effect subject to the following sub-paragraphs.

• (2) In relation to a time after the year 1965-66 " accounting period " in relation to any company shall mean its accounting period for corporation tax, and the question whether a company has a deficit or surplus for tax purposes, or what is the amount of that deficit or surplus, shall be ascertained by applying the rules applicable under Part IV of this Act to the computation of total profits for corporation tax (deducting any loss incurred in a trade from profits of any description), except that—

• (a) franked investment income shall be included other than income received by the company from its subsidiary or from a subsidiary of a third company of which it is also a subsidiary (" subsidiary" having for this purpose the meaning assigned to it for certain purposes of the profits tax by section 42 of the Finance Act 1938);

• (b) no regard shall be had to any deduction falling to be made in respect of losses, allowances or expenses of management of any other period, except any deduction falling to be made against chargeable gains in respect of losses incurred before the accounting period ;

• (c) there shall be deducted any charges on income.

• (3) Where an accounting period of a company for corporation tax begins before but ends after the end of the year 1965-66, sub-paragraph (2) above shall apply, except that the deficit or surplus shall be ascertained separately for the part of the period falling in that year (according to the rules applying to that year) and for the part falling after it (in accordance with sub-paragraph (2) above), and shall be aggregated with, or as the case may be, set off against, the other to arrive at the deficit or surplus for the whole period.

• (4) Where any period of account of a company beginning before the year 1966-67 is partly but not wholly comprised in an accounting period for corporation tax ending in that year, then the part not so comprised shall be treated for purposes of section 20 as a separate accounting period.

• (5) In subsection (2) of section 20 for the words " second year of assessment " in the proviso (as amended by the Finance Act 1958) there shall, in relation to accounting periods ending after the year 1965-66, be substituted the words " second year ".

11

In section 23 of the Finance Act 1953 (elections for the herd basis after compulsory slaughter of farm animals) subsections (2) and (3) shall, in relation to corporation tax, have effect as if references to years of assessment were references to accounting periods, and with the omission of the proviso to each of those subsections.

The Atomic Energy Authority Act 1954.

12

In section 6(2) of the Atomic Energy Authority Act 1954 (which confers certain exemptions from income tax on the Authority and its pension fund) there shall be inserted as a new paragraph (e)—

(e) tax in respect of chargeable gains

;

and at the end of the final paragraph (which relates to the pension fund) there shall be added the words " and similarly with chargeable gains (the exemptions from corporation tax conferred on the Authority having effect as exemptions from income tax or capital gains tax) ".

The Finance Act 1957.

13

In section 22 of the Finance Act 1957 there shall be inserted as a new subsection (1A):—

(1A) A bank or issue department of a bank to which this section for the time being applies shall be exempt from tax in respect of chargeable gains accruing to it: Provided that subsection (1) above may be applied to a bank or issue department without this subsection, or this subsection without that.

The Finance Act 1960.

14

In section 25(6) of the Finance Act 1960 for the reference to section 346 of the Income Tax Act 1952 there shall be substituted a reference to the corresponding provision of this Act.

15

In the Finance Act 1960—

• (a) in section 28(2) for the reference to section 256(2) and (3) of the Income Tax Act 1952 there shall be substituted a reference to paragraph 3 of Schedule 18 to this Act; and

• (b) for section 28(11) proviso there shall be substituted:—

Provided that there shall be disregarded any amount received by a company by way of dividend from an associated company in so far as the dividend is paid out of income arising to the company paying it since the two companies became associated companies, and Schedule 17 to the Finance Act 1965 shall with the necessary modifications apply for determining the extent to which the dividend was so paid

; and

• (c) in section 29 (power to obtain information), and in the definition of "tax advantage" in section 43(4)(g), the references to income tax shall include corporation tax ;

and (without prejudice to any general provision of this Act for the continuity of income tax and corporation tax) in relation to tax advantages related to corporation tax the said section 28 shall apply to transactions taking place before the charge to corporation tax becomes effective.

16

In the Finance Act 1960, the references in section 33(4) to a company to which section 245 of the Income Tax Act 1952 applies, not being an investment company, and to Chapter III of Part IX of that Act shall include references to a close company and to section 78 of this Act and the other provisions of this Act having effect for purposes of that section.

The Finance Act 1962.

17

Section 22 of the Finance Act 1962 (taxation of Gas Council and Area Boards) shall apply in relation to corporation tax as it applied in relation to income tax.

The Finance Act 1963.

18

• (1) Schedule 4 to the Finance Act 1963 shall have effect subject to the following sub-paragraphs.

• (2) In relation to a company the references in paragraph 15(1) to a year of assessment shall not be read as references to an accounting period, but any deduction authorised by that paragraph shall be apportioned between the accounting periods (if more than one) comprising the year of assessment; and for the references in paragraph 15(1) to a company to which section 245 of the Income Tax Act 1952 applies and to a director or member of it within the meaning of Chapter III of Part IX of that Act there shall be substituted references to a close company and to a director of or participator in it within the meaning of Part IV of this Act.

• (3) In relation to a company the references in paragraph 16 to a year of assessment shall not be read as references to an accounting period, but any deduction authorised by that paragraph shall be apportioned between the accounting periods (if more than one) comprising the year of assessment, other than any such period ended before the expenditure is incurred or transfer takes place by virtue of which the company is entitled to the deduction.

• (4) In paragraph 17, sub-paragraph (3)(b) shall not have effect in relation to a company.

19

In Schedule 8 to the Finance Act 1963, paragraph 5(a) shall not have effect in relation to a company.

PART II — Continuity of Loss Relief and other Matters.

Trade losses.

20

• (1) For purposes of section 341 of the Income Tax Act 1952 the question whether a company has sustained a loss in a trade in the year 1964-65 or the year 1965-66, and any question as to the amount of a loss so sustained, shall not be affected by the company being within the charge to corporation tax in respect of the trade for the whole or part of that year, but subject to sub-paragraph (2) below, a company shall not be entitled to relief by virtue of that section except against income tax for years of assessment before the year 1966-67, and section 15(3) of the Finance Act 1953 and section 20 of the Finance Act 1954 shall apply accordingly in relation to claims by a company for losses sustained in, but not after, the year 1964-65.

• (2) Where in the year 1965-66 a company is entitled to claim relief under section 341 of the Income Tax Act 1952 in respect of any loss (including any amount treated as a loss under section 20 of the Finance Act 1954), the company may claim that such part, if any, of that loss as cannot be relieved against income tax for that year shall be deducted or set off against profits arising in the year 1965-66, otherwise than from any trade carried on by the company, being profits in respect of which the company would otherwise be chargeable to corporation tax, and in so far as the loss arose in the year 1965-66 and cannot be so deducted or set off against profits arising in that year, that it shall be deducted from or set off against any such profits so arising in the year 1966-67 ; and up to the amount of the deduction or set off those profits shall be excluded accordingly from any assessment to corporation tax (the relief in any year of assessment being given as far as may be against profits of an earlier, rather than the profits of a later, accounting period).

• (3) Relief in respect of the same matter shall not be given both in a manner authorised under this paragraph and in some other manner.

21

• (1) Where a company has before the year 1966-67 incurred a loss in a trade carried on by it, such part, if any, of that loss as but for this Act might have been carried forward to that year under section 342 of the Income Tax Act 1952 may be dealt with under section 58(1) or (7) of this Act as if it were a loss incurred by the company while within the charge to corporation tax in respect of the trade, but incurred in an accounting period ending at the time when the company in fact comes within the charge to tax in respect of the trade.

• (2) This paragraph shall apply to any amount which by virtue of section 345 of the Income Tax Act 1952, or of paragraph 3 of Schedule 3 to the Finance Act 1954, might be dealt with under section 342 as a loss incurred by a company in a trade as if that amount were a loss so incurred ; but where section 345 applies by virtue of section 443(1)(b) of that Act to any amount of share interest or loan interest paid by a registered industrial and provident society, this sub-paragraph shall not have effect except in relation to so much of the said amount as represents share interest or loan interest paid before the society comes within the charge to corporation tax in respect of its trade.

Losses within Case VI.

22

Where a company resident in the United Kingdom has incurred a loss in respect of which relief might be given under section 346 of the Income Tax Act 1952 against income tax for the year 1965-66 or an earlier year of assessment, then in so far as relief cannot be so given the loss may be dealt with under section 60 of this Act as if it had been incurred in the accounting period of the company beginning first after the date when the loss arose; but except in accordance with this paragraph relief shall not be given against corporation tax in respect of a loss if relief can be given in respect of it under the said section 346.

Expenses of management.

23

• (1) No deduction shall be made under section 57 of this Act (or under that section as applied by section 69) in respect of sums disbursed as expenses of management in or before the year 1965-66, or in respect of any amounts which are by virtue of any enactment to be treated as sums so disbursed, in so far as relief can be given in respect thereof under section 425 of the Income Tax Act 1952 or under that section as applied by any other enactment; but in so far as relief cannot be so given, the amount unrelieved shall be treated for purposes of section 57 or 69 of this Act as an amount disbursed as expenses of management for the first accounting period for which the company is within the charge to corporation tax in respect of the business.

• (2) Where sub-paragraph (1) above has effect the company may by notice in writing given not later than twelve months after the end of the accounting period specified in the notice elect to treat such an amount of sums disbursed as expenses of management as is specified in the notice (being an amount not exceeding the total of the sums so disbursed in the said accounting period) as an amount unrelieved for the purpose of sub-paragraph (1), and where such a notice is given the amount so treated shall not be available for relief under section 425 of the Income Tax Act 1952.

Terminal losses.

24

• (1) Where a company carrying on a trade at the beginning of the year 1966-67 ceases to do so within four years of coming within the charge to corporation tax in respect of it, section 59 of this Act shall apply, with any necessary adaptations, so as to enable relief to be given under that section against income tax for years of assessment before 1966-67 in so far as relief cannot be given against corporation tax, but so that—

• (a) where relief is given against income tax, section 3 8(4) of the Finance Act 1954 shall apply as it applies in relation to the corresponding relief under that section; and

• (b) where section 59 of this Act has effect by virtue of this paragraph to reduce the profits of any period and income tax for more than one year of assessment has been computed wholly or partly by reference to those profits, such adjustment shall be made as may be necessary to prevent relief being given more than once.

• (2) Where sub-paragraph (1) above has effect, and before the year 1966-67 there has been in the trade a relevant change within the meaning of Schedule 3 to the Finance Act 1954 (company reconstructions), section 59 of this Act and that sub-paragraph shall apply so as to enable a person carrying on the trade before the relevant change to be given relief in the like circumstances and to the like extent, as nearly as may be, as he might have been given relief under section 18 of the Finance Act 1954 by virtue of paragraph 5 of Schedule 3 to that Act.

Continuation of elections etc.

25

• (1) Where before the year 1966-67 a company has for purposes of income tax made any election or done any other act of a description which—

• (a) would have had continuing effect for income tax for that year or, if revocable, would have had continuing effect unless revoked;

• (b) may also be made for corporation tax ;

then that election or act shall for corporation tax be valid and effectual as if duly made or done for that tax, and have effect from the beginning of the first accounting period for which the company is within the charge to corporation tax in respect of the matter in question.

• (2) Accordingly where any such election or act is required to be made or done, if at all, at a particular time, no provision of this Act amending the enactment under which it is made or done so as to specify a different time in relation to corporation tax (whether by substituting a reference to the first accounting period for a reference to the first year of assessment in which anything takes place, or otherwise) shall be taken, unless the contrary intention appears, to invalidate any election or act duly made or done nor, where the time has passed for making or doing it for income tax, to extend the time in relation to corporation tax ; but nothing in this paragraph shall take away any right of revocation or variation.

• (3) This paragraph shall in particular apply—

• (a) to any election under section 125 of the Income Tax Act 1952 to be assessed in respect of woodlands under Schedule D ;

• (b) to any election for the herd basis under Schedule 20 to that Act;

• (c) to any election under paragraph 4 of Schedule 14 to that Act about capital allowances and charges after certain sales ;

• (d) to any election under paragraph 7 of Schedule 4 to the Finance Act 1963 for land to be treated as a single estate for the purpose of deductions under Case VIII of Schedule D.

SCHEDULE 16

PART I — Double Taxation Relief.

Income Tax.

1

As from such year of assessment as Parliament may hereafter determine, paragraphs 2 and 3 below shall have effect in the case of persons resident in the United Kingdom in place of paragraphs 5, 6 and 8 of Schedule 16 to the Income Tax Act 1952, and shall be construed and have effect as if contained in that Schedule.

2

• (1) Where credit for foreign tax falls to be allowed in respect of any income, and income tax is payable by reference to the amount received in the United Kingdom, the amount received shall be treated for purposes of income tax as increased by the amount of the foreign tax in respect of the income, including in the case of a dividend underlying tax.

• (2) Where credit for foreign tax falls to be allowed in respect of any income, and sub-paragraph (1) above does not apply, then in computing the amount of the income for purposes of income tax—

• (a) no deduction shall be made for foreign tax (whether in respect of the same or any other income); and

• (b) the amount of the income shall, in the case of a dividend, be treated as increased by any underlying tax.

• (3) The amount of any income shall not be treated as increased under this paragraph by reference to any foreign tax not payable but falling to be taken into account for purposes of credit by virtue of section 17 of the Finance Act 1961 (foreign tax reliefs to promote development).

• (4) In this paragraph " underlying tax " means in relation to a dividend tax which is not chargeable directly or by deduction in respect of the dividend but is to be taken into account in considering whether any, and if so what, credit is to be allowed against income tax in respect of the dividend.

3

• (1) The amount of the credit for foreign tax to be allowed to a person against income tax for any year of assessment shall not exceed the difference between the amounts of income tax which would be borne by him for the year (no credit being allowed for foreign tax)—

• (a) if he were charged to tax on his total income for the year, computed in accordance with paragraph 2 above; and

• (b) if he were charged to tax on the same income, computed in the same way, but excluding the income in respect of which the credit is to be allowed.

• (2) Where credit for foreign tax is to be allowed in respect of income from more than one source sub-paragraph (1) above shall be applied successively to the income from each source, but so that on each successive application paragraph (a) shall apply to the total income exclusive of the income to which the sub-paragraph has already been applied.

• (3) Without prejudice to sub-paragraphs (1) and (2) above the total credit to be allowed to a person against income tax for any year of assessment for foreign tax under all arrangements having effect by virtue of section 347 of the Income Tax Act 1952 shall not exceed the total income tax payable by him for that year of assessment, less any tax which he is entitled to charge against any other person.

Corporation Tax.

4

• (1) Where dividends are paid by a company resident in a territory outside the United Kingdom to a company resident in the United Kingdom which controls directly or indirectly not less than one-quarter of the voting power of the company paying the dividends, then for the purpose of allowing credit against corporation tax in respect of the dividends in accordance with Schedule 16 or 17 to the Income Tax Act 1952, any United Kingdom tax payable by the first-mentioned company in respect of its profits (whether income tax or corporation tax) and any tax so payable under the law of any territory outside the United Kingdom shall be taken into account as if it were tax payable under the law of the first-mentioned territory.

• (2) For the purposes of this paragraph a company shall be deemed to control, directly or indirectly, not less than one-quarter of the voting power in another company if a third company having such control also controls directly or indirectly not less than one-half of the voting power in the first-mentioned company.

• (3) In relation to dividends paid by a company resident in the Commonwealth territories, paragraph 3 of Schedule 17 to the Income Tax Act 1952 shall apply as if in that paragraph and (as they apply for purposes of that paragraph) in section 16 of the Finance Act 1964 and sub-paragraphs (1) and (2) above references to one-quarter of the voting power were references to one-tenth of the voting power.

5

• (1) Subject to sub-paragraph (2) below, where a company resident in the United Kingdom is charged to tax under Case I of Schedule D in respect of any insurance business carried on by it, and that business or any part of it is carried on through a branch or agency in a territory outside the United Kingdom, then in respect of dividends referable to that business which are paid to the company by companies resident in that territory any tax payable by those companies in respect of their profits under the law of that or any other territory outside the United Kingdom and any United Kingdom tax so payable (whether income tax or corporation tax) shall, in considering whether any, and if so what, credit is to be allowed under Schedule 16 or 17 to the Income Tax Act 1952, be taken into account as tax so payable under the law of the first-mentioned territory is taken into account in a case falling within paragraph 9 of Schedule 16.

• (2) Credit shall not be allowed to a company by virtue of this paragraph for any financial year in respect of a greater amount of dividends paid by companies resident in any overseas territory than is equal to any excess of the relevant fraction of the company's total income in that year from investments (including franked investment income and group income) so far as referable to the said business over the amount of the dividends so referable which are paid to it in the year by companies resident in that territory and in respect of which credit may apart from this paragraph be allowed to it for tax not chargeable directly or by deduction.

• (3) For purposes of sub-paragraph (2) above " the relevant fraction " is, in relation to any overseas territory, the fraction of which the numerator is the company's local, and the denominator the company's total, premium income in the financial year so far as referable to the said business, and premium income shall be deemed to be local premium income in so far as it consists of premiums under contracts entered into at or through a branch or agency in that territory by persons not resident in the United Kingdom.

6

As from such time as Parliament may hereafter determine, where, in the case of a company resident in the United Kingdom, credit for foreign tax falls to be allowed in respect of any income, then in computing the amount of the income for purposes of corporation tax paragraph 7 of Schedule 16 to the Income Tax Act 1952 shall not apply, but instead paragraph 2(2) to (4) above shall apply as they apply for purposes of income tax.

PART II — Overseas Trade Corporations.

7

A company ceasing to be an overseas trade corporation by the operation of Part IV of this Act shall be treated for corporation tax as having at the beginning of the year 1966-67 ceased to carry on its trade and begun to carry on a new trade.

8

Notwithstanding anything in Part IV of this Act, paragraph 4 of Schedule 4 to the Finance Act 1957 (under which an overseas trade corporation is to be treated as having received capital allowances) shall continue to have effect, whether for corporation tax or for income tax, in relation to a company ceasing by the operation of Part IV of this Act or otherwise to be an overseas trade corporation.

9

• (1) Where in the year 1965-66 dividends become due on shares in a company which is an overseas trade corporation, those dividends shall not by virtue of paragraph 7(1) of Schedule 5 to the Finance Act 1957 be related to any period ending after that year, in so far as so treating them would result in a greater amount being apportioned to the part of the period falling after that year than the amount which by virtue of section 83 of this Act is to be taken into account under sections 47(3) and 48.

• (2) Where sub-paragraph (1) above applies to any dividends, so much of those dividends as would otherwise be, but cannot be, related to a period ending after the year 1965-66 shall be related in the first instance to the period of account in which they become due or, if that period ends after the year 1965-66, to the part of it falling within that year (the dividends, if any, which are to be taken into account under sections 47(3) and 48 of this Act being for this purpose taken as those becoming due later rather than those becoming due earlier).

SCHEDULE 17

Application of Schedule.

1

This Schedule has effect for the interpretation of section 65 of this Act (" the principal section ") and for its modification in particular cases, and for transitional purposes relating to that section or section 4 of the Finance (No. 2) Act 1955.

Construction of references to holdings.

2

• (1) Subject to sub-paragraph (3) below, references to a holding in a company refer to a holding of shares, securities or rights by virtue of which the holder may receive distributions made by the company, but so that a person's holdings of different classes, and a person's holdings of the same class acquired at different times, shall be treated as separate holdings.

• (2) Holdings of shares, securities or rights which differ in the entitlements or obligations they confer or impose shall be regarded as holdings of different classes.

• (3) References to a holding in a company shall not apply, unless the contrary intention appears, to a holding consisting of shares which satisfy the following conditions:—

• (a) that they are fully paid and do not carry any right to dividends other than dividends at a rate per cent. of the nominal value of the shares which is fixed or fluctuates only with the standard rate of income tax ; and

• (b) that the rights which they carry in respect of dividends and capital are comparable with those general for fixed-dividend shares quoted on stock exchanges in the United Kingdom; and

• (c) that no part of the share capital represented by the shares has at any time been treated as paid up otherwise than by the receipt by the company of new consideration.

• (4) Sub-paragraph (3) above shall not operate in relation to any acquisition of such a holding as is there mentioned if either—

• (a) at the time of that acquisition dividends on the shares were more than twelve months in arrear and would or might become payable thereafter ; or

• (b) as a sequel to or in contemplation of that acquisition or any related acquisition of a holding in the company (but before the making of the distribution which is in question under the principal section) there has been any alteration of the rights attached to the shares or, so as materially to affect those rights or the operation of those rights, any alteration of the rights attached to or comprised in holdings of any other class in the company.

For purposes of this sub-paragraph " related acquisitions " are acquisitions by the same person or by persons acting in concert and acquisitions together comprised in arrangements made by any person.

3

• (1) In the application of subsection (1)(a) of the principal section all the recipient's holdings of the same class in the company are to be treated as ingredients constituting a single holding, together with such holdings of other persons as are mentioned below, except that no account shall be taken under any provision of this paragraph of a person's holdings acquired before the year 1960-61.

• (2) A person's holding in a company shall be treated as an ingredient in the same holding as the recipient's if the holdings are - of the same class, and either—

• (a) the transaction in pursuance of which he acquired the holding in question and the transaction in pursuance of which the recipient acquired any holding of that class were entered into by them in concert or were together comprised in arrangements made by any person ; or

• (b) he and the recipient are both dealers, and his trade as dealer is under the same control as that of the recipient.

For purposes of this sub-paragraph two trades shall be regarded as under the same control if they are carried on by persons one of whom is a body of persons over whom the other has control (within the meaning assigned to that expression by section 333 of the Income Tax Act 1952), or both of whom are bodies of persons under the control (as so defined) of a third person ; and for this purpose " body of persons " includes a partnership.

• (3) A holding acquired in right of another holding shall be included under sub-paragraph (2)(a) above where that other holding would be so included ; and for this purpose holdings acquired in pursuance of an offer or invitation made in respect of any holdings in the company and restricted to the holders thereof shall be treated as acquired in right of their holdings.

Time of acquisition.

4

• (1) A person having more than one holding of the same class in a company and selling or otherwise disposing of a part only shall be regarded as selling or disposing of a holding or part of a holding acquired earlier rather than one acquired later.

• (2) Where at the time when a dealer's trade is set up and commenced (or is to be treated in computing the trading income for corporation tax or income tax as set up and commenced) a holding is included in the trading stock, or profits from a sale of it would otherwise form part of the trading profits, the holding shall be regarded as having been acquired at that time; but where there is a change in the persons engaged in carrying on a trade, and a new trade is not on that change to be so treated as set up and commenced, the principal section shall apply to the person so engaged after the change as if there had been done to or by him anything done to or by his predecessor since the time when the trade was set up and commenced (or is to be so treated as having been set up and commenced).

• (3) A company acquiring from another company (neither of them being a dealer) a holding in a third company at a time when the three companies are associated shall, for the purpose of determining how far, if at all, a distribution made in respect of the holding is made out of profits arising to the third company since the acquisition, be treated as having acquired the holding at the time when that other company acquired it (or, if this sub-paragraph applies also to that acquisition, is to be treated as having acquired it) or at the time, if it is later, when the said three companies became associated.

For this purpose " associated " means as regards two companies, that one is a subsidiary of the other or both are subsidiaries of a third company and, as regards three or more companies, that one is associated with each of the others ; and a company shall be deemed to be a subsidiary of another if (within the meaning of section 42 of the Finance Act 1938) more than one-half of its ordinary share capital is owned by that other, whether directly or through one or more bodies corporate or partly directly and partly through one or more bodies corporate.

Relation of distribution to profits.

5

• (1) Subject to paragraph 7 below, the question how far a distribution made in respect of a holding of any class is to be treated as made out of profits arising to the company since the time when the holding was acquired shall be determined by taking the profits arising to the company since that time and seeing what proportion of that distribution and the distributions made with it on other holdings of the same class can be met out of those profits, after allowing for previous distributions made since that time on holdings of that class and for distributions made or not yet made on holdings not of that class (including any such holdings as are described in paragraph 2(3) above); and for this purpose there shall be treated as included in any distribution or part of a distribution the income tax thereon for which the company is liable to account under this Act.

• (2) The allowance to be made under sub-paragraph (1) above for previous distributions made since the time there referred to on holdings of the same class is the amount which, in the case of those distributions, is treated under that sub-paragraph as made out of the profits arising to the company since that time.

• (3) The allowance to be made under sub-paragraph (1) above for distributions on holdings not of the class in question shall be such amount, whether fixed or proportionate to the amount of the profits, as ought justly and reasonably to be set aside for making such distributions, having regard to the respective rights comprised in or attaching to holdings in the company, and on the assumption that the total amount available for distributions by the company over any period will be proportionately greater or less than the profits taken into account under sub-paragraph (1) above, according as that period is longer or shorter than the period so taken into account; and regard may be had to the fact (if it is so) that distributions for which allowance is to be made under this sub-paragraph have been treated for purposes of the principal section as paid wholly or partly out of profits arising before the period so taken into account.

6

• (1) For purposes of paragraph 5 above, the profits arising to a company in the period between a person's acquisition of a holding and the making of a distribution on the holding shall be arrived at by ascertaining in accordance with the following sub-paragraphs the profits or loss for any accounting period wholly or partly comprised in that period and, where necessary, by the division and aggregation or apportionment of the profits or losses so ascertained.

• (2) Except as provided by sub-paragraph (3) below, the profits for any accounting period shall be ascertained according to the rules applicable under Part IV of this Act to the computation for corporation tax of the total profits of the company (losses of any description except those related to chargeable gains being deducted from profits of any description), except that—

• (a) franked investment income and group income shall be included ; and

• (b) no regard shall be had—

• (i) to any investment allowances, initial allowances or balancing charges, to any scientific research allowance in respect of expenditure incurred after 5th November 1962 or to so much of any writing down allowance made at a rate determined under section 38 or 39 of the Finance Act 1963 (free depreciation in development districts) or under section 14 of this Act as exceeds an allowance at a yearly rate of fifteen per cent. of the relevant amount of expenditure; or

• (ii) to any deduction falling to be made in respect of losses, allowances or expenses of management of any other period, except any deduction falling to be made against chargeable gains in respect of losses incurred before the accounting period; or

• (iii) to any restriction on the deduction that may be made for directors' remuneration ;

• (c) there shall be deducted—

• (i) any charges on income; and

• (ii) the corporation tax payable by the company in respect of the accounting period and any surtax paid by it in that period under section 249 of the Income Tax Act 1952 as applied by the provisions of Part IV of this Act about close companies.

This sub-paragraph shall apply for ascertaining a loss sustained by a company in an accounting period as it applies for ascertaining the profits of a company for an accounting period.

• (3) Where a company has a holding in another body corporate resident in the United Kingdom, and—

• (a) that holding was acquired by it before the recipient acquired his holding in the company ; and

• (b) on the assumption that the company's holding and any other relevant holdings in the body corporate were acquired when the recipient acquired his holding in the company, the company's holding in the body corporate would be treated for purposes of the principal section as amounting to, or being an ingredient in a holding amounting to, ten per cent. of all holdings of the same class in the body corporate;

then any distribution made to the company in respect of that holding shall be brought into account under sub-paragraph (2) above only to the extent to which it would, on the said assumption, be treated under this Schedule as made out of profits arising to the body corporate since the time when the holding was acquired:

Provided that this sub-paragraph shall not apply to a distribution which, on the said assumption, would fall within subsection (8) of the principal section.

Transitional.

7

• (1) For the application of section 4 of the Finance (No. 2) Act 1955 to dividends paid before the year 1966-67 the profits or gains arising in any period from a trade shall, notwithstanding that those profits or gains are within the charge to corporation tax, be computed in accordance with paragraph 5(2)(a) of Schedule 3 to that Act as if they were within the charge to income tax.

• (2) As regards distributions made in or after the year 1966-67 in respect of holdings acquired before that year.—

• (a) paragraphs 5 and 6(1) and (2) above shall be applied in relation to the period beginning with that year, as if the acquisition had been made at the beginning of that year, and paragraph 6(3) shall not apply; but

• (b) as regards the period before the beginning, of that year there shall be ascertained, as if for purposes of section 4 of the Finance (No. 2) Act 1955, whether there were profits of the company arising since the date of the acquisition and available at the beginning of that year for payment of the distribution or, if not, whether the company had incurred a loss between the date of the acquisition and the beginning of that year, and any such profits or loss shall be brought into account under paragraph 6(2) above by adding the amount of the profits or deducting the amount of the loss in the computation for the accounting period or part of an accounting period ending first after the beginning of that year.

8

• (1) As respects dividends paid before the year 1966-67 section 4 of the Finance (No. 2) Act 1955 shall have effect for corporation tax notwithstanding the exclusion from the charge to corporation tax of distributions received from companies resident in the United Kingdom ; and any other enactment operating by reference to the said section 4 shall apply accordingly.

• (2) Where—

• (a) a company carries on a trade other than such a trade as is mentioned in subsection (1) of section 4 of the Finance (No. 2) Act 1955 ; or

• (b) the business of a company consists wholly or mainly in the making of investments;

and in the year 1965-66 the company receives a dividend the net amount of which would, if the company carried on such a trade as is mentioned in the said subsection (1), be required to any extent to be brought into account for tax purposes as a trading receipt which has not borne tax, then so much of the said net amount as would have been required to be brought into account as aforesaid shall for the purpose of corporation tax in respect of chargeable gains be treated as if it were a capital distribution (within the meaning of Part III of this Act) received in respect of the stock or shares on which the dividend is paid, and to that extent paragraph 2(1) of Schedule 6 to this Act shall not apply thereto.

SCHEDULE 18

PART I — Interpretation Generally.

" Close company " and " associated company ".

1

• (1) For purposes of Part IV a " close company " is one which is under the control of five or fewer participators or of participators who are directors, except that the expression does not apply—

• (a) to a company not resident in the United Kingdom; or

• (b) to a registered industrial and provident society within the meaning of section 442 of the Income Tax Act 1952, or to a building society within the meaning of section 445 of that Act or any other company to which section 445 applies ; or

• (c) to a company controlled by or on behalf of the Crown, and not otherwise a close company; or

• (d) to a company falling within sub-paragraph (4) below.

• (2) Subject to sub-paragraph (4) below, a company resident in the United Kingdom (but not falling within sub-paragraph (1)(b) above) is also a close company if, on the assumption that it is so or on the assumption that it and any other such company or companies are so, more than half of any amount falling under Part IV of this Act to be apportioned for purposes of surtax in the case of the company could be apportioned among five or fewer participators or among participators who are directors.

• (3) A company is not to be treated as being at any time a close company if shares in the company carrying not less than thirty-five per cent. of the voting power in the company (and not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) have been allotted unconditionally to, or acquired unconditionally by, and are at that time beneficially held by, the public, and any such shares have within the preceding twelve months been the subject of dealings on a recognised stock exchange, and the shares have within those twelve months been quoted in the official list of a recognised stock exchange ; but for this purpose shares shall not be deemed to be allotted to, or acquired or held by, the public if they are allotted to, or acquired or held by—

• (a) any director or associate of a director of the company ; or

• (b) any company which is under the control of any such director or associate or of two or more persons each of whom is such a director or associate ; or

• (c) any associated company of the company.

In this sub-paragraph " share " includes " stock ".

• (4) A company is not to be treated as a close company in any case where—

• (a) by reason of beneficial ownership of shares in the company the control of it is in the hands of a company which is not a close company or of two or more companies none of which is a close company; and

• (b) it could only be treated as a close company as being under the control of five or fewer participators, and it cannot be so treated except by taking as one of the participators a company which is not a close company;

but so that references in this sub-paragraph to a close company shall be construed as applying to any company which, if resident in the United Kingdom, would be a close company.

• (5) For the purposes of this paragraph a company is to be treated as controlled by or on behalf of the Crown if, but only if, it is under the control of the Crown or of persons acting on behalf of the Crown, independently of any other person ; and where a company is so controlled, it shall not be treated as being otherwise a close company, unless it can be treated as a close company as being under the control of persons acting independently of the Crown.

2

For purposes of the provisions of this Act relating to close companies, a company is to be treated as another's " associated company " at a given time if at that time, or at any time within one year previously, one of the two has control of the other or both are under the control of the same person or persons.

" Control ".

3

• (1) For purposes of this Schedule a person shall be taken to have control of a company—

• (a) if he exercises, or is able to exercise, or is entitled to acquire, control, whether direct or indirect, over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire, the greater part of the share capital or voting power in the company; or

• (b) if he possesses or is entitled to acquire, either—

• (i) the greater part of the issued share capital of the company ; or

• (ii) such part of that capital as would, if the whole of the income of the company were in fact distributed to the members, entitle him to receive the greater part of the amount so distributed ; or

• (iii) such redeemable share capital as would entitle him to receive on its redemption the greater part of the assets which, in the event of a winding up, would be available for distribution among members ; or

• (c) if in the event of a winding up he would be entitled to the greater part of the assets available for distribution among members.

Where two or more persons together satisfy any of the conditions in paragraphs (a) to (c) above, they shall be taken to have control of the company.

• (2) In sub-paragraph (1) above " member " includes any person having a share or interest in the capital or income of the company, and for purposes of that sub-paragraph a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire ; but for the purposes of sub-paragraph (1)(b)(iii) and (c) any such loan creditor as is mentioned in paragraph 4(1)(b) below may be treated as a member (and the references to share capital as including loan capital).

• (3) For purposes of sub-paragraph (1) above there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.

• (4) For purposes of sub-paragraph (1) above there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under sub-paragraph (3) above but not those attributed to an associate under this sub-paragraph ; and such attributions shall be made under this sub-paragraph as will result in the company being treated as under the control of five or fewer participators, if it can be so treated.

" Participator " and " associate ".

4

• (1) For purposes of Part IV a " participator " is, in relation to any company, a person having a share or interest in the capital or income of the company and, without prejudice to the generality of the preceding words, includes—

• (a) any person who possesses or is entitled to acquire share capital or voting rights in the company;

• (b) any person who is a loan creditor of the company otherwise than in respect of any loan capital or debt issued or incurred by the company for money lent by him to the company in the ordinary course of a business of banking carried on by him;

• (c) any person who possesses or is entitled to acquire a right to receive or participate in distributions of the company (as defined in Part I of Schedule 11 to this Act) or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption ;

• (d) any person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for his benefit.

• (2) In sub-paragraph (1) above references to being entitled to do anything apply where a person is presently entitled to do it at a future date or will at a future date be entitled to do it; and " loan creditor" means a creditor in respect of any redeemable loan capital issued by the company or in respect of any debt incurred by the company, being a debt—

• (a) for money borrowed or capital assets acquired by the company; or

• (b) for any right to receive income created in favour of the company; or

• (c) for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon).

5

For purposes of the provisions of this Act relating to close companies, including this Schedule, " associate " means, in relation to a participator.—

• (a) a person in any of the following relationships to the participator, that is to say, husband or wife, parent or remoter forebear, child or remoter issue, brother or sister, and partner;

• (b) the trustee or trustees of any settlement in relation to which the participator is, or any such relative of his (living or dead) as is mentioned in sub-paragraph (a) above is or was, a settlor (" settlement " and " settlor " here having the same meaning as in Chapter III of Part XVIII of the Income Tax Act 1952, and " relative " including a husband or wife);

• (c) where the participator is interested in any shares or obligations of the company which are subject to any trust or are part of the estate of a deceased person, any other person interested therein;

and has a corresponding meaning in relation to a person other than a participator.

" Director " and " whole-time service director ".

6

• (1) For purposes of the provisions of this Act relating to close companies, including this Schedule, " director " and " whole-time service director " have the meanings assigned to them by this paragraph.

• (2) " Director " includes any person occupying the position of director by whatever name called, any person in accordance with whose directions or instructions the directors are accustomed to act and any person who—

• (a) is a manager of the company or otherwise concerned in the management of the company's trade or business ; and

• (b) is remunerated out of the funds of that trade or business; and

• (c) is, either on his own or with one or more associates, the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control twenty per cent. or over of the ordinary share capital of the company (" ordinary share capital" here meaning all the issued share capital, by whatever name called, other than capital the holders whereof have a right to a dividend at a fixed rate or a rate fluctuating in accordance with the standard rate of income tax, but have no other right to share in the profits of the company).

• (3) " Whole-time service director" means a director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity, and is not, either on his own or with one or more associates, the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control, more than five per cent. of the ordinary share capital of the company (" ordinary share capital" here having the same meaning as in sub-paragraph (2)(c) above):

Provided that a person is not to be treated as a whole-time service director if, on an amount equal to the whole distributable income of the company (computed without regard to the restriction on deductions for directors' remuneration) falling under Part IV of this Act to be apportioned for purposes of surtax, more than five per cent. of that amount could be apportioned to him together with his associates (if any).

PART II — Provisions Specially Related to Shortfalls in or Apportionment of Distributions.

Descriptions of profits or income.

7

• (1) The " distributable profits " of a company for an accounting period shall be the amount on which corporation tax falls finally to be borne, less the amount of that tax, but with additions equal to—

• (a) any deduction made by virtue of section 87 of this Act by way of allowance in respect of any source of income; and

• (b) any franked investment income, less the amount of any relief given against it for management expenses or charges on income ;

• (c) any group income.

• (2) The " distributable income " of a company for an accounting period shall be the amount of the distributable profits exclusive of the part attributable to chargeable gains, which shall be taken to be the amount of the chargeable gains on which corporation tax is finally borne less the amount of that tax.

• (3) The " distributable investment income " of a company for an accounting period shall be the amount of the distributable income exclusive of the part attributable to estate or trading income and less whichever is the smaller of—

• (a) ten per cent. of the estate or trading income ; and

• (b) £200 or, if the accounting period is of less than twelve months, a proportionately reduced amount.

• (4) The " estate or trading income " of a company means the income of the following descriptions:—

• (a) income which is not investment income for purposes of paragraph 8(1) below ; and

• (b) income which is chargeable to tax under Schedule B or which is chargeable to tax under Schedule D and, not being yearly or other interest, arises from the ownership or occupation of land (including any interest in or right over land) or from the letting furnished of any building or part of a building.

• (5) The amount for part of an accounting period of any description of income referred to in this paragraph shall be a proportionate part of the amount for the whole period, and, in determining the amount for any period of any description of income, any deduction from the company's profits for charges on income, expenses of management or other amount deductible from profits of more than one description shall be treated as made from such profits, and in such proportions from those profits, as is appropriate.

" Trading company " and " trading group ".

8

• (1) For purposes of the provisions of this Act relating to close companies, including this Schedule, a " trading company " is any company which exists wholly or mainly for the purpose of carrying on a trade and any other company whose income does not consist mainly of investment income, that is to say, income which, if the company were an individual, would not be earned income; but for this purpose any amount which is apportioned to a company under this Act, and any such amount as, in relation to a company to which section 245 of the Income Tax Act 1952 applied, is directed by any enactment to be treated as investment income, shall be deemed to be income of the company and to be investment income.

• (2) For the said purposes a company is to be treated as a " member of a trading group " if, but only if—

• (a) it exists wholly or mainly for the purpose of co-ordinating the administration of a group of two or more companies each of which is under its control and exists wholly or mainly for the purpose of carrying on a trade ; or

• (b) it is under the control of another company resident in the United Kingdom and not itself under the control of a third company, and it exists wholly or mainly for the purpose of a trade or trades carried on by that other company or by a group which, consisting of that other company and a company or companies also under its control and resident in the United Kingdom, exists wholly or mainly for the purpose of carrying on the said trade or trades:

Provided that a company shall not be treated as a member of a trading group by reason of any company having the control of another, if that control is exercised through a company which is not resident in the United Kingdom or through a company whose control depends on a holding a profit on the sale of which would be treated as a trading receipt of the company.

Amounts to be taken into account as distributions for accounting periods.

9

• (1) For the purpose of the provisions of this Act relating to shortfalls in the distributions of a close company the distributions for an accounting period shall be taken, subject to sub-paragraph (2) below, to consist of—

• (a) any dividends which are paid for the period and paid during or within twelve months after the period; and

• (b) any amount by which the directors' remuneration paid for the period exceeds the deduction allowed for it in computing the income of the period ; and

• (c) all distributions made in the period except dividends which in relation to any previous period would fall under paragraph (a) above.

• (2) Where a period of account is not an accounting period, dividends which, if it were an accounting period, would be treated under sub-paragraph (1)(a) above as distributions for that accounting period shall be apportioned to any accounting period or part of an accounting period falling within the period of account in proportion to the distributable income of each such period or part.

Procedure.

10

The following provisions of the Income Tax Act 1952 (which relate to appeals and to powers to obtain information) that is to say, section 248(2) and (3), section 250(3), (4) and (5) and section 264, shall apply in relation to section 78 of this Act with the necessary adaptations, references to a company to which section 245 of that Act applies or to an investment company being read as references to a close company and, in section 264(1), as extending to any company which appears to the Board to be a close company; and the powers conferred on the Board in relation to section 78 of this Act by the said sections 250(3) and 264 shall be exercisable by the inspector in relation to section 77 of this Act.

11

• (1) A close company may, at any time after the general meeting at which the accounts for any period of account are adopted, forward to the inspector a copy of those accounts, together with a copy of the report, if any, of the directors for that period, and such further information, if any, as it may think fit, and may request the inspector to proceed under this paragraph in relation to any accounting period comprised in that period of account :

Provided that this sub-paragraph shall not apply if the company is neither a trading company nor a member of a trading group and has no estate or trading income.

• (2) Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, then subject to sub-paragraph (3) below he shall, within three months after receipt of the request, intimate to the company whether or not he proposes to make an assessment on the company in respect of the accounting period under section 77 of this Act.

• (3) On receiving a request made in accordance with sub-paragraph (1) above the inspector may, not later than three months after receipt of the request, call on the company to furnish him with such further particulars as he may reasonably require ; and if he does so, the time for giving the intimation required by sub-paragraph (2) above shall not expire before three months after he has been furnished with those particulars.

• (4) Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, and does not within the time limited by sub-paragraphs (2) and (3) intimate his intention to make an assessment in respect of the period, no such assessment shall be made unless either—

• (a) the information accompanying the request, and any further particulars furnished to the inspector in connection therewith, are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to the inspector ; or

• (b) within twelve months of the end of the period paragraph 12 or 13 below has effect in relation to the company.

Cessation of trade and liquidations.

12

• (1) Where a close company ceases to carry on the trade, or the business of holding investments, in which its activities wholly or mainly consisted, then, subject to sub-paragraph (2) below but notwithstanding any other provision limiting the required standard of distributions, the required standard for any accounting period in which that event occurs, or which ends in or with the twelve months ending with that event, shall be calculated on the whole, instead of sixty per cent., of the estate or trading income (if any) taken into account and without any deduction in respect of the requirements of the business.

• (2) Where sub-paragraph (1) above applies to an accounting period and the company shows that the company could not make distributions up to the required standard without prejudice to the claims of creditors (excluding those mentioned in sub-paragraph (3) below), then for purposes of section 77 of this Act so much of the shortfall as the company shows could not be avoided without prejudice to those claims shall be disregarded.

Where this sub-paragraph applies a reference to it shall be substituted in section 78(3) of this Act for the reference to section 77(4).

• (3) The creditors excluded for the purpose referred to in sub-paragraph (2) above are all participators and associates of participators, and all creditors in respect of debts originally created in favour of or due to a person who was then a participator or associate of a participator:

Provided that a creditor is not to be excluded in respect of any debt which either—

• (a) arose in the ordinary course of the company's trade or the company's business of holding investments and also in the ordinary course of a trade or profession of the creditor or, as the case may be, of the participator or associate who was the original creditor ; or

• (b) is a debt for remuneration chargeable to income tax under Schedule E; or

• (c) is a debt for any rent or other payment due for the use of tangible property or of copyright in a literary, dramatic, musical or artistic work within the meaning of the Copyright Act 1956 (or any corresponding right under the law of a country to which that Act does not extend), and not representing more than a reasonable commercial consideration for that use.

13

• (1) Paragraph 12 above shall apply where a resolution is passed or an order is made for the winding up of a close company, or where any other act is done for a like purpose in the case of a winding up otherwise than under the Companies Act 1948, as that paragraph applies in a case falling within sub-paragraph (1) of it.

• (2) Where an event mentioned in sub-paragraph (1) above occurs in the case of a close company, then any assessment on the company in respect of a shortfall in distributions for an accounting period which ends in or with the twelve months ending with that event, shall be an assessment as for a distribution made immediately before that event, and the amount due under the assessment shall be recoverable accordingly.

• (3) Where after any such event the company carries on a trade or a business of holding investments, then sections 77 and 78 of this Act shall, notwithstanding the winding up, continue to apply as if the company were not being wound up, and paragraph 12 above shall apply for any accounting period ending after the date of that event.

Transitional and consequential.

14

• (1) Sections 77 and 78 of this Act shall not have effect as regards any accounting period or part of an accounting period falling before the beginning of the year 1966-67.

• (2) As regards income arising to a company before the end of the year 1965-66 Chapter III of Part IX of the Income Tax Act 1952 shall continue to have effect, and the income of a company to be taken into account under that Chapter shall include income chargeable to corporation tax, subject to the following provisions:—

• (a) in deciding under section 245 whether a company has distributed a reasonable part of its actual income account may be taken of amounts treated under paragraph 9 above as distributions for a period after the end of the year 1965-66, but only to the extent to which they exceed the required standard ; and

• (b) section 249(5) shall have effect subject to the like limitation as is imposed by section 78(7)(d) of this Act for purposes of section 78.

• (3) Where a period of account or an accounting period of a company falls partly in the year 1965-66, and partly in the year 1966-67, the two parts shall for purposes of the said Chapter III or, as the case may be, the said sections of this Act be dealt with as separate accounting periods:

Provided that—

• (a) where under paragraph 9(2) above it is necessary to apportion any dividends treated as dividends for any such period of account, it shall be done according to the proportion which the income of the part falling in the year 1965-66, computed as for the said Chapter III (but less income tax at the standard rate), bears to the distributable income for the part falling in the year 1966-67 ; and

• (b) where the distributions for any such accounting period are to be treated as including any amount in respect of the directors' remuneration, then—

• (i) in the case of a trading company, that amount shall be apportioned between the two parts of the period, and the amount apportioned to the earlier may be treated for purposes of the said Chapter III as income distributed by the company;

• (ii) in the case of a company other than a trading company, the whole amount shall be taken into account in the part of the period falling in the year 1966-67.

15

• (1) In relation to income arising in or after the year 1966-67 section 411(1)(b) of the Income Tax Act 1952 (which defines " income arising under a settlement " for certain purposes relating to revocable settlements etc.) shall have effect with the substitution for the reference to Chapter III of Part IX of that Act of a reference to section 78 of this Act; and in relation to that and subsequent years of assessment there shall be substituted for subsection (4) of that section—

(4) For the purposes of this Chapter, a body corporate shall be deemed to be connected with a settlement in any year of assessment if, within the meaning of Part IV of the Finance Act 1965, it is at any time in the year a close company (or only not a close company because it is not resident in the United Kingdom) and the participators then include the trustees of or a beneficiary under the settlement.

• (2) In relation to the year 1966-67 and later years of assessment—

• (a) in section 412(8)(d) of the Income Tax Act 1952 (which provides for amounts apportioned to a person under Chapter III of Part IX of that Act to be treated as his income for certain purposes) for the words " Chapter III of Part IX of this Act" there shall be. substituted the words " section 78 of the Finance Act 1965 "; and

• (b) in section 414(4) of that Act (which relates to the information a solicitor may be required to furnish under that section about transactions resulting in transfers of income to persons abroad) for the words from " The bodies corporate " onwards there shall be substituted the words—

The bodies corporate mentioned in the preceding provisions of this section are bodies corporate resident or incorporated outside the United Kingdom which are, or if resident in the United Kingdom would be, close Companies, but not trading companies, within the meaning of Part IV of the Finance Act 1965.

.

• (3) Any amount apportioned under section 78 of this Act to the personal representatives of a deceased person shall be treated as included as regards surtax in the aggregate income of the estate for purposes of Part XIX of the Income Tax Act 1952.

SCHEDULE 19

Preliminary.

1

• (1) This Schedule has effect for the modification of section 83 of this Act (" the principal section ") in relation to companies, being bodies corporate, which are members of a group of companies.

• (2) For purposes of this Schedule, save as otherwise provided therein.—

• (a) two companies shall be deemed to be members of a group of companies if one is the subsidiary of the other or both are subsidiaries of a third company ;

• (b) " subsidiary " has the meaning assigned to it for certain purposes of the profits tax by section 42 of the Finance Act 1938, and subsections (2) and (3) of that section shall apply as they applied for purposes of that section ;

• (c) " dividend " does not include a capital dividend.

• (3) References in this Schedule to a company apply only to companies resident in the United Kingdom ; and in determining for purposes of this Schedule whether one company is a subsidiary of another, the other company shall be treated as not being the owner—

• (a) of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade ; or

• (b) of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt; or

• (c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.

Company paying dividends within the group.

2

Where in the year 1965-66 a company pays a gross amount in dividends greater than the standard amount, but any of those dividends are paid to another member of the same group of companies, the amount to be treated under subsection (1) of the principal section as dividends paid in the year 1966-67 shall be such part only of the excess as is proportionate to the gross amount of the dividends (if any) paid otherwise than to members of the same group.

Company receiving dividends from within the group.

3

• (1) Subject to paragraph 4 below, where a company's profits in the financial year 1965 (as ascertained for purposes of the principal section) include dividends paid in the year 1965-66 by a member of the same group of companies, and that member pays in the year 1965-66 a gross amount in dividends greater than its standard amount, then there shall, except as provided in sub-paragraph (2) below, be deducted from the said profits as so ascertained an amount equal to such part of the excess as bears to the whole the same proportion as the gross amount of the part of those dividends which is included in the profits bears to the gross amount of all the dividends paid by the said member in the year 1965-66.

• (2) Sub-paragraph (1) above shall not apply to the computation of a company's profits in the financial year 1965 unless the profits include a gross amount of dividends received by it from members of the same group of companies in excess of one-third of the gross amount of the dividends received by the company in its standard period from companies then being members of the same group of companies (or if the standard period is less than three years, an amount bearing to the dividends last mentioned the same proportion as one year bears to the standard period); and where in computing a company's profits for the financial year 1965 a deduction would fall to be made under sub-paragraph (1) above, the company may elect that instead there shall be made a deduction equal to the excess referred to in this sub-paragraph.