REV BN24 - Corporation Tax Reform: Management Expenses

Who is likely to be affected?

1. Companies with investment business and life assurance companies.

General description of the measure

2. Relief for the expenses of managing investments will become available to companies with investment business, whether or not they qualify as investment companies under current legislation.

Operative date

3. 1 April 2004.

Current law and proposed revisions

4. Under current law, relief for the expenses of managing investments (“management expenses”) is available only to companies qualifying as “investment companies”. Relief is given in the accounting period for which the expense is “disbursed”.

5. The proposed change lifts the requirement to be an investment company and extends relief to companies with investment business. The requirement for a company to be UK resident will also be removed, so that UK permanent establishments of non-resident companies will be able to obtain relief for the costs of managing their investments.

6. The rule governing the timing of relief will also change, to align with the accounting treatment.

7. These proposals were included in the December 2003 Inland Revenue Technical Note Corporation Tax Reform: The Next Steps, which included draft legislation. This followed two previous consultation documents in August 2002 and August 2003. Draft consequential legislation was published on the Inland Revenue website earlier this month.

8. The Finance Bill will contain legislation to give effect to these changes. The legislation will broadly follow the draft clauses published in December 2003. A summary of the responses to consultation will be published alongside the Finance Bill.

9. Changes in response to points raised during the consultation will include:

• repeal of the provisions which require appeals on management expenses to go to the Special Commissioners; and
• drafting changes to ensure that the legislation achieves its intended purpose in the most straightforward way.

10. The Finance Bill clauses, like the draft clauses published in December 2003, will specifically exclude capital expenditure from deduction as a management expense. This is not intended to restrict the deductibility of expenditure as compared with the Revenue’s view of the law prior to the High Court decision (currently under appeal) in the case of Camas plc v. Atkinson.

11. The Finance Bill will also contain legislation to give effect to changes to the way relief is given to life assurance companies for their expenses. This legislation will also broadly follow the draft clauses published in December 2003, but a number of changes will be included as a result of points made in consultation.

Further advice

12. Draft guidance on the new legislation will be made available on the Inland Revenue website following publication of the Finance Bill. This will include detailed guidance on the issue of capital expenditure mentioned above.

13. If you have any questions about this change, please contact Peter Marriott on 020 7438 6442.

www.inlandrevenue.gov.uk