ICTA88/S774 is aimed at transactions which attempt to exploit
mismatches in tax treatment between a ‘dealing company', that
is a company carrying on a trade of dealing in securities, land or
buildings, and an associated ‘non-dealing company', defined
as any company which is not a ‘dealing company’.
Since the definition of a dealing company extends to
‘any company whose profits on the sale of securities, land or
buildings are part of its trading profits' its scope is fairly
wide. It would include banks and insurance companies and in-house
finance companies that are regarded as financial traders and
assessed under Case I of Schedule D.
Section 774 is aimed at the situation where a ‘dealing'
company seeks a Case I deduction for a write-off of an amount, due
from an associated ‘non-dealing company’. Where Section
774 applies then the amount written off is assessed on the
associated ‘non-dealing company’ under Case VI of
Schedule D or, if there is an election under Section 774 (2), by
inclusion of the amount as a trading receipt of the
‘non-dealing company’. It is appreciated that the
reason for the write-off may be the insolvency of the associate,
but the effect may be to prevent losses being available for group
relief surrender.
However, the non-dealing company will not necessarily be
insolvent.
Cases of doubt or difficulty should be submitted to
Anti-Avoidance Group (Investigation), as should any case where it
is considered that the information power in Section 774 (5) should
be invoked.
