CTM09020 - Corporation Tax: charges on income: annuities or other annual payments

Subject to ICTA88/S338A (4), under ICTA88/S338A (2)(a) annuities or other annual payments are charges if they meet the conditions in ICTA88/S338B.

ICTA88/S338A (4) excludes from being a charge a payment which is:

• an annuity payable by an insurance company, or
• an annuity or other annual payment payable by a company wholly or partly in satisfaction of any claim under an insurance policy in relation to which the company is the insurer.

Under ICTA88/S338B (1) an annuity or other annual payment is a charge if it:

• meets the requirements of ICTA88/S338B (2), and
• is not specifically excluded from being a charge by ICTA88/S338B or any other provision.

The requirements of ICTA88/S338B (2) are that the payment:

1. Is made under a liability incurred for a valuable and sufficient consideration (previously in ICTA88/S338 (5)(b)). This point was considered in Ball v National and Grindlays Bank 47TC287. What is at issue in any case is whether, in exchange for the liability to make the annual payments, the company has received full consideration. There is guidance at CTM09080 on a pension paid in respect of the services of a former employee, and at CTM09090 on the payment of an annuity taken over by a company.
2. Is not charged to capital (previously ICTA88/S338 (5)(a)).
3. Is ultimately borne by the company (previously ICTA88/S338 (5)(a)).
4. In the case of a non-UK resident company, is incurred wholly and exclusively for the purposes of a trade which is or is to be carried on by it in the UK through a branch or agency (see CTM34210, CTM34220, and CTM34240) (previously ICTA88/S338 (5)(b)).

Under ICTA88/S338B (3) an annuity or other annual payment made to a non-UK resident person is a charge only if it fulfils the conditions of ICTA88/S338B (4) (previously ICTA88/S338 (4)).

The conditions of ICTA88/S338B (4) are that the company making the payment is UK resident (but see DT1951) and that either:

• the company deducts IT in accordance with ICTA88/S349 and accounts for it under ICTA88/SCH16, or
• the person beneficially entitled to the income in respect of which the payment is made is a company that is not UK resident but which carries on a trade in the UK through a branch or agency and the payment falls to be brought into account in computing the chargeable profits (within the meaning given by ICTA88/S11 (2)) of that company), or
• the payment is one payable out of income brought into charge under Case V of Schedule D (Case IV or V of Schedule D prior to 25 July 2002).

Under ICTA88/S338B (5) an annuity or other annual payment is not a charge on income if:

• it is payable in respect of the company’s loan relationships, or
• it is a royalty to which FA02/SCH29 applies.

Nothing in ICTA88/S338B prevents an annuity or other annual payment from being a charge if it is a qualifying donation within the meaning of ICTA88/S339 (see CTM09050) - ICTA88/S338B (6).

Prior to 25 July 2002 ICTA88/S338 (7) specifically provided that any payment to which ICTA88/S125 (1) applied could not be a charge on income. ICTA88/S125 is about annual payments for non-taxable consideration, and there is guidance on this at IM4865.