OT21101 - Corporation Tax Ring Fence and Supplementary Charge

Treatment of ACT: Restrictions

S497 ceases to apply for accounting periods commencing on or after 6th April 1999. The notes below are for periods prior to this.

ICTA88/s239 governs the set-off of ACT against liability to CT generally. In dealing with ring fence companies S239 applies subject to the provisions of ICTA88/s497 (ICTA88/s497(1)).

The purpose of s497 is to prevent a group with non-ring fence losses from importing those losses, indirectly through the general ACT rules, within the ring fence. Initially, the legislation was aimed at groups with non ring-fence losses who could reduce their ring fence CT liability by claims under ICTA88/s242 (set-off of losses against surplus of franked investment income) for repayment of tax credits relating to inter-group distributions of ring fence profits. In its simplest form a ring fence company made profits which it distributed to its loss making non- ring fence parent by paying a dividend outside a group election. Under ICTA88/s239, which allows ACT paid by a company (and not repaid) in an accounting period to be set against any CT arising on the company for that accounting period, the subsidiary set the ACT against its ring fence profits and the parent reclaimed the ACT deducted from the dividend by using its non-ring fence losses under ICTA88/s242.

Under ICTA88/s497, where ACT is paid by a company with ring fence profits in respect of a distribution it makes to an associated company which is resident in the UK, the distributing company cannot set the ACT against CT on its ring fence profits (ICTA88/s497(2)(a)). The distributing company can set the ACT against CT on its non-ring fence profits.

If the distributing company surrenders ACT to a subsidiary under ICTA88/s240, that surrendered ACT cannot be set against the CT arising on the subsidiary's ring fence profits (ICTA88/s497(2)(b)). The ACT can be set against the CT on any non-ring fence profits of the subsidiary company