OT21106 - Corporation Tax Ring Fence and Supplementary Charge

Surrender of ACT Oil Extraction Company Owned by a Consortium.

Manual users are reminded S499 ceases to apply in relation to distributions made on or after 6th April 1999. The notes below are for periods prior to this.

Problems in this area surfaced in the mid '80s when companies acting through a joint venture consortium in the North Sea claimed that the ring fence legislation penalised them. Consortium companies are able to pay up dividends under a ICTA88/s247 election, but members cannot normally surrender ACT down, ICTA88/s240 applying only where there is at least 51% control by the paying company.

For companies generally, this did not cause problems because, if the company owned by the consortium had the capacity to absorb ACT, all it had to do was to pay up the dividend outside the ICTA88/s247 election. That option is not open to ring fence companies because of ICTA88/s497, where the definition of 'associated' companies includes one being owned by a consortium of which the other is a member

It was accepted that this was somewhat harsh and that relief should be given in certain very restricted circumstances set out at ICTA88/s499. The conditions to be satisfied were:

1. the consortium company is owned 50/50 by two members only (there is no relief for minority consortium members)
2. that company carries on a trade consisting of or including oil extraction activities or/and the acquisition, enjoyment or exploitation of oil rights (ICTA88/s492(1)).
3. all that company's shares carry the same rights and are of the same class
4. the dividend is paid on or after 17 March 1987
5. conditions "a-c" are fulfilled throughout the accounting period in which the dividend is paid and there are no arrangements which could cause these not to be fulfilled during that accounting period or at a later date.

Where these conditions are satisfied, the company is treated as a subsidiary of each consortium member for ICTA88/s240 purposes. The restrictive definition of "subsidiary" in ICTA88/s240(11) is overridden. This allows each consortium member to surrender surplus ACT to the consortium company.

The maximum amount of ACT which can be set against CT is restricted by ICTA88/s239(2). Where ICTA88/s499 applies, the s239(2) restriction for each member company is based on 50% of the consortium company's ring fence profits.

It should be noted that

there can be no carry forward of surplus surrendered ACT under ICTA88/s239(4) to an accounting period in which the 50/50 consortium relationship is not maintained or in which the consortium company is no longer carrying on a ring fence trade or in which all the share capital of the consortium company does not carry the same rights.

the consortium company does not become a subsidiary for carrying back ACT, so that the limited carry back relief in ICTA88/s498 is not available.