Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Grant Thornton UK - Investment company technical release 2012
1. Investment company
technical release
March 2012
Revised tax regime for investment trust companies
Introduction
HMRC’s regulations on the modernisation of the tax rules company the benefit of the results of the management of
for Investment Trust Companies (ITCs) were approved by its funds.
Parliament in December 2011 and the new regime is effective Condition B – that the company’s ordinary shares must be
for all accounting periods commencing on or after admitted to trading on a regulated market.
1 January 2012. Condition C – that the company is not a Venture Capital
As an increasing number of investment companies have Trust or a UK Real Estate Investment Trust.
chosen to establish themselves offshore in recent years, These new eligibility conditions largely do away with the
HMRC hopes that a more principles based regime with 15% holdings test and the 70% income test and potentially
improved flexibility, together with the changes in taxation expand the range of assets that can be held by the company.
of overseas dividends resulting in the majority of ITCs not Prima facie, Condition A will give closed-ended investment
paying UK tax, will help to remove some of the barriers to companies the opportunity to execute a wider range of
setting up ITCs in the UK. Historically, compliance with investment remits without worrying about breaching
s1158 Corporation Tax Act (CTA) 2010 (and prior to that, prescribed limits. Although the wording is not identical,
s842 ICTA 1988) harboured significant risk to ITCs as the risk spreading concept is similar to that contained in
clearance was given retrospectively and annually and, due to the definition of a closed – ended investment fund used
prescriptive tests, it suffered from a precipice problem. If a in Chapter 15 of the Listing Rules. The listing condition
company failed a test, even by a very small margin, it would (Condition B) now uses the EU definition of a regulated
be denied investment trust status and all gains that year market, which is wider than the existing requirement for
would be taxable, with no opportunity for rectification. shares to be admitted to the official UK list.
The revised regime has three main features: Both conditions A and B are subject to further detailed
• a more principles based definition of ‘investment trust’ for conditions which are set out in regulations.
tax purposes
• the conditions in s1158 -1162 of CTA 2010 are
substantially shortened, with revised criteria set out in
regulations
• revised operational rules, covering application procedures
and inadvertent breaches.
Definition of an investment trust – s1158 CTA 2010
Section 1158 CTA 2010 requires that an investment trust
must meet three conditions:
Condition A – that the business of the company consists
of investing in shares, land or other assets with the aim
of spreading investment risk and giving members of the
2. Detailed conditions set out in regulations • include an undertaking to meet the conditions for
The requirements which must continue to be met by an subsequent periods
approved investment trust include the following: • include a copy of the company’s published
investment policy
The close company test
• contain evidence that ordinary shares are admitted to
The close company test will continue to operate in its trading on a regulated market.
current form as set out in s439 CTA 2010. Contrary to
what was proposed in the original consultation, the quoted Breaches
company exemption is to be maintained - an ITC would Once investment trust status is granted, it will continue
not be a close company if 35% of the voting shares are held to apply subject to compliance with certain breaching
by the public and have been listed and dealt on a recognised conditions. The regulations introduce the concept of minor
stock exchange. and serious breaches, in a similar way to the reporting fund
The 15% income retention test regulations applying to offshore funds.
The original consultation had proposed to reduce the Minor inadvertent breaches for which there is a reasonable
maximum retention to 10%. In the final regulations, this excuse and which are remedied as soon as reasonably
remains at 15%, but it is calculated as 15% of all income, practicable will not cause a loss of investment trust status.
rather than on income from shares and securities. The Serious breaches on the other hand cause loss of approval
amount of income permitted to be retained is however and could arise for example where, in a ten year period, there
reduced if the company has reportable income from offshore have been three minor breaches of the same condition, or
funds which has been accounted for as capital in accordance four minor breaches of more than one condition. Failure to
with the SORP. From HMRC’s perspective this mechanism comply with the close company test at any time, significant
ensures that reported income is distributed to investors, over-retention of income (defined as over 5%) or failure to
and in practice it will be a key point to be alert to when comply with eligibility conditions A to C in s1158 CTA 2010
determining the amount of any distribution. would also constitute serious breaches.
The required distribution must be made before the filing Particular care, as now, needs to be taken with the close
date of the company’s tax return – ie 12 months following the company test, but also the published investment policy needs
end of the accounting period. to be considered carefully to ensure that the ITC does not
There is also a helpful development for investment trusts risk breaching the eligibility conditions.
with low levels of income whereby the minimum level below
which a distribution is not required has been increased from Distribution of capital profits and changes to
£10,000 to £30,000. Companies Act 2006
Historically, obtaining approval as an investment trust
Investment policy has required an ITC to have a clause in its memorandum
Any changes in the company’s published investment policy or articles of association which prohibit the distribution
must be notified to HMRC. as dividend of surpluses arising from the realisation of
investments. This prohibition is removed in the
Breaches
new regulations.
Any breaches of the regulations or the eligibility conditions
In order to align company law with the tax regulations, a
must be notified to HMRC, along with details of any
similar amendment is expected to be made to the investment
action taken.
company rules in the Companies Act (CA)2006. At present
a CA 2006 s833 investment company is prohibited from
All ITCs are required to make an up-front application
distributing capital profits (other than by way of share
The existing system of retrospective confirmation of ITC
buyback). This prohibition is also to be removed, although
status is replaced with a requirement to make an up-front
the legislation to give effect to this will not be effective
application for approval. The deadline for this application is
until April.
90 days after the end of the first applicable accounting period.
This represents a significant potential change in the
HMRC will then respond or request further information
investment trust legal framework. The ability to distribute
within 28 days before making a final decision. Boards will
capital gains is not something which will necessarily appeal
need to review the Company’s proposed compliance with the
to all companies but having the flexibility to re-evaluate
revised requirements and make appropriate arrangements for
distribution policies is something which is likely to have a
transition to the new regime.
significant impact in some cases.
Applications for approval require to be made in writing
The Companies Act is also to be amended to align the
and must:
other conditions for investment companies with the revised
• specify the date from which approval is sought (this will
tax regulations, in particular to reflect the removal of the 15%
be the first day of an accounting period)
holding condition and the revised listing condition.
• include a statement that the company meets (or will meet)
the conditions