Annex 1: Minor Changes in the Law Change 18: Trading income etc: contributions to local enterprise organisations or urban regeneration companies: disqualifying benefits: sections 82, 1244 and 1253 and Schedule 1
This change concerns the anti-avoidance rules in sections 79(3) and (9), 79A(3) and (4) and 79B(3) and (4) of ICTA.
The change brings the income tax and corporation tax codes back into line. It also applies for management expenses.
The aim of the anti-avoidance rules is to stop companies obtaining a deduction for contributions that have strings attached. For example, a company may give money to a local enterprise agency which is used to meet the costs of a shareholder’s relative setting up in business. These costs would normally not be tax deductible. So the anti-avoidance rules are designed to prevent the costs becoming tax deductible by passing the money through a local enterprise organisation.
The denial of the deduction in the source legislation is “all or nothing”. This may cause a problem. For example, a company gives £1 million to a training and enterprise council, but asks that employees be given free places on a word processing course (worth say £5000). The anti-avoidance rule bars any deduction under these provisions.
When section 79A of ICTA was enacted in 1990 an assurance was given that in a case such as this a deduction would be allowed. In practice HMRC ignore such benefits, or treat the payment as split into two, one part for the training and one for the donation.
Paragraph 47610 of the HMRC Business Income Manual makes it clear that relief is not denied if the costs of obtaining the benefit provided would have been allowable as a deduction if incurred directly on an arm’s length basis. So the section disallows a deduction only if there is a “disqualifying benefit”.
Even if there is a “disqualifying benefit” the deduction may not be lost entirely. Instead, the deduction is restricted to take account of the benefit.
This change applies also to the corresponding rule for expenses of insurance companies in section 76ZK of ICTA (inserted by Schedule 1 to this Act).
The change may give some relief in a case where the source legislation denies it because there is a benefit to the company making the contribution.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.