Annex 1: Minor changes in the law Change 2: Small profits rate and marginal relief: ignore “passive companies”: sections 25 and 26
This change enacts SP5/94 which excludes some non-holding companies from those treated as “associated companies”.
Although the HMRC practice in this area is presented formally as a statement of practice it contains an element of concession. So its enactment is a change in the law.
The statement of practice applies only if the company does not carry on a trade (see section 26(1)(a)). And it applies only to a “holding company”. So it must have at least one 51% subsidiary (see section 26(1)(b)). Those conditions are straightforward.
The statement of practice includes three detailed conditions (and a definition of 51% subsidiary). Section 26 sets out six conditions for a company to be a “passive company” in an accounting period.
The first condition (corresponding to the first detailed condition in SP5/94) is that the company has no assets in addition to shares in its subsidiaries. Subsection (5) of the section relaxes this condition for assets representing a dividend received.
The second condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no income other than dividends from its subsidiaries.
The third condition (corresponding to part of the third detailed condition in SP5/94) is that any dividends received by the company are distributed in full. The section expresses this condition in more detail than the statement of practice because a company cannot distribute a dividend that it receives: the dividend received is part of its profits, out of which it may pay a dividend of its own. So subsection (4) of the section sets out a “redistribution condition” which compares the dividends received with dividends paid.
The fourth condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no chargeable gains.
The fifth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for management expenses. A company may incur minor administrative expenses. But the benefit of the treatment in the section is incompatible with a deduction for management expenses.
The sixth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for qualifying charitable donations.
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.