Annex 1: Minor changes in the law Change 66: Company distributions: demergers: Schedule 2
This change disapplies paragraph 8(1) of Schedule 2 in respect of the repeal by this Act of regulations that amend the source legislation for section 1081(1). As a result, section 1081(1) applies to the whole of the first accounting period of a company to which this Act has effect.
Section 213 of ICTA provides that certain distributions made in the course of a demerger are excluded from references to “distribution” in the Corporation Tax Acts (see the definition of that term in section 832(1) of ICTA). The Corporation Tax (Implementation of the Mergers Directive) Regulations 2009 (SI 2009/2797) amended section 213(4) of ICTA, substituting the words “resident in a memberState” for the words “UK resident” in setting out a condition applying to companies relevant to the demerger. The regulations ensure that the United Kingdom is, in respect of distributions in a demerger, fully compliant with its obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.The effect of the amendment is to increase the number of cases in which distributions in the course of a demerger are exempt distributions (and are therefore taken out of the charge to income tax or corporation tax on income). Section 1081(1) rewrites section 213(4) of ICTA as so amended, and accordingly provides that one condition for exemption under the provisions about exempt distributions is that “each relevant company must be resident in a member State at the time of the distribution”.
The regulations came into force on 11 November 2009 and have effect in relation to distributions falling within section 213(3) of ICTA made on or after that date. The Act repeals the regulations in full. Paragraph 8(1) of Schedule 2 preserves the remaining force of a transitional or saving provision associated with a provision rewritten by the Act notwithstanding the repeal by the Act of that transitional or saving provision. Without the change made by this paragraph, the application of the amendment made by the regulations for distributions made on or after 11 November 2009 would continue to have effect for some companies in respect of the first accounting period to which this Act applies.
The Act comes into force on 1 April 2010 and has effect for corporation tax purposes for accounting periods ending on or after that day. It therefore applies to accounting periods beginning as early as 2 April 2009. Because of the change made by this paragraph, the law as restated in section 1081(1) applies to any distribution made in that first accounting period. There is therefore no question of having to apply different rules (that is, those in this Act and those as they existed in ICTA before the regulations had effect) to the same accounting period. This change ensures, having regard to the need for a statement of compatibility under section 19 of the Human Rights Act 1998, that the law to be enacted in the Act is also compliant with the United Kingdom’s obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.
The change may further increase the number of cases in which distributions in the course of a demerger are exempt distributions. That reduces the incidence of the charge to income tax or corporation tax on income for those who benefit from the change.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.