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HMRC internal manual

Company Taxation Manual

Corporation Tax: small profits relief: definition of augmented profits

For the purpose of the small profits relief in CTA10/PART3 the augmented profits of a company for any accounting period are defined by CTA10/S32 as:

  • the taxable total profits of that period, as defined in CTA10/S4 (2) and (3), plus
  • any franked investment income received by the company in that period other than franked investment income which the company (if a member of a group) receives from companies within the group.

For this purpose, franked investment income is treated as received from within the group only if the dividends are

  • paid by a 51 per cent subsidiary of the recipient or of a company of which the receiving company is a 51 per cent subsidiary, or
  • paid by a trading company or relevant holding company that is a ‘quasi-subsidiary’ of the receiving company: a quasi subsidiary company means one owned by a consortium of which the receiving company is a member, which is not a 75 per cent subsidiary of any company, and no arrangements exist for it to become so.

CTA10/S32 provides definitions:

  • as regards the 51 per cent subsidiary relationship, in addition to the requirements at CTA10/S1154 (2) the relationship will only qualify at any time if the parent would be entitled to more than 50 per cent of

    • profits available for distribution to equity holders and
    • assets available to equity holders on a winding up

    ignoring indirect ownership and ownership on trading account

    • trading company has the usual meaning of one whose business consists of carrying on a trade or trades
    • relevant holding company means a company whose business consists of holding shares in or securities of 90 per cent trading subsidiaries
    • a company is owned by a consortium if at least 75 per cent of its ordinary share capital is beneficially owned by two or more companies each of which has at least a 5 per cent beneficial entitlement to profits and assets available to equity holders as above.

    The group relief provisions set out in CTA10/PART5/CHAPTER6 apply for the purpose of identifying equity holders and profits and assets available for distribution.

    Similar rules applied to calculate small companies’ relief in relation to ‘basic profits’ - profits on which CT falls finally to be borne - with the addition of franked investment income. Prior to 6 April 1999 franked investment income was treated as received from within the group only if the dividends were or might be ‘group income’. Foreign income dividends were included.

    If the franked investment income arose in 1993-94, see CTM20550.