Corporation Tax: management expenses: introduction
In 1915 new legislation provided investment companies and certain life insurance companies with tax relief for management expenses. The aim of the legislation was to put investment companies into a broadly similar position to trading companies. The statutory provisions remained essentially unchanged until 1965, when the legislation was incorporated into the CT provisions.
Following the 1988 consolidation, the basic framework for the relief can be found in the following provisions:
- ICTA88/S75 general rules for expenses of management,
- ICTA88/S76 specific rules for management expenses of insurance companies,
- ICTA88/S130 definition of an investment company.
FA04 introduced substantial changes to the legislation
- Section 130 has been amended.
- A new Section 75 has replaced the old one and there are new Sections 75A and 75B.
- The commencement and transitional provisions are at FA04/S43 - S44 and consequential amendments are made by FA04/SCH6 and SI2004/2310.
- Section 76, relief for insurance companies, was also substantially amended.
The changes affect expenditure on or after 1 April 2004. There are transitional provisions that cover any straddling periods and aim to ensure that the transition to the new regime does not mean some expenses do not get relieved. The provisions also ensure that all expenses are relieved only once.
The main changes affect four broad areas:
- Companies qualifying for relief for management expenses.
These are no longer limited to companies resident in the UK. The companies who qualify is further extended to ‘companies with investment business’ (CTM08040).
- Restrictions to expenditure which qualifies as management expenses.
- New timing rule for relief.
Broadly this follows the accounts (CTM08560).
- Case VI charge.
There is now a Case VI charge where a company receives a credit for sums that have previously been allowed as management expenses (CTM08570).
The guidance is laid out as follows:
Investment companies and companies with investment business
CTM08020 provides guidance on the meaning of an investment company and CTM08040 on the meaning of a ‘company with investment business’. In most cases ‘investment company’ applies up to 31 March 2004 and ‘company with investment business’ thereafter. But the meaning of ‘investment company’ has been retained for the purposes of ICTA88/S573 and for the transitional provisions of FA04/S43.
CTM08150 to CTM08170 provide guidance on the general meaning of ‘expenses of management’, and CTM08180 to CTM08470 covers particular expenses and particular situations such as take-overs. The legislation also provides for expenses of management to include specific expenditure and to exclude other specific expenditure (CTM08430).
Up to 31 March 2004 there is a proviso in Section 75 (1) which means that expenses that are ‘otherwise deductible in computing profits’ are not allowable as management expenses under Section 75. From 1 April 2004 there is a similar provision Section 75 (2) which states that a deduction is not to be allowed for any expenses to the extent that those expenses are deductible in computing profits apart from Section 75.
There is specific guidance at CTM08440 regarding emoluments of employees and directors of property companies.
Life assurance companies and management expenses
You will find guidance in the Life Assurance Manual.