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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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ACT: set-off against CT on profits: capacity buying: introduction

ICTA88/S245 (1) & (6)

Section 245 was repealed in relation to changes in ownership occurring on or after 6 April 1999, although its effect was there after broadly replicated (in respect of unrelieved surplus ACT as at 6 April 1999) in the shadow ACT regulations (see CTM18750 onwards).

Section 245 countered a form of ACT buying - one company buying another which has surplus of ACT available for carry forward under Section 239 (4) (CTM20250) and exploiting that surplus. Without Section 245 the purchaser would have been able to introduce new or different profitable trading activities or business into the company, changing its existing trade or business significantly. They could then have deducted the surplus ACT built up under its previous ownership from CT chargeable on its profits in subsequent years.

The provision was modelled on ICTA88/S768 (CTM06300 onwards), which counters the buying of companies for their trading losses to carry forward. Indeed in the case of a trading company both provisions may have applied at the same time. Section 245 however applied to businesses, including that of an investment company, as well as to trades.

Where the conditions of Section 245 were satisfied the company’s surplus ACT was cancelled for carry forward purposes as at the date of change in ownership. This cancellation extended to ACT received under a ICTA88/S240 surrender as well as ACT paid by the company itself. However, relief for the surrendered ACT would normally also have been barred under ICTA88/S240 (5), see CTM81215.

FA93/S81 introduced a new restriction that appeared at subsection 3A to counter ‘ACT capacity buying’. This involved the buying of companies that had the capacity to absorb Section 239 (3) claims for past periods by groups expecting to accumulate surplus ACT in future periods.

Without FA93/S81 the following could have occurred. The newly acquired company with the ACT capacity would have been given funds and profits by other companies in the group. This would have enabled it to pay dividends up to its new parent accounting for ACT on the dividends. It could then have claimed to carry back surplus ACT against CT paid on profits charged in previous years. Meanwhile, the parent would have used the franked investment income to frank the dividends paid to shareholders.

The provision was modelled on Section 768A (see CTM06450). Where the conditions of Section 245 were met the effect was that the surplus ACT could not be carried back and set against CT paid by the company for accounting periods beginning before the change in ownership. For the purpose of subsection 3A the accounting period in which the change of ownership occurred was treated as consisting of two accounting periods, one ending and the other beginning on the change of ownership. Subsection 3A applied in relation to changes in ownership occurring on or after 16 March 1993.