Breaches of conditions: Distribution Condition: tax charge for failure
Where the distribution condition has not been met, the company (principal company in the case of a Group REIT) is deemed to have received an amount of other chargeable income.
The income arises to C (residual) and is chargeable at the main CT rate (section 119 FA 2006 applies, as the income arises to C (residual)). No expenses, losses, deficits etc can be used to reduce the amount of income brought into charge under regulation 6 SI 2006/2864.
When the charge arises
The income is brought into charge when the failure occurs. That will be the CTSA return filing day for the accounting period to which the failure relates. For example, company C (a UK-REIT) has tax-exempt income for the accounting period ending 31 December 2010 of 1,000. By the filing date for that period, C has paid out only 500 as a PID. The other chargeable income will arise to C (residual) on 31 December 2011, and be included in the taxable profits of the accounting period ending 31 December 2011. If the company (principal company in the case of a Group REIT) leaves the regime before the charge arises the income will arise to C(post cessation) (or G(post cessation) in the case of a Group REIT).
Amount of income brought into charge
The amount of the charge is set out in regulation 6(4) and is
P - D
P is 90% of the income of the tax-exempt business the company is required to distribute in respect of the accounting period, and
D is the amount the company actually distributed by the CTSA filing date for the period.
In the above example, the amount of deemed income would be 400, and the tax charge 112.