HMRC internal manual

International Manual

Controlled Foreign Companies: definitions

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Definitions: accounting periods


Chapter IV operates by reference to the ‘accounting periods’ of a company resident outside the United Kingdom to establish whether a Chapter IV liability exists and to compute that liability. In the straightforward case of a United Kingdom company’s foreign subsidiary, which has a continuing trade or business and makes up its accounts annually to the same date each year, its accounting periods will normally be the periods of those accounts. Special rules are included in Chapter IV because the companies in question are not actually resident in the United Kingdom and Chapter IV does not impose an annual charge. Additionally, many of the normal Corporation Tax rules in CTA09/S9 and S10 apply to govern the commencement or cessation of an accounting period.

Commencement of Accounting Period - ICTA88/S751(1)

An accounting period of a company resident outside the United Kingdom begins whenever -

  1. the company comes under the control of United Kingdom residents, or
  2. the company commences business, unless it has previously been the subject of an apportionment, or
  3. an accounting period ends without the company ceasing to carry on business or to have any sources of income.

In (a) above the term ‘United Kingdom residents’ means persons who are resident in the United Kingdom for tax purposes.

Cessation of Accounting Period - ICTA88/S751(2)

An accounting period of a company resident outside the United Kingdom ends whenever-

  1. the company ceases to be under the control of United Kingdom residents, or
  2. the company becomes, or ceases to be, liable to tax in a territory by reason of domicile, residence or place of management, or
  3. the company ceases to have any sources of income.

The rule in (b) above ensures that the company is resident in the same territory throughout the accounting period which is necessary for applying the lower level of taxation and exempt activities tests. However, the opening or closure of a permanent establishment of the company outside its territory of residence will not normally cause an accounting period to end. INTM254400 has further information about the effect on accounting periods of changes in a company’s liability to tax in a given territory.

Rules in CTA09/S9 and S10 and ICTA88/S751(3)

In addition to the rules in ICTA88/S751(1) and (2), ICTA88/S751(3) applies the rules in CTA09/S10(1) and (5), S11(1) and (2) and S12 with the exception of those relating to a company commencing or ceasing to be within the charge to Corporation Tax. The main effects are that-

  • an accounting period ends no more than twelve months after the end of the preceding accounting period;
  • an accounting period ends on a date to which a company makes up its accounts;
  • an accounting period ends when a company begins or ceases to trade;
  • an accounting period ends and a new one begins when a company commences to be wound up.

Insufficient Information to Determine Accounting Period - ICTA88/S751(4)-(5)

In some cases there is insufficient information to establish the correct accounting period of a company resident outside the United Kingdom. In these circumstances the Board may by notice, specify an appropriate accounting period not exceeding twelve months. If, following such a notice, further information becomes available, to show the true accounting period the notice is amended. Further guidance may be obtained, in cases of difficulty, from CSTD Business, Assets & International Base Protection Policy team - see INTM256830.

Accounting Periods beginning on or after 3 December 2004

SI 2005/185 amended The Controlled Foreign Companies (Excluded Countries) Regulations 1988 for accounting periods beginning on or after 3 December 2004.

Specific reference to the accounting period in the SI was necessary to prevent subsidiaries deferring the commencement date for the new clauses by manipulating their accounting periods. So where an accounting period of a company resident outside the United Kingdom would, without amendment, have ended on or after 2 December 2004 but is amended on or after that date so as to end before that date, an accounting period of the company shall, for the purposes of SI 2005/185, be treated as having ended on that date