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HMRC internal manual

International Manual

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HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: intangible fixed assets: partial use

CTA09/S848A

CTA09/S848A applies where the normal tax neutral provision is disapplied by section S775(4)(c) but where the asset has not been used exclusively for the purpose of a foreign permanent establishment. S848A(2) provides that where this is the case the transfer value is taken to be the TWDV plus the amount which would be the transferor’s foreign permanent establishments amount (FPEA) attributable to the transfer if the transfer was at market value. This FPEA may be a positive or negative amount.

This ensures that debits (“losses”) and credits (“gains”) relating to the part of the asset attributed to the exempt PE, or relating to its period of economic ownership, are appropriately taken into account on the disposal to another company to preserve the effect of exemption. The continuity of the tax neutral provision is effectively preserved in relation to the part of the asset not attributed to the exempt PE or the period of economic ownership that was not with the exempt PE.

Example 1 (assuming partial use by the PE business over the period asset amortised etc)

The UK business of Company A acquires an intangible fixed asset costing £100. It subsequently moves the part of the business in which the asset is exclusively used, along with all the relevant significant people functions, to a foreign PE. At that time company A has deductible debits of £20 under CTA09/Part 8 and the TWDV has been reduced to £80. The market value of the asset at that time is £120.

Company A subsequently transfers the asset to group company B when its TWDV has reduced to £70 and the market value is £130. The chargeable credit (“gain”) of company A computed in accordance with the rules in CTA09/Part 8 is £60, i.e. the difference between the market value and the TWDV. But the amount attributable to the exempt foreign PE’s period of ownership is £20 (based on the increase in market value (£130 - £120) and the decrease in TWDV (£80 - £70)) in respect of the period of ownership by the exempt foreign PE.

CTA09/S848A(2) provides that the transfer value is taken to be the TWDV of £70 plus the FPEA of £20 (the credit of £20 attributable to the exempt foreign PE).

The transfer value is therefore £90, calculated by adding the exempt foreign PE credit of £20 to the TWDV at the time of transfer (£70). If company B then sold the asset for £200 its chargeable credit would be £110 (rather than £130), effectively preserving the value of exemption for the transferee company - which should not be taxed on company A PE’s credit of £20.

Company A’s credit on the transfer is £90 - £70 = £20, but all of this is included in the relevant profits amount for the foreign territory, so is left out of account for corporation tax.

Example 2 (assuming partial use by the PE business over the period asset amortised etc - first use by PE)

This example considers the position if the situation in example 1 was reversed. The asset is first acquired by the exempt foreign PE business, but then transferred to the UK Head Office when the PE’s business closes down and the relevant functions revert to the UK. The asset is subsequently transferred to company B. Using the same figures as example 1 (cost £100, market value on relocation to the UK £120, with TWDV £80), the credit attributable to the exempt foreign PE period of ownership is £40. This is added to the TWDV of £70 at the time of the intra group transfer to arrive at the transfer value on the transfer to company B of £110 under CTA09/S848A.

Company A’s credit is £110 - £70 = £40, but all of this is included in the relevant profits amount for the foreign territory, so is an exempt credit. As noted at INTM282040, CTA09/S18B(1) provides that exemption adjustments include those to remove the effect of any gains or losses taken into account in computing the foreign PE’s amount in relation to any accounting period.

Example 3 (assuming partial use by the PE business over the period asset amortised etc - adjustment to debit or loss)

The UK business of Company A acquires an intangible fixed asset costing £100. It subsequently moves the part of the business in which the asset is exclusively used, along with all the relevant significant people functions, to a foreign PE. At that time company A has deductible debits of £20 under CTA09/Part 8 and the TWDV has been reduced to £80, equal to its market value.

Company A subsequently transfers the asset to group company B when its value has been reduced by unforeseen events occurring in that period to £10. The TWDV at the time of this transfer is £40 (which had been market value prior to the unforeseen events). If this was the company’s year end, an impairment review would reduce the Net Book Value of the asset to £10. But as this is not the company’s year end the TWDV at the time of the transfer is still £40. The deductible debit (loss) is £30 i.e. the difference between TWDV and the market value and it is correct to attribute the deductible debit to the exempt foreign PE.

The transfer value under CTA09/S848A is £10, calculated by deducting the foreign PE debit of £30 from (or adding the negative FPEA to) the TWDV of £40. Company A’s £30 debit arising on the transfer is ‘left out of account’ in calculating profits for corporation tax, under CTA09/S18A. Looking at the result for company B, the transfer value of £10 ensures that the debit (loss) of £30 accruing to the exempt foreign PE is not subsequently relieved on a disposal out of the group.