INTM600720 - Transfer of assets abroad: The income charge: General conditions - reduction where controlled foreign company involved

Where a potential income charge falls on an individual, that charge may be reduced by ITA07/S725 where a controlled foreign company (CFC) is involved. New legislation regarding the taxation of controlled foreign companies was introduced by the Finance Act of 2012. This may affect how a controlled foreign company’s profits are taxed in the UK for accounting periods beginning on or after 1 January 2013, but it does not affect how the transfer of assets income charge is reduced, as ITA07/S725 acts to reduce the income subject to the charge by a proportion of the controlled foreign company’s profits.

For the purposes of this guidance, reference is made to the new legislation which is contained in Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), but the formula referred to later in this page applies equally to periods covered by the old controlled foreign company rules in Chapter 4 of Part 17 ICTA 1988.

The income charge falling on an individual may be reduced if the following conditions are met:

  • under Part 9A TIOPA 2010 (controlled foreign companies) the CFC is charged in relation to the CFC accounting period,
  • an amount of income is treated as arising to an individual under ITA07/S721 for a tax year, and
  • the income mentioned in ITA07/S721(2) is or includes a sum forming part of the CFC’s chargeable profits for the accounting period.

Apart from this provision the amount of income treated as arising to an individual under the income charge for a tax year would be or include a sum forming part of the controlled foreign company’s chargeable profits for that accounting period.

Where the above conditions are met, the amount that would otherwise be chargeable under the income charge is reduced by:

S multiplied by CA divided by CP

where:

  • S is the sum forming part of the controlled foreign company’s chargeable profits for that accounting period,
  • CA is the chargeable amount, and
  • CP is the controlled foreign company’s chargeable profits for that accounting period.

Example 1

An individual is treated as having income of £500,000 which is chargeable under the income charge. Of this amount £100,000 represents profits of an offshore company of which £50,000 has been apportioned to a UK resident company under the controlled foreign company provisions.

The income charge is reduced as follows:

£100,000 (S) multiplied by £50,000 (CA) divided by £100,000 (CP) equals £50,000

The income charge will therefore be on income of £500,000 minus £50,000 equalling £450,000.

Finance Act of 2013 introduced a similar rule to allow for a reduction in the amount of the income charge where a controlled foreign company is involved and the special rules in ITA07/S724 apply (that is, where a benefit is provided out of the income of a person abroad). The legislation had previously only provided for a reduction in the amount of an income charge where the charge was under ITA07/S721 (charge where there is power to enjoy income) (INTM600860 onwards). This amendment takes effect for the tax year 2013-2014 and subsequent years. Where the above conditions are met, the amount that would otherwise be chargeable under the income charge in ITA07/S724 is reduced by reference to a percentage (X%) of S in the above formula. X% is determined as follows:

100% multiplied by A divided by I

where:

  • A is the amount on which the individual is liable as determined under ITA07/S724(2), and
  • I is the amount of the income mentioned in ITA07/S721(2).

Example 2

An offshore company has profits of £100,000 of which £50,000 has been apportioned to a UK resident company under the controlled foreign company provisions. An individual has power to enjoy the income of the offshore company because he receives a benefit of £50,000 provided out of the income of the company. It is held that section ITA07/S724 applies in the circumstances.

The income charge is reduced as follows:

100% multiplied by £50,000 (A) divided by £100,000 (I) equals 50%

S equals £50,000 multiplied by 50% equals £25,000

The income charge is reduced as follows:

£25,000 (X% of S) multiplied by £50,000 (CA) divided by £100,000 (CP) equals £12,500

The income charge will therefore be on income of £50,000 minus £12,500 equalling £37,500.