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Corporation tax on restitution interest

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The Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations, SI 2017/364, make amendments to the special 45% rate of corporation tax charged on restitution interest paid by HMRC arising from a mistake of law. The special rate was introduced with effect from 21 October 2015 to tax the potential windfall arising to claimants on the interest element of claims which may have accrued over a number of years when corporation tax rates were significantly higher. The main aim of the amendments is to provide relief for charitable companies and with-profits policyholders, and strengthen provisions to prevent avoidance of the charge through a winding-up, or where a claim is made on a beneficiary company’s behalf by a third party. The changes:

  • place charitable companies and amounts representing income of policyholders of with-profits funds outside the scope of the special rate, as these claimants would either not have been liable to tax, or liable at a rate below the prevailing CT rate;
  • introduce anti-avoidance provisions applying the special rate in ‘pass through’ situations, where a claimant makes a claim on behalf of another person and passes any award to that person without the payment being recognised in its own financial statements;
  • apply the existing anti-avoidance provision, which keeps the charge with the transferor company where rights to claim are assigned, to non-resident companies carrying on a trade in the UK through a UK permanent establishment; and
  • transfer the latent charge of the transferor company to a related group member if the transferor company enters into a winding up or is dissolved within a given time.

The regulations came into force on 14 March 2017, with the main changes having effect from 21 October 2015.