BIM60660 - Pre-trading expenses – Overview

An Offshore Property Developer will come within the charge to UK tax under Section 5(2)(a) CTA 2009 or Section 6(1A) ITTOIA 2005 on making a disposal of UK land or property on or after 5 July 2016.

Where there are write-downs in the value of a property before the company/individual comes within the charge - the opening value of the property would follow UK GAAP or IFRS. Subsequently, the opening value of the property would take into account the write-down, but the costs represented by the write-downs are to be treated as pre-trading expenses if incurred in the seven years prior to the company/individual coming within the charge.  To the extent that the write-down is reversed, there should be a corresponding adjustment to the value of pre-trading expenses.

Normal construction and other qualifying expenditure may have been incurred prior to the date the company or individual comes within the charge and in most instances relief for pre trading expenditure will be obtained under the normal rules in Section 57 ITTOIA 2005 or Section 61 CTA 2009. Guidance on these rules can be found at BIM46350.

Company with a UK Permanent Establishment (UK PE) prior to coming within the charge under S5(2)(a) CTA 2009

Where a company was already within the charge to UK corporation tax as a result of carrying on thetrade through a permanent establishment in the UK, a deduction would not have been given to any element of expenditure which was not related to the UK PE.  Without specific rules no relief would be given under the pre-trading rules when the company comes within the charge under s5(2)(a) CTA 2009. This is because the trade would have already commenced.

Specific rules have been introduced in Section 80 of FA 2016 to ensure Section 61 CTA 2009 will apply to provide relief for this expenditure.

Where the conditions listed below are met, Section 61 CTA 2009 will apply as if the company had started to carry on the trade at the point the company is first within the charge under Section 5(2)(a) CTA 2009

The following conditions must be met:

  • No deduction would otherwise be available for the expenses in question.
  • The company would have been eligible for a deduction under Section 41 or 61 of CTA 2009 if it had not been carrying on a trade before coming within the charge under Section 5(2)(a) CTA 2009.
  • No relief can have been obtained for these expenses under the law of any other country other than the UK. HMRC consider relief to have been given where there is any reduction in the tax payable in any country other than the UK. 

Example

Company A has been developing land in the UK for many years through a UK permanent establishment.

In 2014, Company A commenced ‘Project X’ in the UK. Company A incurred employee expenses of £2m in respect of Project X in 2014, none of which were attributable to the UK permanent establishment. Company A disposes of Project X in August 2016.

Because Company A already had a UK permanent establishment, it fell within the charge to corporation tax and was trading prior to coming within the charge under section 5(2)(a) CTA 2009.  The £2m employee expenses would not be ‘pre-trading expenditure’ were it not for special provisions.

So long as relief has not already been given, Company A can have relief for the £2m, to be taken into account as pre-trading expenditure when the company comes within the charge to tax under Section 5(2)(a) CTA 2009.

Expenses falling within the rule at Section 80 FA 2016 will be subject to the seven-year rule in Section 61 CTA 2009.