Finance (No. 2) Bill (HC Bill 155)

Finance (No. 2) BillPage 50

412J Meaning of “operator” and related terms

(1) This section applies for the purposes of this Chapter.

(2) “Operator” means a person who—

(a) has permission under Part 4A of FISMA 2000 to carry on a
5regulated activity specified in Article 36H of the Financial
Services and Markets Act 2000 (Regulated Activities) Order
2001 (S.I. 2001/544S.I. 2001/544) (operating an electronic system in relation
to lending), or

(b) has been granted equivalent permission under the law of a
10territory outside the United Kingdom that is within the
European Economic Area.

(3) A loan is “made through” an operator if the person who makes the loan
and the recipient of the loan enter the agreement under which the loan
is made at the invitation of the operator.

(4) 15A right is “assigned through” an operator if the person who assigns the
right and the person to whom the right is assigned enter the agreement
under which the assignment takes effect at the invitation of the
operator.

(5) A person is not to be treated as having entered an agreement at the
20invitation of an operator if the operator made the invitation otherwise
than in the course of carrying on the activity to which the permission
mentioned in subsection (2)(a) or (b) relates.”

(3) In section 24(1) (list of reliefs deductible at Step 2 of the calculation of income
tax liability), in paragraph (b), at the appropriate place insert—

  • 25“Chapter 1A of Part 8 (irrecoverable peer-to-peer loans),”.

(4) In section 25(3) (list of provisions requiring reliefs to be deducted from
particular components of income etc) at the appropriate place insert—

  • “sections 412A(4), 412B(3) and 412C(3) (relief for irrecoverable
    peer-to-peer loans only against interest on certain loans),”.

30Transactions in securities

33 Transactions in securities: company distributions

(1) Chapter 1 of Part 13 of ITA 2007 (transactions in securities) is amended as
follows.

(2) In section 684 (person liable to counteraction), in subsection (1)—

(a) 35in the opening words, after “a person” insert “(“the party”)”;

(b) in paragraph (c), omit “the person in being a party to”;

(c) in paragraph (d), for “the person” substitute “the party or any other
person”.

(3) In that section, in subsection (2)—

(a) 40in paragraph (c), omit the final “and”;

(b) after paragraph (d) insert—

(e) a repayment of share capital or share premium, and

(f) a distribution in respect of securities in a winding up.”

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(4) In section 685 (receipt of consideration in connection with distribution by or
assets of close company)—

(a) in subsection (2)—

(i) in the opening words, for “the person” substitute “a relevant
5person”;

(ii) in the words after paragraph (c), after “and” insert “the relevant
person”;

(b)
in subsection (3)—

(i) in paragraph (a), for “the person” substitute “a relevant person”;

(ii) 10in paragraph (c), for “the person” substitute “the relevant
person”;

(c) after subsection (3) insert—

(3A) In subsections (2) and (3) “relevant person” means—

(a) the party, or

(b) 15any person other than the party in relation to whom the
condition in section 684(1)(d) is met.”

(d) omit subsection (6);

(e) after subsection (7) insert—

(7A) The references in subsection (4)(a)(i) and (ii) to assets do not
20include assets shown to represent return of sums paid by
subscribers on the issue of securities merely because the law of
the country in which the company is incorporated allows assets
of that description to be available for distribution by way of
dividend.

(7B) 25The references in subsections (4)(a)(i) and (5)(a) to assets which
are available for distribution by way of dividend by the
company include assets which are available for distribution to
the company by way of dividend by any other company it
controls.”

(5) 30In section 686 (excluded circumstances: fundamental change of ownership)—

(a) in subsection (1)(a), for the words from “the person” to “party”)”
substitute “the party”;

(b) for subsections (2) to (5) substitute—

(2) There is a fundamental change of ownership of the close
35company if, as a result of the transaction or transactions in
securities, the condition in subsection (3) is met.

(3) The condition in this subsection is that the original shareholder
or original shareholders taken together with any associate or
associates—

(a) 40do not directly or indirectly hold more than 25% of the
ordinary share capital of the close company,

(b) do not directly or indirectly hold shares in the close
company carrying an entitlement to more than 25% of
the distributions which may be made by the close
45company, and

(c) do not directly or indirectly hold shares in the close
company carrying more than 25% of the total voting
rights in the close company.

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(4) In this section “original shareholder” means a person who,
immediately before the transaction in securities (or the first of
the transactions in securities), held any ordinary share capital of
the close company.

(5) 5For the purposes of this section, shares of or share capital in the
close company which are held by a person controlled by an
original shareholder, or by two or more original shareholders
taken together, count as shares or share capital held by that
original shareholder or those original shareholders.”

(6) 10In section 687 (income tax advantage)—

(a) in subsection (1), in the opening words, for “the person” substitute “a
person”;

(b) in subsection (2)—

(i) after “to the person” insert “or an associate of the person”;

(ii) 15for “the relevant consideration is received” substitute
“Condition A or B in section 685 is met”.

(7) In section 713 (interpretation), at the appropriate place insert—

  • ““associate” is to be construed in accordance with section 681DL,
    but as if subsection (4) of that section also included, as persons
    20associated with each other, a person as trustee of a settlement
    and an individual, where one or more beneficiaries of the
    settlement are connected or associated with the individual;”.

(8) The amendments made by this section have effect in relation to—

(a) a transaction occurring on or after 6 April 2016, or

(b) 25a series of transactions any one or more of which occurs on or after that
date.

(9) Accordingly, Chapter 1 of Part 13 of ITA 2007 has effect without the
amendments made by this section in relation to a tax advantage obtained on or
after 6 April 2016 in consequence of—

(a) 30a transaction occurring before that date, or

(b) a series of transactions all of which occur before that date.

(10) Where—

(a) before 6 April 2016 a person provides particulars to the Commissioners
for Her Majesty’s Revenue and Customs under section 701 of ITA 2007
35in respect of a transaction or transactions,

(b) on the basis of Chapter 1 of Part 13 of ITA 2007 as it has effect apart from
this section, notification is given under section 701 of that Act that no
counteraction notice ought to be served about the transaction or
transactions,

(c) 40the transaction, or any one or more of the transactions, occurs on or
after 6 April 2016, and

(d) the person would, but for the notification, be liable for counteraction of
an income tax advantage from the transaction or transactions under
Chapter 1 of Part 13 of ITA 2007 as amended by this section,

45the notification is void and section 702(2) of ITA 2007 does not apply in relation
to the transaction or transactions.

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34 Transactions in securities: procedure for counteraction of advantage

(1) Chapter 1 of Part 13 of ITA 2007 (transactions in securities) is amended as
follows.

(2) For section 695 (preliminary notification) substitute—

695 5Notice of enquiry

(1) An officer of Revenue and Customs may enquire into a transaction or
transactions if—

(a) the officer has reason to believe that section 684 (person liable to
counteraction of income tax advantage) may apply to a person
10(“the taxpayer”) in respect of the transaction or transactions,
and

(b) the officer notifies the taxpayer of his intention to do so.

(2) The notification may be given at any time not more than 6 years after
the end of the tax year to which the income tax advantage in question
15relates.”

(3) Omit sections 696 and 697 (opposed notifications).

(4) In section 698 (counteraction notices), for subsection (1) substitute—

(1) If on an enquiry under section 695 an officer of Revenue and Customs
determines that section 684 applies to the taxpayer, the income tax
20advantage in question is to be counteracted by adjustments, unless the
officer is of the opinion that no counteraction is required.”

(1) In that section, for subsection (5) substitute—

(5) An assessment may be made in accordance with a counteraction notice
at any time (without regard to any time limit on making the assessment
25that would otherwise apply).”

(6) After that section insert—

698A No-counteraction notices

(1) If on an enquiry under section 695 an officer of Revenue and Customs
is of the opinion that no counteraction is required, the officer must
30serve notice on the person (a “no-counteraction notice”) stating that no
counteraction is required and why.

(2) The taxpayer may apply to the tribunal for a direction requiring an
officer of Revenue and Customs to issue one of the following within a
specified period—

(a) 35a counteraction notice;

(b) a no-counteraction notice.

(3) Any such application is to be subject to the relevant provisions of Part
5 of TMA 1970 (see, in particular, section 48(2)(b) of that Act).

(4) The tribunal must give the direction applied for unless satisfied that
40there are reasonable grounds for not serving either a counteraction
notice or a no-counteraction notice within a specified period.”

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(7) In section 684 (person liable to counteraction), for subsection (4) substitute—

(4) This section is subject to no-counteraction notices issued under section
698A.”

(8) The amendments made by this section have effect in relation to—

(a) 5a transaction occurring on or after 6 April 2016, or

(b) a series of transactions any one or more of which occurs on or after that
date.

(9) Accordingly, Chapter 1 of Part 13 of ITA 2007 has effect without the
amendments made by this section in relation to a tax advantage obtained on or
10after 6 April 2016 in consequence of—

(a) a transaction occurring before that date, or

(b) a series of transactions all of which occur before that date.

35 Distributions in a winding up

(1) In Chapter 3 of Part 4 of ITTOIA 2005 (dividends and other distributions from
15UK resident companies), after section 396A insert—

396B Distributions in a winding up

(1) For the purposes of this Chapter, a distribution made to an individual
in respect of share capital in the winding up of a UK resident company
is a distribution of the company if—

(a) 20Conditions A to D are met, and

(b) the distribution is not excluded (see subsection (7)).

(2) Condition A is that, immediately before the winding up, the individual
has at least a 5% interest in the company.

(3) Condition B is that the company—

(a) 25is a close company when it is wound up, or

(b) was a close company at any time in the period of two years
ending with the start of the winding up.

(4) Condition C is that, at any time within the period of two years
beginning with the date on which the distribution is made—

(a) 30the individual carries on a trade or activity which is the same as,
or similar to, that carried on by the company or an effective 51%
subsidiary of the company,

(b) the individual is a partner in a partnership which carries on
such a trade or activity,

(c) 35the individual, or a person connected with him or her, is a
participator in a company in which he or she has at least a 5%
interest and which at that time—

(i) carries on such a trade or activity, or

(ii) is connected with a company which carries on such a
40trade or activity, or

(d) the individual is involved with the carrying on of such a trade
or activity by a person connected with the individual.

(5) Condition D is that it is reasonable to assume, having regard to all the
circumstances, that—

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(a) the main purpose or one of the main purposes of the winding
up is the avoidance or reduction of a charge to income tax, or

(b) the winding up forms part of arrangements the main purpose or
one of the main purposes of which is the avoidance or reduction
5of a charge to income tax.

(6)
The circumstances referred to in subsection (5) include in particular the
fact that Condition C is met.

(7) A distribution to an individual is excluded if or to the extent that—

(a) the amount of the distribution does not exceed the amount that
10would result in no gain accruing for the purposes of capital
gains tax, or

(b) the distribution is a distribution of irredeemable shares.

(8) In this section—

  • “arrangements” includes any agreement, understanding, scheme,
    15transaction or series of transactions, whether or not legally
    enforceable;

  • “effective 51% subsidiary” has the meaning given by section 170(7)
    of TCGA 1992;

  • “participator” has the meaning given by section 454 of CTA 2010.

(9) 20For the purposes of this section, an individual has at least a 5% interest
in a company if—

(a) at least 5% of the ordinary share capital of the company is held
by the individual, and

(b) at least 5% of the voting rights in the company are exercisable
25by the individual by virtue of that holding.

(10)
For the purposes of subsection (9) if an individual holds any shares in
a company jointly or in common with one or more other persons, he or
she is to be treated as sole holder of so many of them as is proportionate
to the value of his or her share (and as able to exercise voting rights by
30virtue of that holding).”

(2) In Chapter 4 of Part 4 of ITTOIA 2005 (dividends from non-UK resident
companies), after section 404 insert—

404A Distributions in a winding up

(1) For the purposes of this Chapter, a distribution made to an individual
35in respect of share capital in a winding up of a non-UK resident
company is a dividend of the company if—

(a) Conditions A to D are met, and

(b) the distribution is not excluded (see subsection (7)).

(2) Condition A is that, immediately before the winding up, the individual
40has at least a 5% interest in the company.

(3) Condition B is that the company—

(a) is a close company when it is wound up, or

(b) was a close company at any time in the period of two years
ending with the start of the winding up.

(4) 45Condition C is that, at any time within the period of two years
beginning with the date on which the distribution is made—

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(a) the individual carries on a trade or activity which is the same as,
or similar to, that carried on by the company or an effective 51%
subsidiary of the company,

(b) the individual is a partner in a partnership which carries on
5such a trade or activity,

(c) the individual, or a person connected with him or her, is a
participator in a company in which he or she has at least a 5%
interest and which at that time—

(i) carries on such a trade or activity, or

(ii) 10is connected with a company which carries on such a
trade or activity, or

(d) the individual is involved with the carrying on of such a trade
or activity by a person connected with the individual.

(5) Condition D is that it is reasonable to assume, having regard to all the
15circumstances, that—

(a) the main purpose or one of the main purposes of the winding
up is the avoidance or reduction of a charge to income tax, or

(b) the winding up forms part of arrangements the main purpose or
one of the main purposes of which is the avoidance or reduction
20of a charge to income tax.

(6)
The circumstances referred to in subsection (5) include in particular the
fact that Condition C is met.

(7) A distribution to an individual is excluded if or to the extent that—

(a) the amount of the distribution does not exceed the amount that
25would result in no gain accruing for the purposes of capital
gains tax, or

(b) the distribution is a distribution of irredeemable shares.

(8) In this section—

  • “arrangements” includes any agreement, understanding, scheme,
    30transaction or series of transactions, whether or not legally
    enforceable;

  • “close company” includes a company which would be a close
    company if it were a UK resident company;

  • “effective 51% subsidiary” has the meaning given by section 170(7)
    35of TCGA 1992;

  • “participator” has the meaning given by section 454 of CTA 2010.

(9) For the purposes of this section, a person has at least a 5% interest in a
company if—

(a) at least 5% of the ordinary share capital of the company is held
40by the individual, and

(b) at least 5% of the voting rights in the company are exercisable
by the individual by virtue of that holding.

(10)
For the purposes of subsection (9) if an individual holds any shares in
a company jointly or in common with one or more other persons, he or
45she is to be treated as sole holder of so many of them as is proportionate
to the value of his or her share (and as able to exercise voting rights by
virtue of that holding).”

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(3) The amendments made by this section have effect in relation to distributions
made on or after 6 April 2016.

Disguised fees and carried interest

36 Disguised investment management fees

(1) 5Section 809EZA of ITA 2007 (disguised investment management fees: charge
to income tax) is amended as specified in subsections (2) and (3).

(2) In subsection (3)—

(a) in paragraph (a), for “performs” substitute “at any time performs or is
to perform”;

(b) 10omit paragraph (b);

(c) in paragraph (c), for “the scheme” substitute “an investment scheme”.

(3) After subsection (6) insert—

(7) The reference in subsection (6)(a) to a collective investment scheme
includes—

(a) 15arrangements which permit an external investor to participate
in investments acquired by the collective investment scheme
without participating in the scheme itself, and

(b) arrangements under which sums arise to an individual
performing investment management services in respect of the
20collective investment scheme without those sums arising from
the scheme itself.”

(4) In section 809EZE of that Act (interpretation), in subsection (1), in paragraph
(a) of the definition of “external investor”, for “performs” substitute “at any
time performs or is to perform”.

(5) 25The amendments made by this section have effect in relation to sums arising
on or after 6 April 2016 (whenever the arrangements under which the sums
arise were made).

37 Income-based carried interest

(1) In Chapter 5E of Part 13 of ITA 2007 (tax avoidance: disguised investment
30management fees), in section 809EZB(1) (meaning of “management fee”), for
paragraph (c) substitute—

(c) carried interest which is not income-based carried interest (see
sections 809EZC and 809EZD for carried interest, and Chapter
5F for income-based carried interest).”

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(2) After Chapter 5E of Part 13 of ITA 2007 insert—

“CHAPTER 5F Income-based carried interest
Income-based carried interest
809FZA Overview

(1) 5This Chapter determines when carried interest arising to an individual
from an investment scheme is “income-based carried interest” for the
purposes of Chapter 5E (and, in particular, section 809EZB(1)(c)).

(2) Section 809FZB contains the general rule, under which the extent to
which carried interest is income-based carried interest depends on the
10average holding period of the investment scheme.

(3) Sections 809FZC to 809FZP contain further provision relating to
average holding periods.

(4) Sections 809FZQ and 809FZR contain a particular rule for direct
lending funds.

(5) 15Sections 809FZS and 809FZT contain an exception to the general rule
for carried interest which is conditionally exempt from income tax.

(6) Sections 809FZU to 809FZZ contain supplementary and interpretative
provision.

(7) Nothing in this Chapter affects the liability to any tax of—

(a) 20the investment scheme, or

(b) external investors in the investment scheme.

809FZB Income-based carried interest: general rule

(1) “Income-based carried interest” is the relevant proportion of a sum of
carried interest arising to an individual from an investment scheme.

(2) 25The relevant proportion is determined by reference to the investment
scheme’s average holding period as follows.

Average holding period Relevant proportion
Less than 36 months 100%
At least 36 months but less than 37 months 80%
At least 37 months but less than 38 months 3060%
At least 38 months but less than 39 months 40%
At least 39 months but less than 40 months 20%
40 months or more 0%

(3) This section is subject to the following provisions of this Chapter.

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Average holding period
809FZC Average holding period

(1) The average holding period of an investment scheme, in relation to a
sum of carried interest, is the average length of time for which relevant
5investments have been held for the purposes of the scheme.

(2) In this section, “relevant investments” means investments—

(a) which are made for the purposes of the scheme, and

(b) by reference to which the carried interest is calculated.

(3) The average holding period is calculated by reference to the time the
10carried interest arises.

(4) It is calculated as follows.

Step 1

For each relevant investment, multiply the value invested at the time
the investment was made by the length of time for which the
15investment has been held.

Step 2

Add together the amounts produced under step 1 in respect of all
relevant investments.

Step 3

20Divide the amount produced under step 2 by the total value invested in
all relevant investments.

(5) Disregard intermediate holdings or intermediate holding structures
(including intermediate investment schemes) by or through which
investments are made or held—

(a) 25when identifying, for the purpose of determining the average
holding period of an investment scheme, what relevant
investments are held for the purposes of an investment scheme,
and

(b) for any other purpose relating to the determination of the
30average holding period.

This is subject to the following provisions of this Chapter.

(6) In this section, references to the length of time for which a relevant
investment has been held are—

(a) in the case of an investment which has been disposed of before
35the carried interest arises, references to the time for which it was
held before being disposed of, and

(b) in any other case, references to the time for which it has been
held up to the time the carried interest arises.

(7) For the purposes of this Chapter, carried interest which is deferred
40carried interest in relation to a person within the meaning of section
103KG of TCGA 1992 is to be treated as arising to that person at the time
it would have arisen had it not been deferred as specified in section
103KG(3)(a) or (b) of that Act.

(8) Sections 809FZD to 809FZP apply for the purposes of determining the
45average holding period of an investment scheme.