Finance (No. 2) Bill (HL Bill 156)

(7) Subsection (8) applies if, in relation to each of tax year A and tax year
B—

(a) section 783AI applies in calculating the profits or losses of the
trade, and

(b) 5the deductible amount subtracted at step 2 of section
783AI(2) in relation to the trade is less than the non-adjusted
overlap profit.

(8) The profit which arises in the overlap period is treated as equal to the
non-adjusted overlap profit less the higher of the following—

(a) 10the deductible amount subtracted at step 2 of section
783AI(2) in calculating the profits or losses of the trade for tax
year A, and

(b) the deductible amount subtracted at step 2 of section
783AI(2) in calculating the profits or losses of the trade for tax
15year B.

(9) In this section “non-adjusted overlap profit” means the amount of
profit that would arise in the overlap period apart from—

(a) Chapter 1 of Part 6A, and

(b) this section.””

6 20In section 227A (application of Chapter where cash basis used), after
subsection (2) insert—

“(3) This section is subject to section 227C (application of Chapter where
section 227B applies).””

7 After section 227A insert—

“227B 25 Cash basis treatment: full relief under Chapter 1 of Part 6A (trading
allowance)

(1) Subsection (2) applies if—

(a) an individual carries on a trade in a tax year,

(b) the condition in section 783AE(1)(b) is treated as met in
30relation to the individual for the tax year by virtue of
subsection (3) of that section, and

(c) the profits or losses of the trade are treated as nil for the tax
year under section 783AF (trade profits: full relief under
Chapter 1 of Part 6A).

(2) 35For the purposes of determining if this Chapter applies, an election
under section 25A is to be treated as having effect in relation to the
trade for the tax year.

227C Application of Chapter where section 227B applies

(1) This section applies if, as a result of the operation of section 227B, the
40basis on which profits of a trade are calculated is treated as changed
as mentioned in section 227A(1).

(2) This Chapter applies as if—

(a) in sections 232(1) and 233(1), for “the first period of account
for which the new basis is adopted” there were substituted
45“the first tax year for which the profits or losses of the trade
are not treated as nil under section 783AF”, and

(b) sections 235, 236, 237, 239A and 239B were omitted.

(3) If there is no tax year after the change of basis for which the profits
or losses of the trade are not treated as nil under section 783AF, this
Chapter does not apply.””

8 5After section 307F (inserted by Schedule 5 to this Act) insert—

““Property allowance

307G Property allowance

(1) The rules for calculating the profits of an individual’s property
business are subject to Chapter 2 of Part 6A (property allowance).

(2) 10That Chapter gives relief on relevant property income and, where
relief is given, disallows all deductions under this Part which relate
to that income (see, in particular, sections 783BC, 783BF and
783BH).””

9 In section 688 (income charged under Chapter 8 of Part 5), before paragraph
15(a) of subsection (2) insert—

“(za) Chapter 1 of Part 6A (which gives relief on relevant income
which may consist of or include income chargeable under
this Chapter: see, in particular, sections 783AB, 783AC,
783AG and 783AJ),”.”

10 20In section 828 (overlap profit), in subsection (3), for “section 204” substitute
“sections 204 and 204A”.

11 In Part 2 of Schedule 4 (defined expressions)—

(a) at the appropriate places insert—

(b) in the entry for “overlap profit”, for “section 204” substitute “sections
204 and 204A”.

TIOPA 2010

12 In TIOPA 2010—

(a) in section 22(8) (credit for foreign tax on overlap profit if credit for
that tax already allowed), in the definition of “overlap profit”, for
5“section 204” substitute “sections 204 and 204A”, and

(b) in section 24(8) (claw-back of relief under section 22(2)), in the
definition of “overlap profit”, for “section 204” substitute “sections
204 and 204A”.

Part 3 10Commencement

13 The amendments made by this Schedule have effect for the tax year 2017-18
and subsequent tax years.

Section 21

SCHEDULE 7 Deduction of income tax at source

15Part 1 Interest distributions of investment trust or authorised investment fund

1 In Chapter 3 of Part 15 of ITA 2007 (deduction of tax from certain payments
of yearly interest), after section 888A insert—

“888B Designated dividends of investment trusts

20The duty to deduct a sum representing income tax under section 874
does not apply to a dividend so far as it is treated as a payment of
yearly interest by regulations under section 45 of FA 2009 (dividends
designated by investment trust or prospective investment trust).

888C Interest distributions of certain open-ended investment companies

25The duty to deduct a sum representing income tax under section 874
does not apply to a payment of yearly interest under section 373 of
ITTOIA 2005 (in the case of certain open-ended investment
companies, payments of yearly interest treated as made where
distributable amount shown in accounts as yearly interest).

888D 30Interest distribution of certain authorised unit trusts

The duty to deduct a sum representing income tax under section 874
does not apply to a payment of yearly interest under section 376 of
ITTOIA 2005 (in the case of certain authorised unit trusts, payments
of yearly interest treated as made where distributable amount shown
35in accounts as yearly interest).””

2 In section 45(2) of FA 2009 (provision that regulations may make about
dividends of investment trusts) omit paragraph (c) (power to disapply duty
to deduct tax under section 874 of ITA 2007).

Part 2 Interest on peer-to-peer lending

3 In Chapter 3 of Part 15 of ITA 2007 (deduction of tax from certain payments
of yearly interest), after section 888D (inserted by this Schedule) insert—

“888E 5 Interest on certain peer-to-peer lending

(1) The duty to deduct a sum representing income tax under section 874
does not apply to a payment of interest on an amount of peer-to-peer
lending.

(2) In subsection (1) “peer-to-peer lending” means credit in relation to
10which the condition in subsection (4) is met.

(3) In this section—

• “original borrower”, in relation to any credit, means the person
  to whom the credit is originally provided,

• “credit” includes a cash loan and any other form of financial
  15accommodation, and

• “original lender”, in relation to any credit, means the person
  who originally provides the credit.

(4) The condition is that—

(a) the original borrower and the original lender enter the
20agreement under which the credit is provided at the
invitation of a person (“the operator”),

(b) the operator makes the invitation in the course of, or in
connection with, operating an electronic system,

(c) the operator’s operation of the electronic system is an activity
25specified in article 36H(1) or (2D) of the Order (operating an
electronic system in relation to lending), and

(d) the operator has permission under Part 4A of FISMA 2000 to
carry on that activity.

(5) For the purposes of subsection (4), it does not matter if the agreement
30mentioned in subsection (4)(a) is not an article 36H agreement (as
defined in article 36H of the Order).

(6) The Commissioners for Her Majesty’s Revenue and Customs may by
regulations make such amendments of the preceding provisions of
this section as they consider appropriate in consequence of—

(a) 35the Order, or any part of it, being replaced (or further
replaced) by provision in another instrument, or

(b) any amendment of the Order or any such other instrument.

(7) In this section “the Order” means the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544S.I. 2001/544).””

Part 3 Further amendment and commencement

Further amendment

4 In section 874(3)(a) of ITA 2007 (which refers to provisions which disapply
5the duty under section 874 to deduct tax from yearly interest), for “888”
substitute “888E”.

Commencement

5 (1) The new sections 888B to 888D of ITA 2007, and the repeal of section 45(2)(c)
of FA 2009, have effect in relation to amounts treated as payments of yearly
10interest made on or after 6 April 2017.

(2) The new section 888E of ITA 2007 has effect in relation to payments of
interest made on or after 6 April 2017.

Section 27

SCHEDULE 8 Social investment tax relief

15Part 1 Amendments of Part 5B of ITA 2007

Introductory

1 ITA 2007 is amended as follows.

Date by which investment must be made to qualify for SI relief

2 20In section 257K(1)(a)(iii) (date by which investment must be made to qualify
for SI relief) for “6 April 2019” substitute “6 April 2021”.

The existing investments requirement

3 After section 257LD insert—

“257LDA The existing investments requirement

(1) 25If at the time immediately before the investment is made the investor
holds any shares in or debentures of—

(a) the social enterprise, or

(b) a company which at that time is a qualifying subsidiary of the
social enterprise,

30those shares or debentures must be risk finance investments or (in
the case of shares) permitted subscriber shares.

(2) A share or debenture is a “risk finance investment” for the purposes
of this section if—

(a) it is a share that was issued to the investor, or a debenture of
which the investor is the holder in return for advancing an
amount, and

(b) at any time, a compliance statement under section 205, 257ED
5or 257PB is provided in respect of it or of shares or
investments including it.

(3) Subscriber shares are “permitted subscriber shares” for the purposes
of this section if—

(a) they were issued to the investor and have been continuously
10held by the investor since they were issued, or

(b) they were acquired by the investor at a time when the
company which issued them—

(i) had issued no shares other than subscriber shares,
and

(ii) 15had not begun to carry on or make preparations for
carrying on any trade or business.

(4) In this section “debenture” is to be read in accordance with section
257L(6).””

The no disqualifying arrangements requirement

4 20After section 257LE insert—

“257LEA The no disqualifying arrangements requirement

(1) The investment must not be made, and money raised by the social
enterprise from the making of the investment must not be
employed,—

(a) 25in consequence or anticipation of disqualifying
arrangements, or

(b) otherwise in connection with disqualifying arrangements.

(2) Arrangements are “disqualifying arrangements” if—

(a) the main purpose, or one of the main purposes, of the
30arrangements is to secure both that an activity is or will be
carried on by the social enterprise or a 90% social subsidiary
of the social enterprise and that—

(i) one or more persons (whether or not including any
party to the arrangements) may obtain relevant tax
35relief in respect of a qualifying investment which
raises money for the purposes of that activity, or

(ii) shares issued by the social enterprise which raise
money for the purposes of that activity may comprise
part of the qualifying holdings of a VCT,

(b) 40that activity is the relevant qualifying activity, and

(c) one or both of conditions A and B are met.

(3) Condition A is that, as a (direct or indirect) result of the money raised
by the investment being employed as required by section 257MM, an
amount representing the whole or the majority of the amount raised
45is, in the course of the arrangements, paid to or for the benefit of a
relevant person or relevant persons.

(4) Condition B is that, in the absence of the arrangements, it would have
been reasonable to expect that the whole or greater part of the
component activities of the relevant qualifying activity would have
been carried on as part of another business by a relevant person or
5relevant persons.

(5) For the purposes of this section it is immaterial whether the social
enterprise is a party to the arrangements.

(6) In this section—

• “90% social subsidiary” is to be read in accordance with section
  10257MV;

• “component activities” means the carrying on of a qualifying
  trade or preparing to carry on such a trade, which constitutes
  the relevant qualifying activity;

• a “qualifying investment” means—

  (a)

  15shares in the social enterprise, or

  (b)

  a qualifying debt investment in the social enterprise
  (see section 257L);

• “qualifying holdings”, in relation to the social enterprise, is to be
  construed in accordance with section 286 (VCTs: qualifying
  20holdings);

• “relevant person” means a person who is a party to the
  arrangements or a person connected with such a party;

• “relevant qualifying activity” means the qualifying trade or
  activity mentioned in section 257ML(1) for the purposes of
  25which the investment raised money;

• “relevant tax relief” has the meaning given by subsection (7).

(7) “Relevant tax relief”—

(a) in relation to a qualifying debt investment, means SI relief in
respect of that investment;

(b) 30in relation to shares, means one or more of the following—

(i) SI relief in respect of the shares;

(ii) EIS relief (within the meaning of Part 5) in respect of
the shares;

(iii) SEIS relief (within the meaning of Part 5A) in respect
35of the shares;

(iv) relief under Chapter 6 of Part 4 (losses on disposal of
shares) in respect of the shares;

(v) relief under section 150A or 150E of TCGA 1992 (EIS
and SEIS) in respect of the shares;

(vi) 40relief under Schedule 5B to that Act (EIS:
reinvestment) in consequence of which deferral relief
is attributable to the shares (see paragraph 19(2) of
that Schedule);

(vii) relief under Schedule 5BB to that Act (SEIS: re-
45investment) in consequence of which SEIS re-
investment relief is attributable to the shares (see
paragraph 4 of that Schedule).””

5 (1) Section 257SH (power to require information where reason to believe SI
relief may not be due because of certain kinds of arrangements, etc) is
amended as follows.

(2) In subsection (1) after “257LE,” insert “257LEA,”.

(3) 5In subsection (4) at the appropriate place insert—

Limits on amounts that may be invested

6 (1) In the italic heading before section 257M, after “enterprise” insert “: general”.

(2) 15Omit sections 257MA and 257MB (which are superseded by the provision
inserted by sub-paragraph (3) below).

(3) After section 257MN insert—

““Limits on amounts that may be invested

257MNA Maximum amount where investment made in first 7 years

(1) 20This section applies where—

(a) the investment is made before the end of the period of 7 years
beginning with the relevant first commercial sale, or

(b) the investment is made after that period but—

(i) a relevant investment was made in the social
25enterprise before the end of that period, and

(ii) some or all of the money raised by that relevant
investment was employed for the purposes of (or of
part of) the qualifying activity for which the money
raised by the investment is employed.

(2) 30Where this section applies, the total amount of relevant investments
made in the social enterprise on or before the date when the
investment is made must not exceed £1.5 million.

(3) The reference in subsection (2) to relevant investments “made in the
social enterprise” is to be read with section 257MNB.

(4) 35In this section—

• “qualifying activity” means—

  (a)

  a qualifying trade within paragraph (a) of section
  257ML(1) carried on by the social enterprise or a 90%
  social subsidiary of the social enterprise, or

  (b)

  40an activity within paragraph (b) of section 257ML(1)
  so carried on;

Finance (No. 2) BillPage 258

• “the relevant first commercial sale” has the meaning given by
  section 175A(6), reading—

  (a)

  references to the issuing company as references to the
  social enterprise,

  (b)

  5references to the issue date as references to the
  investment date, and

  (c)

  references to money raised by the issue of the relevant
  shares as references to money raised by the
  investment;

• 10“relevant investment” has the meaning given by section 173A(3)
  (reading references in section 173A(3) to a company as
  including any social enterprise).

(5) Section 173A(4) and (5) apply to determine for the purposes of this
section when a relevant investment is made.

(6) 15Where the social enterprise is an accredited social impact
contractor—

(a) the reference in subsection (1)(a) to the relevant first
commercial sale is to be read as a reference to the date on
which the social enterprise first entered into a social impact
20contract;

(b) the reference in subsection (1)(b) to the qualifying activity
mentioned there is to be read as a reference to the carrying
out of the social impact contract for which the money raised
by the investment is employed.

(7) 25For provision about maximum amounts where this section does not
apply, see section 257MNC.

257MNB Section 257MNA: supplementary

(1) In section 257MNA(2) the reference to relevant investments “made in
the social enterprise” includes—

(a) 30relevant investments made in a company which, at the
material date, is or has been a 51% subsidiary of the social
enterprise,

(b) any other relevant investment made in a company to the
extent that the money raised by that relevant investment has
35been employed for the purposes of a trade carried on by
another company (“company X”) which, at the material date,
is or has been a 51% subsidiary of the social enterprise, and

(c) any other relevant investment made in a company if—

(i) the money raised by that relevant investment has
40been employed for the purposes of a trade carried on
by that company or another person, and

(ii) after that relevant investment was made, but on or
before the material date, that trade became a
transferred trade (see subsection (5)).

(2) 45The investments within paragraph (a) of subsection (1)—

(a) include investments made in a company mentioned in that
paragraph before it became a 51% subsidiary of the social
enterprise, but

(b) where a company mentioned in that paragraph is not a 51%
subsidiary of the social enterprise at the material date, do not
include any investments made in that company after it last
ceased to be such a subsidiary.

(3) 5For the purposes of subsection (1)(b), where company X is not a 51%
subsidiary of the social enterprise at the material date, any money
employed after company X last ceased to be such a subsidiary is to
be ignored.

(4) Where only a proportion of the money raised by a relevant
10investment is employed for the purposes of a trade which becomes a
transferred trade, only the corresponding proportion of that relevant
investment is to be treated as falling within subsection (1)(c).

(5) For the purposes of this section, if—

(a) on or before the material date a trade is transferred—

(i) 15to the social enterprise,

(ii) to a company which, at the material date, is or has
been a 51% subsidiary of the social enterprise, or

(iii) to a partnership of which the social enterprise, or a
company within sub-paragraph (ii), is a member, and

(b) 20the trade or part of it was at any time before the transfer
carried on by another person,

the trade or part mentioned in paragraph (b) becomes a “transferred
trade” when it is transferred as mentioned in paragraph (a).

(6) The cases within subsection (5)(a)—

(a) 25include the case where the trade is transferred to a company
within subsection (5)(a)(ii), or a partnership of which such a
company is a member, before the company became a 51%
subsidiary of the social enterprise, but

(b) where a company within subsection (5)(a)(ii) is not a 51%
30subsidiary of the social enterprise at the material date, do not
include the case where the trade is transferred to that
company, or a partnership of which that company is a
member, after that company last ceased to be such a
subsidiary.

(7) 35In this section—

• “the material date” means the date on which the investment is
  made;

• “relevant investment” has the meaning given by section 173A(3)
  (reading references in section 173A(3) to a company as
  40including any social enterprise).

(8) Section 173A(4) and (5) apply to determine for the purposes of this
section when a relevant investment is made.

(9) Section 173A(6) and (7) (meaning of “trade” etc) apply also for the
purposes of this section.

257MNC 45 Maximum amount for cases outside section 257MNA

(1) This section applies where—