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Finance Bill - continued        House of Commons
PART III, INCOME TAX AND CORPORATION TAX - continued
Distributions, tax credits etc: avoidance - continued
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Payments to companies under section 687 of the Taxes Act 1988.     27. - (1) After section 687 of the Taxes Act 1988 (payments under discretionary trusts) there shall be inserted-
 
 
"Payments to companies under section 687.     687A. - (1) This section applies where-
 
    (a) trustees make a payment to a company;
 
    (b) section 687 applies to the payment; and
 
    (c) the company is chargeable to corporation tax and does not fall within subsection (2) below.
      (2) A company falls within this subsection if it is-
 
 
    (a) a charity, as defined in section 506(1);
 
    (b) a body mentioned in section 507 (heritage bodies); or
 
    (c) an Association of a description specified in section 508 (scientific research organisations).
      (3) Where this section applies-
 
 
    (a) none of the following provisions, namely-
 
      (i) section 7(2),
 
      (ii) section 11(3),
 
      (iii) paragraph 5(1) of Schedule 16,
 
    shall apply in the case of the payment;
 
    (b) the payment shall be left out of account in calculating the profits of the company for the purposes of corporation tax; and
 
    (c) no repayment shall be made of the amount treated under section 687(2) as income tax paid by the company in the case of the payment.
      (4) If the company is not resident in the United Kingdom, this section applies only in relation to so much (if any) of the payment as is comprised in the company's chargeable profits for the purposes of corporation tax."
 
      (2) This section has effect in relation to payments made by trustees to companies on or after 2nd July 1997.
 
Arrangements to pass on value of tax credit.     28. - (1) After section 231A of the Taxes Act 1988 (which is inserted by section 19 of this Act) there shall be inserted-
 
 
"Consequences of certain arrangements to pass on the value of a tax credit.     231B. - (1) This section applies in any case where-
 
    (a) a person ("A") is entitled to a tax credit in respect of a qualifying distribution;
 
    (b) arrangements subsist such that another person ("B") obtains, whether directly or indirectly, a payment representing any of the value of the tax credit;
 
    (c) the arrangements (whether or not made directly between A and B) were entered into for an unallowable purpose; and
 
    (d) the condition in subsection (2) below is satisfied.
      (2) The condition is that if B had been the person entitled to the tax credit and the qualifying distribution to which it relates, and had received the distribution when it was made, then-
 
 
    (a) B would not have been entitled to obtain any payment under section 231(2) or (3) in respect of the tax credit; and
 
    (b) if B is a company, B could not have used the income consisting of the distribution to frank a distribution actually made in the accounting period in which it would have received the distribution to which the tax credit relates.
      (3) This section does not apply if and to the extent that any other provision of the Tax Acts has the effect of cancelling or reducing the tax advantage which would otherwise be obtained by virtue of the arrangements.
 
      (4) Where this section applies-
 
 
    (a) no claim shall be made under section 231(2) for payment of the amount of the tax credit;
 
    (b) no claim shall be made under section 231(3) or 441A(7) in respect of the tax credit;
 
    (c) the income consisting of the distribution in respect of which A is entitled to the tax credit shall not be regarded for the purposes of section 241 as franked investment income; and
 
    (d) no claim shall be made under section 35 of the Finance (No. 2) Act 1997 (transitional relief) for payment of an amount determined by reference to that distribution.
      (5) For the purposes of this section, the question whether any arrangements were entered into for an "unallowable purpose" shall be determined in accordance with subsections (6) and (7) below.
 
      (6) Arrangements are entered into for an unallowable purpose if the purposes for which at least one person is a party to the arrangements include a purpose which is not amongst the business or other commercial purposes of that person.
 
      (7) Where one of the purposes for which a person enters into any arrangements is the purpose of securing that that person or another obtains a tax advantage, that purpose shall be regarded as a business or other commercial purpose of the person only if it is neither the main purpose, nor one of the main purposes, for which the person enters into the arrangements.
 
      (8) Any reference in this section to a person obtaining a tax advantage includes a reference to a person obtaining a payment representing any of the value of a tax credit in circumstances where, had the person obtaining the payment been entitled to the tax credit and the qualifying distribution to which it relates, that person-
 
 
    (a) would not have been entitled to obtain any payment under section 231(2) or (3) in respect of the tax credit; and
 
    (b) if that person is a company, could not have used the income consisting of the distribution to frank a distribution actually made in the accounting period in which it would have received the distribution to which the tax credit relates.
      (9) If an amount representing any of the value of a tax credit to which a person is entitled is applied at the direction of, or otherwise in favour of, some other person (whether by way of set off or otherwise), the case shall be treated for the purposes of this section as one where that other person obtains a payment representing any of the value of the tax credit.
 
      (10) In determining for the purposes of subsections (2)(b) and (8)(b) above whether a company could have used the income consisting of the distribution in question to frank a distribution of the company, the company shall be taken to use its actual franked investment income to frank distributions before using the income consisting of the distribution in question.
 
      (11) References in this section to using franked investment income to frank a distribution of a company have the same meaning as in Chapter V of Part VI.
 
      (12) In this section-
 
 
    "arrangements" means arrangements of any kind, whether in writing or not (and includes a series of arrangements, whether or not between the same parties);
 
    "business or other commercial purposes" includes the efficient management of investments;
 
    "franked investment income" has the same meaning as in Chapter V of Part VI and references to income consisting of a distribution shall be construed accordingly;
 
    "tax advantage" has the same meaning as in Chapter I of Part XVII."
      (2) This section has effect in relation to distributions made on or after 2nd July 1997.
 
Unauthorised unit trusts.     29. - (1) Where a qualifying distribution-
 
 
    (a) is made on or after 2nd July 1997 but before 6th April 1999 by a company resident in the United Kingdom, and
 
    (b) falls to be regarded by virtue of subsection (2) of section 469 of the Taxes Act 1988 (unit trusts other than authorised unit trusts) as income of the trustees of a unit trust scheme to which that section applies, and
 
    (c) is not a foreign income dividend and does not fall to be regarded by virtue of any provision of the Tax Acts apart from this section as a foreign income dividend arising to the trustees,
  the trustees shall be treated for all purposes of the Tax Acts (apart from this section) as if the qualifying distribution were a foreign income dividend.
 
      (2) Subsection (1) above shall not apply-
 
 
    (a) if the unit trust scheme is a common investment fund established under section 42 of the Administration of Justice Act 1982; or
 
    (b) if, apart from section 469(2) of the Taxes Act 1988, the whole of the qualifying distribution would fall to be regarded as income of section 505 bodies.
      (3) In this section-
 
 
    "foreign income dividend" shall be construed in accordance with Chapter VA of Part VI of the Taxes Act 1988;
 
    "section 505 body" means-
 
      (a) a charity, as defined in section 506(1) of the Taxes Act 1988;
 
      (b) a body mentioned in section 507 (heritage bodies) of that Act; or
 
      (c) an Association of a description specified in section 508 of that Act (scientific research organisations).
 
Distributions, tax credits etc in and after 1999-00
Tax credits.     30. - (1) Section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions) shall be amended in accordance with subsections (2) to (7) below.
 
      (2) In subsection (1) (recipient of certain distributions to be entitled to tax credit equal to proportion of distribution corresponding to rate of ACT in force)-
 
 
    (a) after "where" there shall be inserted ", in any year of assessment for which income tax is charged,"; and
 
    (b) for "the rate of advance corporation tax in force for the financial year in which" there shall be substituted "the tax credit fraction in force when."
      (3) After subsection (1) there shall be inserted-
 
 
    "(1A) The tax credit fraction is one-ninth."
 
      (4) Subsection (2) (payment of tax credit to company resident in UK) shall cease to have effect.
 
      (5) In subsection (3) (which includes provision for payment of excess of tax credit over income tax liability to person not being a company resident in the UK)-
 
 
    (a) for "Subject to section 231A," there shall be substituted "Subject to subsection (3AA) below,"; and
 
    (b) the words "and subject to subsections (3A) and (3D) below and section 231A where the credit exceeds that income tax, to have the excess paid to him" shall cease to have effect.
      (6) After subsection (3) there shall be inserted-
 
 
    "(3AA) For any year of assessment, the aggregate amount of the tax credits in respect of which claims are made under subsection (3) above by any person must not exceed the aggregate amount of the tax credits in respect of such qualifying distributions (if any) as are brought into charge to tax in the case of that person."
 
      (7) In consequence of subsection (5) above, subsections (3A) to (3D) shall cease to have effect.
 
      (8) Section 231A of the Taxes Act 1988 (which is superseded by the foregoing provisions of this section) shall cease to have effect.
 
      (9) The amendments made by subsections (5) and (6) above do not affect the entitlement of a person who is not resident in the United Kingdom to payment in respect of a tax credit by virtue of arrangements having effect under section 788 of the Taxes Act 1988 (relief by agreement with other countries).
 
      (10) Where-
 
 
    (a) arrangements having effect by virtue of section 788 of the Taxes Act 1988 confer on a person not resident in the United Kingdom the right to a tax credit under section 231 of the Taxes Act 1988 in respect of a dividend of a company resident in the United Kingdom, and
 
    (b) the arrangements contain provision for permitting-
 
      (i) tax to be charged or deducted, or
 
      (ii) a reduction in the amount of the tax credit that is paid to be made,
 
    by reference to the aggregate of the dividend and the tax credit, and
 
    (c) the amount of that tax or that reduction exceeds the amount of the tax credit,
  that provision shall only have the effect of reducing to nil the amount of the payment to which the person is entitled in respect of the tax credit.
 
      (11) This section has effect in relation to distributions made on or after 6th April 1999.
 
Rates of tax applicable to Schedule F income etc.     31. - (1) Section 1A of the Taxes Act 1988 (application of lower rate to income from savings and distributions) shall be amended in accordance with subsections (2) to (4) below.
 
      (2) In subsection (1) (certain savings and distribution income to be charged at the lower rate to the exclusion of basic rate) for "lower rate" there shall be substituted "rate applicable in accordance with subsection (1A) below".
 
      (3) After subsection (1) there shall be inserted-
 
 
    "(1A) The rate applicable in accordance with this subsection is-
 
 
    (a) in the case of income chargeable under Schedule F, the Schedule F ordinary rate;
 
    (b) in the case of equivalent foreign income falling within subsection (3)(b) below and chargeable under Case V of Schedule D, the Schedule F ordinary rate; and
 
    (c) in the case of any other income, the lower rate."
      (4) For subsection (5) (income to which section 1A applies to be treated as the highest part of a person's income) there shall be substituted-
 
 
    "(5) For the purposes of subsection (1)(b) above and any other provisions of the Income Tax Acts-
 
 
    (a) so much of any person's income as comprises income to which this section applies shall be treated as the highest part of his income; and
 
    (b) so much of that part as consists of-
 
      (i) income chargeable under Schedule F (if any), and
 
      (ii) equivalent foreign income falling within subsection (3)(b) above and chargeable under Case V of Schedule D (if any),
 
    shall be treated as the highest part of that part."
      (5) After section 1A of the Taxes Act 1988 there shall be inserted-
 
 
"Rates of tax applicable to Schedule F income etc.     1B. - (1) In the case of so much of an individual's income which consists of-
 
    (a) income chargeable under Schedule F (if any), and
 
    (b) equivalent foreign income falling within section 1A(3)(b) and chargeable under Case V of Schedule D (if any),
  as is income falling within section 1(2)(b), income tax shall, by virtue of this subsection, be charged at the Schedule F upper rate, instead of at the rate otherwise applicable to it in accordance with section 1(2)(b).
 
      (2) In relation to any year of assessment for which income tax is charged-
 
 
    (a) the Schedule F ordinary rate is 10 per cent., and
 
    (b) the Schedule F upper rate is 32.5 per cent.,
  or, in either case, such other rate as Parliament may determine."
 
      (6) This section has effect in relation to distributions made on or after 6th April 1999.
 
 
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Prepared 4 July 1997