Finance (No.2) Bill

Finance (No.2) Bill - continued	House of Commons
PART III, INCOME TAX, CORPORATION TAX AND CAPITAL GAINS TAX - continued
Securities - continued

back to previous text

Manufactured dividends.

100. - (1) In section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions) in subsection (1), after "Subject to sections" there shall be inserted "231AA," and after that section there shall be inserted-

"No tax credit for borrower under stock lending arrangement or interim holder under repurchase agreement.	231AA. - (1) A person shall not be entitled to a tax credit under section 231 in respect of a qualifying distribution if-
	(a) he is the borrower under a stock lending arrangement or the interim holder under a repurchase agreement;
	(b) the qualifying distribution is, or is a payment representative of, a distribution in respect of securities to which the arrangement or agreement relates; and
	(c) a manufactured dividend representative of that distribution is paid by that person in respect of securities to which the arrangement or agreement relates.
	(2) In this section "stock lending arrangement" has the same meaning as in section 263B of the 1992 Act and, in relation to any such arrangement, any reference to the borrower, or the securities to which the arrangement relates, shall be construed accordingly.
	(3) For the purposes of this section the cases where there is a repurchase agreement are the following-
	(a) any case falling within subsection (1) of section 730A; and
	(b) any case which would fall within that subsection if the sale price and the repurchase price were different;
	and, in any such case, any reference to the interim holder, or the securities to which the agreement relates, shall be construed accordingly.
	(4) For the purposes of this section "manufactured dividend" has the same meaning as in paragraph 2 of Schedule 23A (and any reference to a manufactured dividend being paid accordingly includes a reference to a payment falling by virtue of section 736B(2) or 737A(5) to be treated for the purposes of Schedule 23A as if it were made)."

(2) In section 231 of the Taxes Act 1988, in subsection (1), after "231AA," there shall be inserted "231AB," and after section 231AA of that Act there shall be inserted-

"No tax credit for original owner under repurchase agreement in respect of certain manufactured dividends.	231AB. - (1) A person shall not be entitled to a tax credit under section 231 in respect of a qualifying distribution if-
	(a) he is the original owner under a repurchase agreement;
	(b) the qualifying distribution is a manufactured dividend paid to that person by the interim holder under the repurchase agreement in respect of securities to which the agreement relates; and
	(c) the repurchase agreement is not such that the actual dividend which the manufactured dividend represents is receivable otherwise than by the original owner.
	(2) For the purposes of this section the cases where there is a repurchase agreement are the following-
	(a) any case falling within subsection (1) of section 730A; and
	(b) any case which would fall within that subsection if the sale price and the repurchase price were different;
	and, in any such case, any reference to the original owner, the interim holder, or the securities to which the agreement relates, shall be construed accordingly.
	(3) Subsection (4) of section 231AA applies for the purposes of this section as it applies for the purposes of that section."

(3) In section 737D of the Taxes Act 1988 (power by regulations to provide for manufactured payments to be eligible for relief) in subsection (2) (which defines manufactured payment as any manufactured dividend etc) the words "manufactured dividend" shall cease to have effect.

(4) Schedule 23A to the Taxes Act 1988 (manufactured dividends and interest) shall be amended in accordance with subsections (5) to (8) below.

(5) In paragraph 2 (UK equities) for sub-paragraph (2) there shall be substituted-

	"(2) Where a manufactured dividend is paid by a dividend manufacturer who is a company resident in the United Kingdom, the Tax Acts shall have effect-
	(a) in relation to the recipient, and persons claiming title through or under him, as if the manufactured dividend were a dividend on the UK equities in question; and
	(b) in relation to the dividend manufacturer, as if the amount paid were a dividend of his."

(6) In paragraph 2(3) (manufactured dividends to which paragraph 2(2) does not apply) paragraph (a) (duty to account for notional ACT) shall cease to have effect.

(7) In paragraph 2(6) (written statement in respect of certain manufactured dividends) in paragraph (a), after "a dividend manufacturer pays a manufactured dividend" there shall be inserted "to which sub-paragraph (3) above applies".

(8) In consequence of subsection (6) above, the following provisions shall also cease to have effect-

(a) in paragraph 2, sub-paragraphs (4) and (5) and, in sub-paragraph (6), paragraph (b) and the word "and" immediately preceding it; and

(b) in paragraph 2A (deductibility of manufactured payment in the case of the manufacturer) in sub-paragraph (1), the words "together with an amount equal to the notional ACT" and sub-paragraph (3).

(9) Subsection (1) above has effect in relation to qualifying distributions made on or after 8th April 1998 if the manufactured dividend representative of the distribution is paid (or treated for the purposes of Schedule 23A to the Taxes Act 1988 as paid) on or after 6th April 1999.

(10) Subsections (2) to (8) above have effect in relation to manufactured dividends paid (or treated for the purposes of Schedule 23A to the Taxes Act 1988 as paid) on or after 6th April 1999.

Double taxation relief

Restriction of relief on certain interest and dividends.

101. - (1) For section 798 of the Taxes Act 1988 there shall be substituted the following section-

"Restriction of relief on certain interest and dividends.	798. - (1) This section applies where-
	(a) in any chargeable period the profits of a trade carried on by a qualifying taxpayer include an amount computed in accordance with section 795 in respect of foreign interest or foreign dividends;
	(b) the taxpayer is entitled in accordance with this Chapter to credit for foreign tax on the foreign interest or foreign dividends; and
	(c) in the case of foreign dividends, the foreign tax mentioned in paragraph (b) above is or includes underlying tax.
	(2) The amount of the credit for foreign tax referred to in subsection (1)(b) above which, in accordance with this Chapter, is to be allowed against income tax or corporation tax-
	(a) shall be limited by treating the amount of the foreign interest or foreign dividends (as increased or reduced under section 798A) as reduced (or further reduced) for the purposes of this Chapter by an amount equal to the taxpayer's financial expenditure in relation to the interest or dividends (as determined in accordance with section 798B); and
	(b) so far as the credit relates to foreign tax on interest or foreign tax on dividends which is not underlying tax, shall not exceed 15 per cent of the interest or dividends, computed without regard to paragraph (a) above or to any increase or reduction under section 798A.
	(3) In this section and sections 798A and 798B-
	"interest", in relation to a loan, includes any introductory or other fee or charge which is payable in accordance with the terms on which the loan is made or is otherwise payable in connection with the making of the loan;
	"foreign dividends" means dividends payable out of or in respect of the stocks, funds, shares or securities of a body of persons not resident in the United Kingdom;
	"foreign interest" means interest payable by a person not resident in the United Kingdom or by a government or public or local authority in a country outside the United Kingdom.
	(4) In this section and section 798B "qualifying taxpayer" means, subject to subsection (5) below, a person carrying on a trade which includes the receipt of interest or dividends and is not an insurance business.
	(5) Where a company which is connected or associated with a qualifying taxpayer is acting in accordance with a scheme or arrangement the purpose, or one of the main purposes, of which is to prevent or restrict the application of this section to the taxpayer-
	(a) the company shall be treated for the purposes of this section as a qualifying taxpayer; and
	(b) any foreign interest or foreign dividends received in pursuance of the scheme or arrangement shall be treated for those purposes as profits of a trade carried on by the company.
	(6) For the purposes of this section and section 798B-
	(a) section 839 applies; and
	(b) subsection (10) of section 783 applies as it applies for the purposes of that section."

(2) This section and sections 102 and 103 do not have effect in relation to foreign interest or foreign dividends paid before 1st January 1999 in pursuance of arrangements which were entered into before, and are not altered on or after, 17th March 1998.

(3) Subject to subsection (2) above, this section and sections 102 and 103 have effect in relation to foreign interest or foreign dividends paid on or after 17th March 1998.

Adjustments of interest and dividends for spared tax etc.

102. After section 798 of the Taxes Act 1988 there shall be inserted the following section-

"Adjustments of interest and dividends for spared tax etc.	798A. - (1) In a case where section 798 applies-
	(a) subsection (2) below applies if the foreign tax referred to in subsection (1)(b) of that section is or includes an amount of spared tax; and
	(b) subsection (3) below applies if the foreign tax so referred to is or includes an amount of tax which is not spared tax.
	(2) For the purposes of income tax or corporation tax, the amount which apart from this subsection would be the amount of the foreign interest or foreign dividends shall be treated as increased by so much of the spared tax as does not exceed-
	(a) the amount of the spared tax for which, in accordance with any arrangements applicable to the case in question, credit falls to be given as mentioned in section 798(1)(b); or
	(b) if it is less, 15 per cent of the interest or dividends, computed without regard to any increase under this subsection.
	(3) If the amount of tax which is not spared tax exceeds-
	(a) the amount of the credit which, by virtue of this Chapter (but disregarding subsection (2) of section 798), is allowed for that tax against income tax or corporation tax; or
	(b) if it is less in the case of tax on foreign interest, 15 per cent of the interest, computed without regard to any increase or reduction under this section or that subsection,
	then, for the purposes of income tax or corporation tax, the amount which, apart from this subsection, would be the amount of the foreign interest or foreign dividends shall be treated as reduced by a sum equal to the excess.
	(4) Subsection (2) above has effect for the purposes of corporation tax notwithstanding anything in section 80(5) of the Finance Act 1996 (matters to be brought into account in the case of loan relationships only under Chapter II of Part IV of that Act).
	(5) Nothing in subsection (2) above prejudices the operation of section 795 in relation to foreign tax which is not spared tax.
	(6) In this section "spared tax" means foreign tax which although not payable falls to be taken into account for the purposes of credit by virtue of section 788(5)."

Prepared 24 June 1998