(a) for the purposes of making the calculation, paragraph 1(3) shall be
read as if the reference to that nine-month period were a reference to
the period ending at the time when the calculation is made, but
(b) after the end of the nine-month period the calculation shall if
necessary be adjusted to take account of any benefits provided,
expenses paid or contributions made within that period but after the
time of the calculation.
Life assurance business
7 (1) In the case of an insurance company carrying on life assurance business, the
effect of section 86 of the Finance Act 1989 (c. 26) (spreading of relief for
acquisition expenses) shall be ignored in determining for the purposes of
paragraph 1(1) whether a deduction would (apart from this Schedule) be
allowed for a particular period.
(2) But paragraph 1(4) has effect subject to that section where, in accordance
with sub-paragraph (1) above, an amount is allowed as a deduction for a
particular period under paragraph 1(4).
Deductions to which Schedule does not apply
8 This Schedule does not apply to any deduction that is allowable—
(a) in respect of anything given as consideration for goods or services
provided in the course of a trade or profession,
(b) in respect of contributions under a retirement benefits scheme within
the meaning of Chapter 1 of Part 14 of the Taxes Act 1988 (see section
611 of that Act),
(c) in respect of contributions under a personal pension scheme
approved under Chapter 4 of that Part (see section 630 of that Act),
(d) in respect of contributions under an accident benefit scheme,
(e) under Schedule 4AA to that Act (approved share incentive plans),
(f) under section 67 of the Finance Act 1989 (qualifying share ownership
(g) under Schedule 23 to this Act (relief for employee share acquisition).
9 (1) In this Schedule—
“accident benefit scheme” means an employee benefit scheme under
which benefits may be provided only by reason of a person’s
disablement, or death, caused by an accident occurring during his
service as an employee of the employer;
“employee benefit contribution” shall be read in accordance with
“employee benefit scheme” means a trust, scheme or other
arrangement for the benefit of persons who are, or include,
employees of the employer;
“the employer” shall be read in accordance with paragraph 1(1);
“for tax purposes” means for any purposes of income tax or
“qualifying benefits” shall be read in accordance with paragraph 2;
“qualifying expenses” has the meaning given by paragraph 3;
“the third party” shall be read in accordance with paragraph 1(2).
(2) A reference in this Schedule to a person’s employee includes a reference to
the holder of an office under that person, and “employment” shall be read
10 (1) In section 43 (Schedule D) and section 44 (investment and insurance
companies) of the Finance Act 1989 (c. 26), in subsection (2) (amounts
charged in accounts in respect of employees’ remuneration) for paragraphs
(a) and (b) substitute “for which provision is made in the accounts”.
(2) In Schedule 29 to the Finance Act 2002 (c. 23) (intangible fixed assets), in
paragraph 113(3)(a) (meaning of “potential emoluments”) omit the words
“or benefits” and “, or held by an intermediary,”.
Commencement and transitory provisions
11 (1) This Schedule has effect in relation to deductions that would (but for this
Schedule) be allowed for a period ending on or after 27th November 2002 in
respect of employee benefit contributions made on or after that date.
(2) In relation to any time before the coming into force of the Income Tax
(Earnings and Pensions) Act 2003 (c. 1), this Schedule has effect as if—
(a) the references to tax under that Act were to income tax under
(b) the reference in paragraph 8(e) to Schedule 4AA to the Taxes Act
1988 (approved share incentive plans) were to Part 12 of Schedule 8
to the Finance Act 2000 (c. 17) (employee share ownership plans);
(c) for the words in paragraph 2(5) from “treated as received” to the end
there were substituted “treated as received for the purposes of
section 202A(1)(a) of the Taxes Act 1988, applying the rules in section
202B(1) to (6) of that Act (receipts basis of assessment for Schedule
(3) In relation to any such time, sections 43(11)(a) and 44(9)(a) of the Finance Act
1989 have effect with the omission of the words “or benefits” and “, or held
by an intermediary,”.
(4) In relation to a period beginning before 1st January 2003, the reference in
paragraph 8(g) to a deduction allowable under Schedule 23 to this Act shall
be read as a reference to a deduction allowable to a company for that period
in respect of a person—
(a) acquiring shares that are qualifying shares within the meaning of
that Schedule, or
(b) having a right to acquire such shares,
whether in that period or subsequently, by reason of his or another’s
employment with the company.
Determination of profits attributable to permanent establishment:
The Schedule inserted in the Taxes Act 1988 as Schedule A1 is as follows—
Determination of profits attributable to permanent establishment:
1 (1) The provisions of this Schedule have effect for supplementing
section 11AA as regards the determination of the profits
attributable to a permanent establishment in the United Kingdom
of a company that is not resident in the United Kingdom (“the
(2) In this Schedule “the separate enterprise principle” means the
principle in section 11AA(2) (read with subsection (3) of that
Transactions treated as taking place at arm’s length
2 In accordance with the separate enterprise principle, transactions
between the permanent establishment and any other part of the
non-resident company are treated as taking place on such terms as
would have been agreed between parties dealing at arm’s length.
Application of general provision as to allowable deductions
3 (1) Section 11AA(4) (general provision as to allowable deductions)
applies whether or not the expenses are incurred by, or
reimbursed by, the permanent establishment.
(2) The amount of expenses to be taken into account under section
11AA(4) is the actual cost to the non-resident company.
Prohibition of deductions for payments in respect of intangible assets
4 (1) No deduction is allowed in respect of royalties paid, or other
similar payments made, by the permanent establishment to any
other part of the non-resident company in respect of the use of
intangible assets held by the company.
(2) This does not prevent a deduction in respect of any contribution
by the permanent establishment to the costs of creation of an
(3) In this paragraph “intangible asset” has the meaning it has for
accounting purposes, and includes any intellectual property (as
defined in paragraph 2(2) of Schedule 29 to the Finance Act 2002).
Prohibition of deductions for interest or other financing costs
5 (1) No deduction is allowed in respect of payments of interest or other
financing costs by the permanent establishment to any other part
of the non-resident company, except as provided by sub-
(2) The restriction in sub-paragraph (1) above does not apply to
interest or other costs of financing that are payable in respect of
borrowing by the permanent establishment in the ordinary course
of a financial business carried on by it.
(3) In sub-paragraph (2) “financial business” means any of the
(a) banking, deposit-taking, money-lending or debt-factoring,
or a business similar to any of those;
(b) dealing in commodity or financial futures.
Provision of goods or services for permanent establishment
6 (1) This paragraph applies where the non-resident company provides
the permanent establishment with goods or services.
(2) If the goods or services are of a kind that the company supplies, in
the ordinary course of its business, to third parties dealing with it
at arm’s length, the matter is dealt with as a transaction to which
the separate enterprise principle applies.
(3) If not, the matter is dealt with as an expense incurred by the non-
resident company for the purposes of the permanent
Provisions applicable to non-resident banks
Application of this Part
7 (1) The provisions of this Part of this Schedule have effect where the
non-resident company is a bank.
“Bank” for this purpose has the meaning given by section 840A.
(2) Nothing in this Part of this Schedule shall be read as preventing
the application of principles similar to those provided for in this
Part in applying the separate enterprise principle to a non-resident
company that is not a bank.
Non-resident banks: transfer of financial assets
8 (1) In accordance with the separate enterprise principle, transfers of
loans and other financial assets between the permanent
establishment and any other part of the company are recognised
only if they would have taken place between independent
(2) Such a transfer is not recognised where it cannot reasonably be
considered that it is carried out for valid commercial reasons.
For this purpose the obtaining of a tax advantage is not a valid
Loans by non-resident banks: attribution of financial assets and profits arising
9 (1) In accordance with the separate enterprise principle, loans and
other financial assets, and profits arising from them, are attributed
to a permanent establishment to the extent that they can
reasonably be regarded as having been generated by the activities
of the permanent establishment.
(2) The following provisions have effect as regards the factors to be
taken into account.
(3) Particular account shall be taken of the extent to which the
permanent establishment is responsible for—
(a) obtaining the offer of new business;
(b) establishing the potential borrower’s credit rating and the
risk involved in providing credit;
(c) negotiating the terms of the loan with the borrower;
(d) deciding whether, and if so on what conditions, to make or
extend the loan.
(4) Account may also be taken of the extent to which the permanent
establishment is responsible for—
(a) concluding the loan agreement and disbursing the
proceeds of the loan;
(b) administering the loan (including handling and
monitoring the service of it) and holding and controlling
any securities pledged.
(5) References in this paragraph to a financial asset include any
financial risk in relation to a loan, or potential loan, that is capable
of giving rise to fees or other receipts and for which the holding of
capital is required (or would be required if the transaction were
between parties at arm’s length).
Borrowing by non-resident banks: permanent establishment acting as agent or
10 (1) This paragraph applies where a permanent establishment—
(a) borrows funds for the purposes of another part of the non-
resident company, and
(b) in relation to that borrowing acts only as an agent or
(2) In such a case, in accordance with the separate enterprise
(a) the profits attributable to the permanent establishment,
(b) the capital attributable to the permanent establishment
under section 11AA(3),
shall be that appropriate in the case of an agent acting at arm’s
length, taking into account the risks and costs borne by the
Non-resident companies: transactions through broker, investment
manager or Lloyd’s agent
1 (1) This Schedule makes provision about transactions carried out on behalf of a
company that is not resident in the United Kingdom (a “non-resident
company”), in the course of that company’s trade, by a person in the United
Kingdom acting as—
(a) a broker (paragraph 2),
(b) an investment manager (paragraphs 3 to 5), or
(c) a members’ or managing agent at Lloyd’s (paragraph 6).
(2) The provisions of this Schedule supplement—
(a) section 147(3) (meaning of “permanent establishment”: not to
include independent agent), and
(b) section 150(2)(c) (limit on income tax chargeable on non-resident
company: income arising from transactions carried out through
2 (1) In relation to a transaction carried out on behalf of a non-resident company,
a broker is regarded as an agent of independent status acting in the ordinary
course of his business if, and only if, the following conditions are met.
(2) The conditions are—
(a) that at the time of the transaction he is carrying on the business of a
(b) that the transaction is carried out by him in the ordinary course of
(c) that the remuneration he receives in respect of the transaction for the
provision of the services of a broker to the non-resident company is
not less than is customary for that class of business; and
(d) that he does not fall to be treated as a permanent establishment of the
non-resident company in relation to any other transaction carried
out in the same accounting period.
3 (1) In relation to an investment transaction carried out on behalf of a non-
resident company by a person providing investment management services
(an “investment manager”), the investment manager is regarded as an agent
of independent status acting in the ordinary course of his business if, and
only if, the following conditions are met.
(2) The conditions are—
(a) that at the time of the transaction he is carrying on a business of
providing investment management services;
(b) that the transaction is carried out in the ordinary course of that
(c) that he acts on behalf of the non-resident company in relation to the
transaction in an independent capacity;
(d) that the requirements of the 20% rule are met (see paragraph 4);
(e) that the remuneration he receives in respect of the transaction for the
provision to the non-resident company of investment management
services is not less than is customary for that class of business; and
(f) that he does not fall to be treated as a permanent establishment of the
company in relation to any other transaction carried out in the same
(3) In sub-paragraph (1) “investment transaction” means—
(a) transactions in shares, stock, futures contracts, options contracts or
securities of any description not mentioned in this paragraph, but
excluding futures contracts or options contracts relating to land,
(b) transactions consisting in the buying or selling of any foreign
currency or in the placing of money at interest, and
(c) such other transactions as the Treasury may by regulations designate
for the purposes of this Schedule.
Regulations for the purposes of paragraph (c) shall be made by statutory
instrument which shall be subject to annulment in pursuance of a resolution
of the House of Commons.
(4) For the purposes of sub-paragraph (3) a contract is not prevented from being
a futures contract or an options contract by the fact that any party is or may
be entitled to receive or liable to make, or entitled to receive and liable to
make, only a payment of a sum (as opposed to a transfer of assets other than
money) in full settlement of all obligations.
Investment managers: the 20% rule
4 (1) The requirements of the 20% rule are—
(a) that in relation to a qualifying period (see sub-paragraph (2)) it has
been or is the intention of the investment manager and the persons
connected with him that the company’s relevant excluded income
(see sub-paragraph (3)) should, as to at least 80%, consist of amounts
to which neither he nor any such person has a beneficial entitlement
(see sub-paragraph (4)), and
(b) to the extent that there is a failure to fulfil that intention, that