Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
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Chapter 10 — Avoidance: miscellaneous
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“Net Consideration” means—
(a)
the consideration payable to S for entering into the
relevant transaction, minus
(b)
the restricted disposal value,
“Current Book Value” means the net book value of the leased plant
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or machinery immediately before the termination, and
“Original Book Value” means the net book value of the leased
plant or machinery at the beginning of the leaseback.
(4)
In this section “relevant qualifying activity” means the qualifying
activity for the purposes of which the leased plant or machinery was
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used immediately before the termination.
(5)
Section 228B has no effect on the treatment for the purposes of income
tax or corporation tax of amounts received by way of refund on the
termination of a leaseback of amounts payable under it.
(6)
In subsection (5), “amounts received by way of refund” includes any
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amount that would be so received in respect of the lessee’s interest
under the leaseback if any amounts due to the lessor under the
leaseback were disregarded.
228D  Lessor’s income or profits
(1)
For the purpose of income tax or corporation tax, in calculating the
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lessor’s income or profits for a period of account amounts receivable
under the leaseback in that period may be disregarded to the extent that
they exceed the permitted threshold.
(2)
The permitted threshold is the total of—
(a)
gross earnings, and
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(b)
the allowable proportion of the capital repayment.
(3)
In subsection (2)(a) “gross earnings” means the amount shown in the
lessor’s accounts in respect of the lessor’s gross earnings under the
leaseback.
(4)
In subsection (2)(b) “allowable proportion of the capital repayment”
30
means the amount obtained by this calculation—

where—

“Investment Reduction For Period” means the amount shown in
the lessor’s accounts in respect of the reduction in net
investment in the leaseback, and
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“Net Investment” means the amount shown in the lessor’s
accounts as the lessor’s net investment in the leaseback at the
beginning of its term.
(5)
In relation to a period of account during which the leaseback
terminates, “amounts receivable under the leaseback” includes any
40
amount that would be so receivable in respect of the lessor’s interest
under the leaseback if any reduction in respect of amounts due to the
lessee under the leaseback were disregarded.

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
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(6)
This section does not apply to a leaseback if the lessee is a lessee by way
of an assignment made before 17 March 2004.
228E  Lessor’s income or profits: termination of leaseback
(1)
Subsection (2) applies where—
(a)
the leaseback terminates,
5
(b)
the lessor disposes of the plant or machinery, and
(c)
the amount of the disposal value required to be brought into
account because of that disposal is limited by section 62.
(2)
For the purpose of income tax or corporation tax, in calculating the
lessor’s income or profits for the period in which the termination occurs
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the amount deducted in respect of any amount refunded to the lessee
may not exceed the amount to which the disposal value is limited by
section 62.
228F  Lease and finance leaseback
(1)
Sections 228B, 228C and 228D apply, with the following modifications,
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where plant or machinery is the subject of a lease and finance leaseback.
(2)
In determining the permitted maximum for the purposes of section
228B, depreciation shall be disregarded.
(3)
In the calculation under section 228C(3), the amount of the
consideration referred to in subsection (6)(b) of this section shall be
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substituted for the Net Consideration.
(4)
In determining the permitted threshold for the purposes of section
228D, the allowable proportion of the capital repayment shall be
disregarded.
(5)
Plant or machinery is the subject of a lease and finance leaseback if—
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(a)
a person (“S”) leases the plant or machinery to another (“B”),
(b)
after the date of that transaction, the use of the plant or
machinery falls within sub-paragraph (i), (ii) or (iii) of section
221(1)(b), and
(c)
it is directly as a consequence of having been leased under a
30
finance lease that the plant or machinery is available to be so
used after that date.
(6)
For the purposes of subsection (5), S leases the plant or machinery to B
only if—
(a)
S grants B rights over the plant or machinery (other than rights
35
under a mortgage or other charge),
(b)
consideration is given for that grant, and
(c)
S is not required to bring all of that consideration into account
under this Part.
(7)
In the application of sections 228B to 228D in relation to a lease and
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finance leaseback—
(a)
references to the lessee are references to the person referred to
as S in this section, and
(b)
references to the lessor are references to the person so referred
to as B in this section or, where appropriate, to an assignee of
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that person.

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
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228G  Sections 228A to 228F: supplementary
(1)
In sections 228A to 228F—

the “current book value” of leased plant or machinery means the
book value of the plant or machinery having regard to any
relevant entry in the lessee’s accounts, but—
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(a)
also having regard to depreciation up to the time in
question, and
(b)
disregarding any revaluation gains or losses and any
impairments;

“lessee” does not include a person who is lessee by way of an
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assignment;

“restricted disposal value” means the disposal value under section
222;

“termination” in relation to a leaseback includes (except in section
228E)—
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(a)
the assignment of the lessee’s interest,
(b)
the making of any arrangements (apart from an
assignment of the lessee’s interest) under which a
person other than the lessee becomes liable to make
some or all payments under the leaseback, and
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(c)
a variation as a result of which the leaseback ceases to be
a finance lease.
(2)
In a case where accounts drawn up are not correct accounts, or no
accounts are drawn up—
(a)
the provisions of sections 228A to 228F apply as if correct
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accounts had been drawn up, and
(b)
amounts referred to in any of those sections as shown in
accounts are those that would have been shown in correct
accounts.
(3)
In a case where accounts are drawn up in reliance upon amounts
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derived from an earlier period of account for which correct accounts
were not drawn up, or no accounts were drawn up, amounts referred
to in sections 228A to 228F as shown in the accounts for the later period
are those that would have been shown if correct accounts had been
drawn up for the earlier period.
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(4)
In subsections (2) and (3) “correct accounts” means accounts drawn up
in accordance with generally accepted accounting practice.”
(2)
In sections 228A to 228G of the Capital Allowances Act 2001 (c. 2) (as inserted
by subsection (1) above), a reference to a provision of that Act includes a
reference to an equivalent provision of the Capital Allowances Act 1990 (c. 1)
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(with any necessary modification).
(3)
This section applies to income tax and corporation tax chargeable in relation to
periods that end on or after 17 March 2004.
(4)
Schedule 23 contains transitional provision.

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
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128
Manufactured dividends
Schedule 24 to this Act (which makes provision in relation to cases where
payments are or have been made, or treated as made, which are representative
of dividends on shares of companies resident in the United Kingdom) has
effect.
5
129
Gilt strips
(1)
Schedule 13 to the Finance Act 1996 (c. 8) (discounted securities: income tax
provisions) is amended as follows.
(2)
In paragraph 8 (transfers between connected persons deemed to be at market
value) after sub-paragraph (3) insert—
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“(4)
Where the relevant discounted security is a strip, its market value at
any time shall be determined for the purposes of this paragraph in
accordance with paragraph 14E below.”.
(3)
In paragraph 9 (other transactions deemed to be at market value) after sub-
paragraph (2) insert—
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“(3)
Where the relevant discounted security is a strip, its market value at
any time shall be determined for the purposes of this paragraph in
accordance with paragraph 14E below.”.
(4)
In paragraph 14 (strips of government securities) for sub-paragraph (6)
(regulations as to manner of determining market value) substitute—
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“(6)
Paragraph 14E below makes provision as to the manner of determining
for the purposes of this paragraph the market value at any time of—
(a)
any strip, or
(b)
any security exchanged for strips of that security.”.
(5)
After paragraph 14A (strips of government securities: losses) insert—
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“Strips of government securities: manipulation of acquisition, sale or redemption price
14B   (1)
This paragraph applies in any case where, as a result of any scheme
or arrangement,—
(a)
the amount paid by a person in respect of his acquisition of a
strip is or was more than the market value of the strip at the
30
time of that acquisition,
(b)
the amount payable to a person on a transfer of a strip by him
is less than the market value of the strip at the time of the
transfer, or
(c)
on redemption of a strip, the amount payable to a person, as
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the person holding the strip, is less than the market value of
the strip on the day before redemption,

and the obtaining of a tax advantage by any person is the main
benefit, or one of the main benefits, that might have been expected to
accrue from, or from any provision of, the scheme or arrangement.
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      (2)
In a case falling within sub-paragraph (1)(a) above, the person shall
be treated for the purposes of paragraphs 1(2)(b) and 14A(3)(b)
above on a transfer of the strip by him as if he had paid in respect of

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Chapter 10 — Avoidance: miscellaneous
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his acquisition of the strip an amount equal to the market value of the
strip at the time of that acquisition.
      (3)
In a case falling within sub-paragraph (1)(b) above, the person shall
be treated for the purposes of paragraphs 1(2)(b) and 14A(3)(b)
above as if the amount payable to him on the transfer were an
5
amount equal to the market value of the strip at the time of the
transfer.
      (4)
In a case falling within sub-paragraph (1)(c) above, the person shall
be treated for the purposes of paragraphs 1(2)(b) and 14A(3)(b)
above as if the amount payable to him on redemption were an
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amount equal to the market value of the strip on the day before
redemption.
      (5)
For the purposes of this paragraph, no account shall be taken of any
costs incurred in connection with any transfer or redemption of a
strip or its acquisition.
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      (6)
Paragraph 14E below makes provision as to the manner of
determining for the purposes of this paragraph the market value at
any time of a strip.
      (7)
In this paragraph “tax advantage” has the meaning given by section
709(1) of the Taxes Act 1988.”.
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(6)
After paragraph 14B insert—
“Strips: manipulation of price: associated payment giving rise to capital gains tax loss
14C   (1)
Where—
(a)
as a result of any scheme or arrangement which has an
unallowable purpose, the circumstances are, or might have
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been, as mentioned in paragraph (a), (b) or (c) of paragraph
14B(1) above,
(b)
under the scheme or arrangement, a payment falls to be made
otherwise than in respect of the acquisition or disposal of a
strip, and
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(c)
as a result of that payment or the circumstances in which it is
made, a loss accrues to any person for the purposes of capital
gains tax,

the loss shall not be an allowable loss for the purposes of capital
gains tax.
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      (2)
For the purposes of this paragraph a scheme or arrangement has an
unallowable purpose if the main benefit, or one of the main benefits,
that might have been expected to result from, or from any provision
of, the scheme or arrangement (apart from paragraph 14B above and
this paragraph) is—
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(a)
the obtaining of a tax advantage by any person, or
(b)
the accrual to any person of an allowable loss for the
purposes of capital gains tax.
      (3)
In this paragraph “tax advantage” has the meaning given by section
709(1) of the Taxes Act 1988.”.
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Chapter 10 — Avoidance: miscellaneous
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(7)
After paragraph 14C insert—
“Restriction of profits and losses on strips by reference to original acquisition cost
14D   (1)
This paragraph has effect for the purpose of excluding from charge
or, as the case may be, relief under this Schedule so much of—
(a)
any profit realised by a person from the discount on a strip, or
5
(b)
any loss sustained by a person from the discount on a strip,

as is referable to a relevant amount being less than the person’s
original acquisition cost for the strip.

For this purpose a relevant amount is any amount that falls to be
brought into account as paid in respect of the acquisition of the strip
10
or as payable on the transfer or redemption of the strip.
      (2)
Where, on the transfer or redemption of a strip,—
(a)
a person realises a profit (apart from this paragraph) from the
discount on the strip and amount C exceeds amount A, or
(b)
a person sustains a loss (apart from this paragraph) from the
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discount on the strip and amount C exceeds amount P,

then, for the purposes of the other provisions of this Schedule, the
profit or loss shall be restricted or eliminated in accordance with the
following provisions of this paragraph.
      (3)
For the purposes of this paragraph—
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“amount A” is the amount that falls to be brought into account
as the amount paid by the person in respect of his
acquisition of the strip in determining the amount of the
profit or loss apart from this paragraph,
“amount C” is the person’s original acquisition cost for the
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strip (see sub-paragraph (6) below);
“amount L” is the amount (apart from this paragraph) of the
loss mentioned in sub-paragraph (2)(b) above;
“amount P” is the amount that falls to be brought into account
as the amount payable on the transfer or redemption of the
30
strip in determining the amount of the profit or loss apart
from this paragraph.
      (4)
In a case falling within sub-paragraph (2)(a) above (person realising
a profit)—
(a)
if amount P exceeds amount C, the amount of the profit is
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restricted to the amount of that excess;
(b)
if amount P does not exceed amount C, the person shall be
treated as not realising a profit from the discount on the strip.
      (5)
In a case falling within sub-paragraph (2)(b) above (person
sustaining a loss)—
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(a)
if amount A exceeds amount C, the amount of the loss is
restricted to so much of amount L as remains after deducting
from it the amount by which amount C exceeds amount P;
(b)
if amount A does not exceed amount C, the person shall be
treated for the purposes of this Schedule as not sustaining a
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loss from the discount on the strip.
      (6)
For the purposes of this paragraph a person’s “original acquisition
cost” in the case of a strip is the amount which—

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(a)
disregarding any deemed transfers or re-acquisitions under
paragraph 14(4) above (other than the transfer mentioned in
sub-paragraph (2) above, if it is such a transfer), but
(b)
otherwise giving effect, so far as applicable, to paragraph 8,
9, 14 or 14B above (each of which treats a person acquiring a
5
security as having paid an amount equal to its market value
determined in accordance with paragraph 14E below),

would fall to be taken into account as the amount paid by the person
in respect of his acquisition of the strip in determining whether a
profit is realised, or a loss is sustained, from the discount on the strip.
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      (7)
In this paragraph any reference to a transfer includes a reference to a
deemed transfer under paragraph 14(4) above.
      (8)
In this paragraph any reference to sustaining a loss from the discount
on a strip shall be construed in accordance with paragraph 14A
above.”.
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(8)
After paragraph 14D insert—
“Market value of strips etc for the purposes of paragraphs 8, 9, 14 and 14B
14E   (1)
This paragraph makes provision as to the manner of determining—
(a)
for the purposes of paragraph 8, 9, 14 or 14B above, the
market value at any time of a strip, and
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(b)
for the purposes of paragraph 14(2) above, the market value
at any time of a security exchanged for strips of that security.
      (2)
The market value on any day of a strip or security quoted in the Daily
List shall be—
(a)
the lower of the two figures shown in the Daily List for the
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strip or security for that day,
  plus
(b)
one-quarter of the difference between those two figures,

unless the Stock Exchange is closed on that day.
      (3)
If the Stock Exchange is closed on any day, the market value on that
30
day of any such strip or security shall be taken to be its market value
on the latest previous day or earliest subsequent day on which the
Stock Exchange is open, whichever affords the lower value.
      (4)
In the case of a strip or security which—
(a)
is a security, or a strip of a security, issued by or on behalf of
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the government of a territory outside the United Kingdom,
and
(b)
is not quoted in the Daily List, but
(c)
is quoted in a foreign stock exchange list,

the market value shall be determined in accordance with sub-
40
paragraph (5) below.
      (5)
In any such case, subsections (2) and (3) above shall have effect for
determining the market value of the strip or security, but for this
purpose those provisions shall have effect—
(a)
with the substitution for references to the Daily List of
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references to the foreign stock exchange list,