Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
29

(b)
any other enterprise (including that of the liquidator or
administrator),

is a small or medium-sized enterprise.
      (4)
Article 3 of the Annex shall have effect with the omission of
paragraph 5 (declaration in good faith where control cannot be
5
determined etc).
      (5)
The first sentence of Article 4(1) of the Annex shall have effect as if
the data to apply to—
(a)
the headcount of staff, and
(b)
the financial amounts,
10

were the data relating to the chargeable period in paragraph 5B(1)
above (instead of the period described in that sentence) and
calculated on an annual basis.
      (6)
Article 4 of the Annex shall have effect with the omission of the
following provisions—
15
(a)
the second sentence of paragraph 1 (data to be taken into
account from date of closure of accounts);
(b)
paragraph 2 (no change of status unless ceilings exceeded for
two consecutive periods);
(c)
paragraph 3 (bona fide estimate in case of newly established
20
enterprise).
Meaning of “qualifying territory” and “non-qualifying territory”
5E    (1)
In this Schedule—
“non-qualifying territory” means any territory which is not a
qualifying territory;
25
“qualifying territory” means—
(a)
the United Kingdom, or
(b)
any territory as respects which Condition 1 or
Condition 2 below is satisfied.
      (2)
Condition 1 is that—
30
(a)
arrangements to which section 788 applies (double taxation
relief by agreement with other territories) have been made in
relation to the territory;
(b)
those arrangements contain a non-discrimination provision
(see sub-paragraphs (4) and (5) below); and
35
(c)
the territory is not designated as a non-qualifying territory
for the purposes of this sub-paragraph in regulations made
by the Treasury.
      (3)
Condition 2 is that—
(a)
arrangements to which section 788 applies have been made in
40
relation to the territory; and
(b)
the territory is designated as a qualifying territory for the
purposes of this sub-paragraph in regulations made by the
Treasury.
      (4)
For the purposes of this paragraph a “non-discrimination provision”,
45
in relation to any arrangement to which section 788 applies, is a
provision to the effect that nationals of a state which is a party to

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
30

those arrangements (a “contracting state”) are not to be subject in any
other contracting state to—
(a)
any taxation, or
(b)
any requirement connected with taxation,

which is other or more burdensome than the taxation and connected
5
requirements to which nationals of that other state in the same
circumstances (in particular with respect to residence) are or may be
subjected.
      (5)
In this paragraph, “national”, in relation to a contracting state,
includes—
10
(a)
any individual possessing the nationality or citizenship of the
contracting state,
(b)
any legal person, partnership or association deriving its
status as such from the laws in force in that contracting state.
      (6)
A statutory instrument containing regulations under this paragraph
15
shall not be made unless a draft of the instrument has been laid
before, and approved by a resolution of, the House of Commons.”.
(5)
In paragraph 14(1) (general interpretation) insert each of the following
definitions at the appropriate place—

“medium-sized enterprise” shall be construed in accordance with
20
paragraph 5D above;”

“ “non-qualifying territory” has the meaning given by paragraph
5E above;”;

“ “qualifying territory” has the meaning given by paragraph 5E
above;”;
25

“ “small enterprise” shall be construed in accordance with
paragraph 5D above;”.
32
Special applications of paragraph 6 of Schedule 28AA to the Taxes Act 1988
(1)
Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) is
amended as follows.
30
(2)
After paragraph 6 insert—
“Application of paragraph 6 in relation to transfers of trading stock etc
6A    (1)
Paragraph 6(3)(a) above does not affect the credits to be brought into
account by the disadvantaged person in respect of—
(a)
closing trading stock, or
35
(b)
closing work in progress in a trade,

for accounting periods ending on or after the last day of the relevant
accounting period of the advantaged person.
      (2)
For the purposes of sub-paragraph (1) above, the relevant accounting
period of the advantaged person is the accounting period in which
40
the actual provision was made or imposed.
      (3)
For the purposes of this paragraph “trading stock”, in relation to any
trade, has the same meaning as it has for the purposes of section 100
(valuation of trading stock at discontinuance of trade) (see
subsection (2) of that section).”.
45

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
31

(3)
After paragraph 6A insert—
“Compensating adjustment where advantaged person is a controlled foreign company
6B    (1)
This paragraph applies in any case where—
(a)
the actual provision is provision made or imposed in relation
to a controlled foreign company,
5
(b)
in determining for the purposes of Chapter 4 of Part 17 the
amount of that company’s chargeable profits for an
accounting period, its profits and losses fall to be computed
in accordance with paragraph 1(2) above in the case of that
provision,
10
(c)
the whole of those chargeable profits fall to be apportioned
under section 747(4) to one or more companies resident in the
United Kingdom, and
(d)
tax is chargeable by virtue of section 747(4) in respect of the
whole of those chargeable profits, as so apportioned to those
15
companies.
      (2)
Where this paragraph applies, paragraph 6 above shall have effect as
if the controlled foreign company were a person on whom a potential
advantage in relation to United Kingdom taxation were conferred by
the actual provision.
20
      (3)
In the application of paragraph 6 above by virtue of this paragraph—
(a)
references to the advantaged person in sub-paragraphs (4)(a)
and (b), (5)(a) and (b) and (6)(b) of that paragraph include a
reference to any of the companies mentioned in sub-
paragraph (1)(c) above, and
25
(b)
references to corporation tax include a reference to tax
chargeable by virtue of section 747(4).
      (4)
In this paragraph—
“controlled foreign company” has the same meaning as in
Chapter 4 of Part 17;
30
“accounting period”, in relation to a controlled foreign
company, has the same meaning as in Chapter 4 of Part 17.”.
(4)
In paragraph 13 (saving for provisions relating to capital allowances and
capital gains) at the beginning insert “(1) Subject to sub-paragraph (2) below,”
and at the end add—
35
     “(2)
Nothing in sub-paragraph (1) above applies to paragraph 6 above.”.
Penalties: temporary relaxation
33
Provision not at arm’s length: temporary relaxation of liability to penalty
(1)
This section has effect in relation to—
(a)
the years of assessment 2004-05 and 2005-06, and
40
(b)
accounting periods beginning on or after 1st January 2004 and ending
on or before 31st March 2006,

and in the following provisions of this section “relevant period” means any of
those years of assessment or accounting periods.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(2)
In this section “records relating to an arm’s length provision” means such
records as might have been requisite for the purpose of making and delivering
a correct and complete return, so far as relating to the determination of the
provision asserted to be the arm’s length provision for the purposes of
Schedule 28AA to the Taxes Act 1988 in a case where that Schedule applies.
5
(3)
In relation to any relevant period, the following provisions (which provide for
penalties for failure to keep and preserve records for purposes of returns)—
(a)
section 12B(5) of the Taxes Management Act 1970 (c. 9), and
(b)
paragraph 23 of Schedule 18 to the Finance Act 1998 (c. 36),

do not apply if the records which the person in question fails to keep or
10
preserve are records relating to an arm’s length provision.
(4)
In the application of subsection (2) in relation to paragraph 23 of Schedule 18
to the Finance Act 1998—
(a)
for “requisite” substitute “needed”, and
(b)
for “making and delivering” substitute “delivering”.
15
(5)
Where a person delivers an incorrect return for any relevant period, he shall
not be regarded as doing so negligently for the purposes of—
(a)
section 95 of the Taxes Management Act 1970 (c. 9), or
(b)
paragraph 20 of Schedule 18 to the Finance Act 1998 (c. 36),

by reason only of his failure, or the failure of any other person, to keep or
20
preserve records relating to an arm’s length provision.
(6)
For the purposes of section 95A of the Taxes Management Act 1970, where a
partner delivers an incorrect partnership return for any relevant period—
(a)
he shall not be regarded as doing so negligently, and
(b)
his doing so shall not be regarded as attributable to negligent conduct
25
on the part of any relevant partner,

by reason only of his failure, or the failure of any other person, to keep or
preserve records relating to an arm’s length provision.
(7)
For the purposes of section 99 of the Taxes Management Act 1970 (penalty for
assisting in preparation of incorrect documents) a person shall not be taken to
30
know that a return is incorrect by reason only of his failure, or the failure of any
other person, to keep or preserve records relating to an arm’s length provision.
Thin capitalisation
34
Payments of excessive interest etc
(1)
In section 209 of the Taxes Act 1988 (meaning of “distribution”) the following
35
provisions shall cease to have effect—
(a)
in subsection (2), paragraph (da) (interest etc in respect of securities
where issuing company is 75% subsidiary of holder etc and the interest
represents an amount that would not have been paid but for a special
relationship etc); and
40
(b)
subsections (8A) to (8F) (application of section 808A(2) to (4) for
purposes of paragraph (da) of subsection (2)).
(2)
Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) is
amended as follows.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(3)
After paragraph 1 insert—
“Provision in relation to securities: determination of arm’s length provision
1A    (1)
This paragraph applies where—
(a)
both of the affected persons are companies, and
(b)
the actual provision is provision in relation to a security
5
issued by one of those companies (“the issuing company”).
      (2)
Paragraph 1(2)(a) above shall be construed as requiring account to be
taken of all factors, including—
(a)
the question whether the loan would have been made at all in
the absence of the special relationship (see sub-paragraph (6)
10
below),
(b)
the amount which the loan would have been in the absence of
the special relationship, and
(c)
the rate of interest and other terms which would have been
agreed in the absence of the special relationship,
15

but this is subject to the following provisions of this paragraph.
      (3)
In a case where—
(a)
a company makes a loan to another company with which it
has a special relationship, and
(b)
it is not part of the first company’s business to make loans
20
generally,

the fact that it is not part of the first company’s business to make
loans generally shall be disregarded in construing sub-paragraph (2)
above.
      (4)
Paragraph 1(2)(a) above shall be construed as requiring no account
25
to be taken, in the determination of any of the matters mentioned in
sub-paragraph (5) below, of (or of any inference capable of being
drawn from) any guarantee provided by a company with which the
issuing company has a participatory relationship (see sub-
paragraphs (7) and (8) below).
30
      (5)
The matters are—
(a)
the appropriate level or extent of the issuing company’s
overall indebtedness;
(b)
whether it might be expected that the issuing company and a
particular person would have become parties to a transaction
35
involving the issue of a security by the issuing company or
the making of a loan, or a loan of a particular amount, to the
issuing company;
(c)
the rate of interest and other terms that might be expected to
be applicable in any particular case to such a transaction.
40
      (6)
In this paragraph “special relationship” means any relationship by
virtue of which the condition in paragraph 1(1)(b) above is satisfied
in the case of the affected persons.
      (7)
In this paragraph any reference to a guarantee includes a reference to
a surety and to any other relationship, arrangements, connection or
45
understanding (whether formal or informal) such that the person
making the loan to the issuing company has a reasonable expectation
that in the event of a default by the issuing company he will be paid
by, or out of the assets of, one or more companies.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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      (8)
For the purposes of this paragraph, the cases where one company
has a “participatory relationship” with another are those where—
(a)
one of them is directly or indirectly participating in the
management, control or capital of the other; or
(b)
the same person or persons is or are directly or indirectly
5
participating in the management, control or capital of each of
them.
      (9)
In this paragraph “security” includes securities not creating or
evidencing a charge on assets.
     (10)
For the purposes of this paragraph—
10
(a)
interest payable by a company on money advanced without
the issue of a security for the advance, or
(b)
other consideration given by a company for the use of money
so advanced,

shall be treated as if payable or given in respect of a security issued
15
for the advance by the company, and references in this paragraph to
a security shall be construed accordingly.
Guarantees etc
1B    (1)
This paragraph applies where the actual provision is made or
imposed by means of a series of transactions which include—
20
(a)
the issuing of a security by a company which is one of the
affected persons (“the issuing company”), and
(b)
the provision of a guarantee by a company which is the other
of those persons.
      (2)
Paragraph 1(2)(a) above shall be construed as requiring account to be
25
taken of all factors, including—
(a)
the question whether the guarantee would have been
provided at all in the absence of the special relationship,
(b)
the amount that would have been guaranteed in the absence
of the special relationship, and
30
(c)
the consideration for the guarantee and other terms which
would have been agreed in the absence of the special
relationship,

but this is subject to the following provisions of this paragraph.
      (3)
In a case where—
35
(a)
a company provides a guarantee in respect of another
company with which it has a special relationship, and
(b)
it is not part of the first company’s business to provide
guarantees generally,

the fact that it is not part of the first company’s business to provide
40
guarantees generally shall be disregarded in construing sub-
paragraph (2) above.
      (4)
Paragraph 1(2)(a) above shall be construed as requiring no account
to be taken, in the determination of any of the matters mentioned in
sub-paragraph (5) below, of (or of any inference capable of being
45
drawn from) any guarantee provided by a company with which the
issuing company has a participatory relationship.
      (5)
The matters are—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
35

(a)
the appropriate level or extent of the issuing company’s
overall indebtedness;
(b)
whether it might be expected that the issuing company and a
particular person would have become parties to a transaction
involving the issue of a security by the issuing company or
5
the making of a loan, or a loan of a particular amount, to the
issuing company;
(c)
the rate of interest and other terms that might be expected to
be applicable in any particular case to such a transaction.
      (6)
The following provisions of paragraph 1A above also apply for the
10
purposes of this paragraph—
(a)
sub-paragraph (6) (meaning of special relationship);
(b)
sub-paragraph (7) (construction of references to a guarantee);
(c)
sub-paragraph (8) (meaning of participatory relationship),
(d)
sub-paragraph (9) (meaning of security),
15
(e)
sub-paragraph (10) (extended meaning of security).”.
(4)
In Schedule 9 to the Finance Act 1996 (loan relationships: special
computational provisions) paragraph 11A (exchange gains and losses where
loan not on arm’s length terms) is amended as follows—
(a)
in sub-paragraph (1)(a) for “section 209(2)(da) or (e)(vii)” substitute
20
“section 209(2)(e)(vii)”;
(b)
in sub-paragraph (1)(b), before “Schedule 28AA” insert “paragraph 1
of”;
(c)
omit sub-paragraph (2)(a);
(d)
in sub-paragraph (2)(b), before “Schedule 28AA” insert “paragraph 1
25
of”;
(e)
omit sub-paragraph (3)(a);
(f)
in sub-paragraph (3)(b), omit “in a case falling within paragraph (b) of
that sub-paragraph,”;
(g)
in sub-paragraph (5)(b), omit “the terms would have been the same,
30
except that”.
35
Elimination of double counting etc
(1)
Schedule 28AA to the Taxes Act 1988 is amended as follows.
(2)
In paragraph 6 (elimination of double counting) in sub-paragraph (2) (right of
disadvantaged person to claim relief, subject to sub-paragraphs (3) to (6) and
35
paragraph 7) before “7” insert “6C, 6D,”.
(3)
After paragraph 6B (which is inserted by section 32) insert—
“Claims under paragraph 6 where paragraph 1A applies
6C    (1)
Where paragraph 1A above applies in relation to any provision, this
paragraph has effect in relation to that provision.
40
      (2)
A claim under paragraph 6(2) above may be made in accordance
with this paragraph.