Finance Bill

House of Commons

Session 2002 - 03
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
118

132
Companies in partnership: supplementary
(1)
In section 131 and this section “capital” includes—
(a)
anything accounted for as partners’ capital, or partners’ equity, in the
accounts of the partnership drawn up in accordance with generally
accepted accountancy practice; or
5
(b)
if no such accounts are drawn up, anything that would be so accounted
for if such accounts had been drawn up.
(2)
Where a partnership is dissolved by reason of one of the partners acquiring the
interests of the others, the remaining partner is to be treated for the purposes
of section 131 as having drawn out his and the others’ shares of capital from
10
the partnership.
(3)
For the purposes of section 131(2)(e), where a profit for a period derives partly
from income arising before 17th March 2004, the part of the profit that derives
from such income shall be determined on such basis as is just and reasonable.
(4)
For the purposes of section 131(2)(f) the capital contributed by the company
15
shall be taken to include amounts originally contributed as mentioned in
section 131(2)(d)(i).
(5)
In section 131(3) the reference to capital that had been contributed includes
amounts purporting to be provided by way of loan where the loan—
(a)
carries no interest; or
20
(b)
carries interest at a rate less than that which might have been expected
if the loan had been between independent persons dealing at arm’s
length.
(6)
For the purposes of section 131 a partnership is to be treated as the same
partnership notwithstanding a change in membership if any person who was
25
a member before the change remains a member after it.
133
Relationship with chargeable gains
(1)
Subsection (3) below applies if—
(a)
section 131 applies as a result of a receipt on or after 17 March 2004, by
a company that is or has been a member of a partnership, of any
30
consideration for a disposal on or after that date of all or any of its
interest in the partnership (“the section 131 disposal”);
(b)
a chargeable gain accrues to the company on a relevant disposal; and
(c)
the total amount of chargeable gains accruing to the company on
relevant disposals exceeds the total amount of any allowable losses
35
accruing to it on such disposals.
(2)
References in this section to a “relevant disposal” are to any disposal of an asset
that, alone or together with other disposals of assets, constitutes the section 131
disposal; and references in this subsection to a disposal of an asset are to be
construed in accordance with the 1992 Act.
40
(3)
Where this subsection applies—
(a)
any chargeable gain accruing to the company on a relevant disposal
must be excluded in computing, for the purposes of section 8(1) of the
1992 Act, the total amount of chargeable gains accruing to the company
in the accounting period in which that gain accrued;
45

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
119

(b)
the relevant net gain (defined by subsection (4) below) must be
included in computing for those purposes the total amount of
chargeable gains accruing to the company in the accounting period in
which the receipt mentioned in subsection (1) above occurred; and
(c)
any allowable loss accruing to the company on a relevant disposal must
5
be excluded in computing for the purposes of section 8(1) of the 1992
Act the amount of any allowable losses.
(4)
To find “the relevant net gain” for the purposes of this section—
(a)
take the amount by which the total amount of chargeable gains
accruing to the company on relevant disposals exceeds the total
10
amount of allowable losses accruing to it on such disposals; and
(b)
reduce it (but not below nil) by an amount equal to the chargeable
amount.
(5)
Where section 131 applies as mentioned in subsection (1)(a) above, in
computing any chargeable gain or allowable loss accruing to the company on
15
a relevant disposal—
(a)
neither the chargeable amount, nor any amount taken into account in
computing it, shall be excluded by section 37(1) of the 1992 Act
(exclusions from consideration); and
(b)
an amount that has been taken into account in computing the
20
chargeable amount shall not by reason of that fact be excluded by
section 39(1) of that Act (exclusions from allowable deductions).
(6)
If section 131 and this section apply more than once as a result of two or more
receipts by a company of consideration relating to the same section 131
disposal—
25
(a)
subsection (3)(b) above does not apply in relation to any of the receipts
after the first; and
(b)
in relation to the first receipt, the amount to be deducted under
subsection (4)(b) above is an amount equal to the total of the chargeable
amounts found in relation to the receipts.
30
(7)
Subsection (8) below applies if subsection (3) above prevents an allowable loss
that accrued to a company otherwise than on a relevant disposal from being
deductible from a chargeable gain accruing to the company on a relevant
disposal.
(8)
That loss (to the extent that it has not been deducted from any other chargeable
35
gain) shall instead be deductible from the total amount of chargeable gains
accruing to the company in the accounting period in which the receipt
mentioned in subsection (1) above occurred.
(9)
But if, in any case where subsection (3) above applies, there are one or more
allowable losses—
40
(a)
that are losses to which section 18(3) of the 1992 Act applies, and
(b)
that accrued to the company otherwise than on a relevant disposal and
are prevented by subsection (3) above from being deductible from a
chargeable gain accruing to the company on a relevant disposal,

the total amount deducted under subsection (8) above in respect of those losses
45
must not exceed the relevant net gain.
(10)
In this section—

“the 1992 Act” means the Taxation of Chargeable Gains Act 1992 (c. 12);

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
120


“the chargeable amount” means the amount found under section 131 in
relation to the receipt mentioned in subsection (1) above; and

references to chargeable gains, or allowable losses, accruing on disposals
are to be construed in accordance with the 1992 Act.
Chapter 10
5
Avoidance: miscellaneous
134
Finance leasebacks
(1)
After section 228 of the Capital Allowances Act 2001 (c. 2) (sale and leaseback:
election) insert—
“Finance leaseback: parties’ income and profits
10
228A  Application of sections 228B to 228E
(1)
Sections 228B to 228E apply where—
(a)
plant or machinery is the subject of a sale and finance leaseback
for the purposes of section 221, and
(b)
section 222 (restriction of disposal value) applies.
15
(2)
Sections 228B to 228D also apply, with the modifications set out in
section 228F, where plant or machinery is the subject of a lease and
finance leaseback (as defined in section 228F).
228B     Lessee’s income or profits: deductions
(1)
For the purpose of income tax or corporation tax, in calculating the
20
lessee’s income or profits for a period of account the amount deducted
in respect of amounts payable under the leaseback may not exceed the
permitted maximum.
(2)
The permitted maximum is the total of—
(a)
finance charges shown in the accounts, and
25
(b)
depreciation, taking the value of the plant or machinery at the
beginning of the leaseback to be the restricted disposal value.
(3)
In relation to a period of account during which the leaseback
terminates, the permitted maximum shall also include an amount
calculated in accordance with subsection (4).
30
(4)
The calculation is—
where—
“Current Book Value” means the net book value of the leased plant
or machinery immediately before the termination,
“Original Consideration” means the consideration payable to S for
35
entering into the relevant transaction, and
“Original Book Value” means the net book value of the leased
plant or machinery at the beginning of the leaseback.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
121

228C  Lessee’s income or profits: termination of leaseback
(1)
Subsection (2) applies where the leaseback terminates.
(2)
For the purpose of the calculation of income tax or corporation tax, the
income or profits of the lessee from the relevant qualifying activity for
the period in which the termination occurs shall be increased by an
5
amount calculated in accordance with subsection (3).
(3)
The calculation is—
where—
“Net Consideration” means—
(a)
the consideration payable to S for entering into the
10
relevant transaction, minus
(b)
the restricted disposal value,
“Current Book Value” means the net book value of the leased plant
or machinery immediately before the termination, and
“Original Book Value” means the net book value of the leased
15
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
used immediately before the termination.
(5)
Section 228B has no effect on the treatment for the purposes of income
20
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
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
25
leaseback were disregarded.
228D  Lessor’s income or profits
(1)
This section applies in relation to the calculation of the lessor’s income
or profits for a period of account for the purpose of income tax or
corporation tax.
30
(2)
Where—
(a)
an amount receivable in respect of the lessor’s interest under the
leaseback falls to be taken into account in that calculation, and
(b)
that amount is reduced by an amount due to the lessee under
the leaseback,
35

that reduction shall be disregarded when taking the amount receivable
into account.
(3)
The amounts receivable in respect of the lessor’s interest under the
leaseback that fall to be taken into account in that calculation may be
disregarded to the extent that they exceed the permitted threshold
40
(whether or not subsection (2) applies).
(4)
The permitted threshold is the total of—
(a)
gross earnings, and

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
122

(b)
the allowable proportion of the capital repayment.
(5)
In subsection (4)(a) “gross earnings” means the amount shown in the
lessor’s accounts in respect of the lessor’s gross earnings under the
leaseback.
(6)
In subsection (4)(b) “allowable proportion of the capital repayment”
5
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
10

“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.
(7)
This section does not apply to a leaseback if the lessee is a lessee by way
of an assignment made before 17 March 2004.
15
228E  Lessor’s income or profits: termination of leaseback
(1)
Subsection (2) applies where—
(a)
the leaseback terminates,
(b)
the lessor disposes of the plant or machinery, and
(c)
the amount of the disposal value required to be brought into
20
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
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
25
section 62.
228F  Lease and finance leaseback
(1)
Sections 228B, 228C and 228D apply, with the following modifications,
where plant or machinery is the subject of a lease and finance leaseback.
(2)
In determining the permitted maximum for the purposes of section
30
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
substituted for the Net Consideration.
(4)
In determining the permitted threshold for the purposes of section
35
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—
(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
40
machinery falls within sub-paragraph (i), (ii) or (iii) of section
221(1)(b), and

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
123

(c)
it is directly as a consequence of having been leased under a
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—
5
(a)
S grants B rights over the plant or machinery,
(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)
Plant or machinery is not the subject of a lease and finance leaseback for
10
the purposes of this section in any case where the condition in
subsection (6)(c) is met only because of an election under section 199
made before 18 May 2004.
(8)
In the application of sections 228B to 228D in relation to a lease and
finance leaseback—
15
(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 referred to
as B in this section or, where appropriate, to an assignee of that
person.
20
228G
Leaseback not accounted for as finance lease in accounts of lessee
(1)
Sections 228B and 228C are subject to this section in their application in
relation to a leaseback that is not accounted for as a finance lease in the
accounts of the lessee.
(2)
Subsection (3) applies where the leaseback is accounted for as a finance
25
lease in the accounts of a person connected with the lessee; and in that
subsection “relevant calculation” means the calculation of—
(a)
the permitted maximum for the purposes of section 228B, or
(b)
the amount by which the income or profits of the lessee are to
be increased in accordance with section 228C.
30
(3)
Where an amount that falls to be used for the purposes of a relevant
calculation—
(a)
cannot be ascertained by reference to the lessee’s accounts
because the leaseback is not accounted for as a finance lease in
those accounts, but
35
(b)
can be ascertained by reference to the connected person’s
accounts for one or more periods,

that amount as ascertained by reference to the connected person’s
accounts shall be used for the purposes of the relevant calculation.
(4)
Subsections (5) and (6) apply in a case where the leaseback is not
40
accounted for as a finance lease in the accounts of a person connected
with the lessee.
(5)
Sections 228B and 228C do not apply in relation to the leaseback.
(6)
If the term of the leaseback begins on or after 18 May 2004 then, for the
purposes of income tax or corporation tax, the income or profits of the
45
lessee from the relevant qualifying activity for the period of account
during which the term of the leaseback begins shall be increased by—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
124

(a)
the net consideration for the purposes of section 228C(3) (in the
case of a sale and finance leaseback), or
(b)
the consideration referred to in section 228F(6)(b) (in the case of
a lease and finance leaseback).
(7)
For the purposes of this section the leaseback is accounted for as a
5
finance lease in a person’s accounts if—
(a)
the leaseback falls, under generally accepted accounting
practice, to be treated in that person’s accounts as a finance
lease or loan, or
(b)
in a case where the leaseback is comprised in other
10
arrangements, those arrangements fall, under generally
accepted accounting practice, to be so treated.
228H  Sections 228A to 228G: supplementary
(1)
In sections 228A to 228G—

“lessee” does not include a person who is lessee by way of an
15
assignment;

the “net 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—
(a)
also having regard to depreciation up to the time in
20
question, and
(b)
disregarding any revaluation gains or losses and any
impairments;

“restricted disposal value” means the disposal value under section
222;
25

“termination” in relation to a leaseback includes (except in section
228E)—
(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
30
person other than the lessee becomes liable to make
some or all payments under the leaseback, and
(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
35
accounts are drawn up—
(a)
the provisions of sections 228A to 228G apply as if correct
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
40
accounts.
(3)
In a case where accounts are drawn up in reliance upon amounts
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 228G as shown in the accounts for the later period
45
are those that would have been shown if correct accounts had been
drawn up for the earlier period.
(4)
In subsections (2) and (3) “correct accounts” means accounts drawn up
in accordance with generally accepted accounting practice.