Finance Bill

House of Commons

Session 2002 - 03
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
125

228J  Plant or machinery subject to further operating lease
(1)
This section applies where—
(a)
plant or machinery is the subject of—
(i)
a sale and finance leaseback, or
(ii)
a lease and finance leaseback, and
5
(b)
some or all of the plant or machinery becomes, while the subject
of the leaseback, also the subject of a lease in relation to which
the following conditions are met—
(i)
the term of the lease begins on or after 18 May 2004;
(ii)
S, or a person connected with S, is the lessee under the
10
lease;
(iii)
the lease is not accounted for as a finance lease in the
accounts of the lessee.
(2)
For the purpose of income tax or corporation tax, in calculating the
lessee’s income or profits for a period of account the amount deducted
15
in respect of amounts payable under the operating lease shall not
exceed the relevant amount.
(3)
Subsections (4) and (5) apply 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.
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(4)
Where—
(a)
an amount receivable in respect of the lessor’s interest under the
operating lease falls to be taken into account in that calculation,
and
(b)
that amount is reduced by an amount due to the lessee under
25
the operating lease,

that reduction shall be disregarded when taking the amount receivable
into account.
(5)
The amounts receivable in respect of the lessor’s interest under the
operating lease that fall to be taken into account in that calculation may
30
be disregarded to the extent that they exceed the relevant amount
(whether or not subsection (4) applies).
(6)
Where only some of the plant or machinery is the subject of the
operating lease, subsections (2) to (5) shall apply subject to such
apportionments as may be just and reasonable.
35
(7)
For the purposes of this section a lease is accounted for as a finance
lease in a person’s accounts if—
(a)
the lease 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 lease is comprised in other arrangements,
40
those arrangements fall, under generally accepted accounting
practice, to be so treated.
(8)
In this section—

“lease and finance leaseback” has the meaning given in section
228F;
45

“lessee” means the lessee under the operating lease;

“lessor” means the lessor under the operating lease;

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
126


“operating lease” means the lease referred to in subsection (1)(b);

“relevant amount” means an amount equal to the permitted
maximum under section 228B as it applies in relation to the
leaseback.”.
(2)
In sections 228A to 228J of the Capital Allowances Act 2001 (c. 2) (as inserted
5
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)
(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.
10
(4)
Schedule 23 contains transitional provision.
135
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
15
effect.
136
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
20
value) after sub-paragraph (3) insert—
“(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-
25
paragraph (2) insert—
“(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)
30
(regulations as to manner of determining market value) substitute—
“(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.”.
35
(5)
After paragraph 14A (strips of government securities: losses) insert—
“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,—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
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(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
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
5
transfer, or
(c)
on redemption of a strip, the amount payable to a person, as
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
10
benefit, or one of the main benefits, that might have been expected to
accrue from, or from any provision of, the scheme or arrangement.
      (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
15
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
20
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
25
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.
30
      (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.”.
35
(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
40
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
45
(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,

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the loss shall not be an allowable loss for the purposes of capital
gains tax.
      (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
5
of, the scheme or arrangement (apart from paragraph 14B above and
this paragraph) is—
(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.
10
      (3)
In this paragraph “tax advantage” has the meaning given by section
709(1) of the Taxes Act 1988.”.
(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
15
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
(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.
20

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
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
25
discount on the strip and amount C exceeds amount A, or
(b)
a person sustains a loss (apart from this paragraph) from the
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
30
following provisions of this paragraph.
      (3)
For the purposes of this paragraph—
“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
35
profit or loss apart from this paragraph;
“amount C” is the person’s original acquisition cost for the
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;
40
“amount P” is the amount that falls to be brought into account
as the amount payable on the transfer or redemption of the
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
45
a profit)—
(a)
if amount P exceeds amount C, the amount of the profit is
restricted to the amount of that excess;

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous
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(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)—
(a)
if amount A exceeds amount C, the amount of the loss is
5
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
loss from the discount on the strip.
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      (6)
For the purposes of this paragraph a person’s “original acquisition
cost” in the case of a strip is the amount which—
(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
15
(b)
otherwise giving effect, so far as applicable, to paragraph 8,
9, 14 or 14B above (each of which treats a person acquiring a
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
20
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.
      (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
25
on a strip shall be construed in accordance with paragraph 14A
above.”.
(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—
30
(a)
for the purposes of paragraph 8, 9, 14 or 14B above, the
market value at any time of a strip, and
(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
35
List shall be—
(a)
the lower of the two figures shown in the Daily List for the
strip or security for that day,
  plus
(b)
one-quarter of the difference between those two figures,
40

unless the Stock Exchange is closed on that day.
      (3)
If the Stock Exchange is closed on any day, the market value on that
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.
45
      (4)
In the case of a strip or security which—

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(a)
is a security, or a strip of a security, issued by or on behalf of
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,
5

the market value shall be determined in accordance with sub-
paragraph (5) below.
      (5)
In any such case, sub-paragraphs (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—
10
(a)
with the substitution for references to the Daily List of
references to the foreign stock exchange list,
(b)
with the substitution for references to the Stock Exchange of
references to the foreign stock exchange to which that list
relates, and
15
(c)
with any modifications which are necessary by reason of the
form of quotation adopted in the foreign stock exchange list
(including, in a case where a single figure only is published,
taking that figure as the market value).
      (6)
Where a strip or security is quoted in more than one foreign stock
20
exchange list—
(a)
any such list published for a foreign stock exchange in the
territory of the issuing government shall be used for the
purposes of sub-paragraph (5) above in preference to any
other such list, and
25
(b)
any such list published for a foreign stock exchange which is
regarded as the major exchange in that territory for strips or
securities shall be used for those purposes in preference to
any other such list.
      (7)
In this paragraph—
30
“the Daily List” means the The Stock Exchange Daily Official
List;
“foreign stock exchange” means a recognised stock exchange
in a territory outside the United Kingdom on which strips
are traded;
35
“foreign stock exchange list” means any publication which
performs in the case of a foreign stock exchange a function
equivalent, or broadly similar, to that performed by the
Daily List in relation to strips;
“issuing government” means the government which issued
40
the security mentioned in sub-paragraph (4)(a) above.
      (8)
The Treasury may by regulations make provision as to the manner of
determining, for any of the purposes mentioned in sub-paragraph (1)
above, the market value at any time of—
(a)
any strip, or
45
(b)
any security exchanged for strips of that security.
      (9)
Regulations under sub-paragraph (8) above may—
(a)
amend or modify any provision of this paragraph other than
that sub-paragraph, sub-paragraph (1) above or this sub-
paragraph;
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(b)
make different provision for different cases; and
(c)
contain such incidental, supplemental, consequential and
transitional provision and savings as the Treasury may think
fit.”.
(9)
In paragraph 15(1) (general interpretation) in the definition of “market value”
5
(which applies except in paragraph 14) for “(except in paragraph 14 above)”
substitute “(except as provided in relation to paragraph 8, 9, 14 or 14B above
by paragraph 14E above)”.
(10)
The amendments made by—
(a)
subsections (2) and (3), and
10
(b)
subsections (8) and (9), so far as relating to paragraph 8 or 9 of Schedule
13 to the Finance Act 1996 (c. 8),

have effect in relation to any transfer of a strip on or after 17th March 2004.
(11)
The amendments made by—
(a)
subsection (4), and
15
(b)
subsections (8) and (9), so far as relating to paragraph 14 of Schedule 13
to the Finance Act 1996,

have effect in relation to exchanges on or after 17th March 2004 and deemed
transfers and re-acquisitions under sub-paragraph (4) of that paragraph on or
after that date.
20
(12)
The amendments made by—
(a)
subsection (5), and
(b)
subsections (8) and (9), so far as relating to paragraph 14B of Schedule
13 to the Finance Act 1996,

have effect in relation to any strip held on 15th January 2004 or acquired after
25
that date (and see subsection (15)).
(13)
The amendment made by subsection (6) has effect in relation to losses accruing
on or after 17th March 2004.
(14)
The amendment made by subsection (7) has effect in relation to any strip
acquired on or after 15th January 2004 (and see subsection (15)).
30
(15)
In determining when a strip is acquired for the purposes of subsection (12) or
(14), any deemed transfers or re-acquisitions under paragraph 14(4) of
Schedule 13 to the Finance Act 1996 shall be disregarded.
137
Life policies etc.: restriction of corresponding deficiency relief
(1)
In Chapter 2 of Part 13 of the Taxes Act 1988 (life policies, life annuities and
35
capital redemption policies), section 549 (certain deficiencies allowable as
deductions) is amended as follows.
(2)
In subsection (1) for the words from “the total amount” to the end substitute
“the allowable amount”.
(3)
After that subsection insert—
40
“(1A)
The allowable amount is the total of any amounts that—
(a)
were treated as a gain by virtue of section 541(1)(d), 543(1)(c) or
546C(7) on the previous happenings of chargeable events, and