Finance Bill

House of Commons

Session 2002 - 03
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Other Bills before Parliament

Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 1 — Income tax and corporation tax charge and rate bands
22

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Personal allowances for those aged 65 or more
(1)
For the year 2004-05—
(a)
the amount specified in section 257(2) of the Taxes Act 1988 (claimant
aged 65 or more) shall be £6,830; and
(b)
the amount specified in section 257(3) of that Act (claimant aged 75 or
5
more) shall be £6,950.
(2)
Accordingly, section 257C(1) of that Act (indexation), so far as it relates to the
amounts so specified, does not apply for that year.
Corporation tax
25
Charge and main rate for financial year 2005
10
Corporation tax shall be charged for the financial year 2005 at the rate of 30%.
26
Small companies’ rate and fraction for financial year 2004
For the financial year 2004—
(a)
the small companies’ rate shall be 19%, and
(b)
the fraction mentioned in section 13(2) of the Taxes Act 1988 (marginal
15
relief for small companies) shall be 11/400ths.
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Corporation tax starting rate and fraction for financial year 2004
For the financial year 2004—
(a)
the corporation tax starting rate shall be 0%, and
(b)
the fraction mentioned in section 13AA of the Taxes Act 1988 (marginal
20
relief for small companies) shall be 19/400ths.
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The non-corporate distribution rate
(1)
In Part 1 of the Taxes Act 1988 (the charge to tax), after section 13AA (the
starting rate of corporation tax) insert—
“13AB   The non-corporate distribution rate
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(1)
This section applies where in any accounting period—
(a)
a company makes (or is treated as making) one or more non-
corporate distributions, and
(b)
the company’s underlying rate of corporation tax is less than
the non-corporate distribution rate.
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(2)
The rate of tax to be applied in calculating the corporation tax
chargeable on the company’s basic profits for the accounting period
is—
(a)
in relation to so much of the company’s basic profits as is
matched with a non-corporate distribution, the non-corporate
35
distribution rate, and
(b)
in relation to the remainder of the company’s basic profits, the
company’s underlying rate of corporation tax.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 1 — Income tax and corporation tax charge and rate bands
23

(3)
The “non-corporate distribution rate” is such rate as Parliament may
from time to time determine.
(4)
Schedule A2 to this Act makes provision supplementing this section, in
particular—
(a)
defining “non-corporate distribution” and a company’s
5
“underlying rate of corporation tax”,
(b)
as to the matching of a company’s profits and non-corporate
distributions, and
(c)
providing for non-corporate distributions to be allocated to
other companies in certain circumstances.”.
10
(2)
After Schedule A1 to the Taxes Act 1988 insert as Schedule A2 the Schedule set
out in Schedule 3 to this Act.
(3)
In section 468(1A) of the Taxes Act 1988 (authorised unit trusts), for “and
13AA” substitute “, 13AA and 13AB”.
(4)
Section 13AB of and Schedule A2 to the Taxes Act 1988 have effect in relation
15
to distributions made on or after 1st April 2004.
(5)
For the purposes of applying the provisions of that section and Schedule to a
distribution made in an accounting period beginning before 1st April 2004 and
ending on or after that date—
(a)
the parts of the accounting period falling in different financial years
20
shall be treated as separate accounting periods, and
(b)
the profits of the period shall be apportioned between the parts on a
time basis according to their respective lengths unless it appears that
that method would work unreasonably or unjustly in which case such
other method shall be used as appears just and reasonable.
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(6)
The non-corporate distribution rate for the financial year 2004 is 19%.
Trusts
29
Special rates of tax applicable to trusts
(1)
Section 686 of the Taxes Act 1988 (accumulation and discretionary trusts:
special rates of tax) is amended as follows.
30
(2)
In subsection (1A) (which sets certain rates of tax in relation to any year of
assessment for which income tax is charged)—
(a)
in paragraph (a) (which sets the Schedule F trust rate at 25 per cent) for
“25 per cent” substitute “32.5 per cent”, and
(b)
in paragraph (b) (which sets the rate applicable to trusts at 34 per cent)
35
for “34 per cent” substitute “40 per cent”.
(3)
The amendments made by subsection (2) have effect in relation to the year
2004-05 and subsequent years of assessment.
(4)
Schedule 4 to this Act (which makes amendments relating to the rate applicable
to trusts) shall have effect.
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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Chapter 2
Corporation tax: general
Transfer pricing
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Provision not at arm’s length: transactions between UK taxpayers etc
(1)
Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) is
5
amended as follows.
(2)
In paragraph 5 (advantage in relation to United Kingdom taxation)—
(a)
in sub-paragraph (1) omit “(but subject to sub-paragraph (2) below)”;
and
(b)
omit sub-paragraphs (2) to (6).
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(3)
Paragraph 6 (elimination of double counting) is amended as follows.
(4)
For sub-paragraph (1) (application of paragraph) substitute—
     “(1)
This paragraph applies where—
(a)
only one of the affected persons (“the advantaged person”) is
a person on whom a potential advantage in relation to United
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Kingdom taxation is conferred by the actual provision; and
(b)
the other affected person (“the disadvantaged person”) is
within the charge to income tax or corporation tax in respect
of profits arising from the relevant activities.”.
(5)
In sub-paragraph (2) (application, on a claim, of arm’s length provision to
20
disadvantaged person)—
(a)
in the opening words (subjection to paragraph 7 etc)—
(i)
for “paragraph”, where first occurring, substitute “paragraphs”,
and
(ii)
after “7” insert “and 8”;
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(b)
in paragraph (a) (computation on basis of arm’s length provision), for
“the disadvantaged person shall be entitled to have his profits and
losses computed” substitute “the profits and losses of the
disadvantaged person shall be computed”.
(6)
After paragraph 7 insert—
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“Balancing payments between affected persons: no charge to, or relief from, tax
7A    (1)
This paragraph applies where—
(a)
the circumstances are as described in paragraph 6(1) above,
(b)
one or more payments (the “balancing payments”) are made
to the advantaged person by the disadvantaged person, and
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(c)
the sole or main reason for making those payments is that
paragraph 1(2) above applies.
      (2)
To the extent that the balancing payments do not in the aggregate
exceed the amount of the available compensating adjustment, those
payments—
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(a)
shall not be taken into account in computing profits or losses
of either of the affected persons for the purposes of income
tax or corporation tax, and

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(b)
shall not for any of the purposes of the Corporation Tax Acts
be regarded as distributions or charges on income.
      (3)
In this paragraph “the available compensating adjustment” means
the difference between PL1 and PL2 where—
PL1 is the profits and losses of the disadvantaged person
5
computed for tax purposes on the basis of the actual
provision, and
PL2 is the profits and losses of the disadvantaged person as
they fall (or would fall) to be computed for tax purposes on
a claim under paragraph 6 above,
10

for this purpose taking PL1 or PL2 as a positive amount if it is an
amount of profits and as a negative amount if it is an amount of
losses.”.
(7)
In paragraph 11 (special provision for companies carrying on ring fence trades)
in sub-paragraph (3) (Schedule to have effect as if ring fence trade and other
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activities were carried on by separate persons etc)—
(a)
at the end of paragraph (c) insert “and”;
(b)
omit paragraph (e) (Schedule to have effect as if paragraphs 5 to 7 were
omitted).
(8)
In paragraph 12 (appeals) in sub-paragraph (3)(b) for “each of whom is a
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person in relation to whom the condition set out in paragraph 5(3) above is
satisfied” substitute “each of whom is within the charge to income tax or
corporation tax in respect of profits arising from the relevant activities”.
(9)
Schedule 5 to this Act (which makes amendments to other enactments in
relation to transactions not at arm’s length) has effect.
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31
Exemptions for dormant companies and small and medium-sized enterprises
(1)
Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) is
amended as follows.
(2)
In paragraph 1 (basic rule on transfer pricing etc) in sub-paragraph (2) (profits
and losses to be computed as if the arm’s length provision had been made)
30
after “Subject to paragraphs” insert “5A, 5B,”.
(3)
After paragraph 5 insert—
“Exemption for dormant companies
5A    (1)
Paragraph 1(2) above does not apply in computing for any
chargeable period the profits and losses of a potentially advantaged
35
person if that person is a company which satisfies the condition in
sub-paragraph (2) below.
      (2)
The condition is that—
(a)
the company was dormant throughout the pre-qualifying
period, and
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(b)
apart from paragraph 1 above, the company has continued to
be dormant at all times since the end of the pre-qualifying
period.
      (3)
In sub-paragraph (2) above “the pre-qualifying period” means—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
26

(a)
if there is an accounting period of the company that ends on
31st March 2004, that accounting period, or
(b)
if there is no such accounting period, the period of 3 months
ending with that date.
      (4)
In this paragraph “dormant” has the same meaning as in section
5
249AA of the Companies Act 1985 (see subsections (4) to (7) of that
section).”.
(4)
After paragraph 5A insert—
“Exemption for small or medium-sized enterprises
5B    (1)
Paragraph 1(2) above does not apply in computing for any
10
chargeable period the profits and losses of a potentially advantaged
person if that person is a small or medium-sized enterprise for that
chargeable period (see paragraph 5D below).
      (2)
Exceptions to sub-paragraph (1) above are provided—
(a)
in the case of a small enterprise, by sub-paragraphs (3) and (4)
15
below, and
(b)
in the case of a medium-sized enterprise, by sub-paragraphs
(3) and (4) and paragraph 5C below.
      (3)
The first exception is where the small or medium-sized enterprise
elects for sub-paragraph (1) above not to apply in relation to the
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chargeable period.

Any such election is irrevocable.
      (4)
The second exception is where, at the time when the actual provision
is or was made or imposed,—
(a)
the other affected person, or
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(b)
a party to a relevant transaction (see sub-paragraph (5)
below),

is a resident (see sub-paragraph (6) below) of a non-qualifying
territory (whether or not that person is also a resident of a qualifying
territory).
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      (5)
For the purposes of sub-paragraph (4) above, a “party to a relevant
transaction” is a person who, in a case where the actual provision is
or was imposed by means of a series of transactions, is or was a party
to one or more of those transactions.
      (6)
In this paragraph “resident”, in relation to a territory,—
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(a)
means a person who, under the laws of that territory, is liable
to tax there by reason of his domicile, residence or place of
management, but
(b)
does not include a person who is liable to tax in that territory
in respect only of income from sources in that territory or
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capital situated there.
      (7)
The definitions of “qualifying territory” and “non-qualifying
territory” are in paragraph 5E below.
Additional provisions for medium-sized enterprises
5C    (1)
Paragraph 5B(1) above does not apply as respects any provision
45
made or imposed if—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(a)
the potentially advantaged person in question is a medium-
sized enterprise for the chargeable period in question, and
(b)
the Board gives that person a notice under this sub-
paragraph (a “transfer pricing notice”) requiring him to
compute the profits and losses of that chargeable period in
5
accordance with paragraph 1(2) above in the case of that
provision.
      (2)
A transfer pricing notice may be given in respect of —
(a)
any provision specified, or of a description specified, in the
notice, or
10
(b)
every provision in relation to which the assumption in
paragraph 1(2) above would fall to be made apart from
paragraph 5B(1) above.
      (3)
A transfer pricing notice may be given only after a notice of enquiry
has been given to the potentially advantaged person in respect of his
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tax return for the chargeable period.
      (4)
A transfer pricing notice must identify the officer of the Board to
whom any notice of appeal under this paragraph is to be given.
      (5)
A person to whom a transfer pricing notice is given may appeal
against the decision to give the notice, but only on the grounds that
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the condition in sub-paragraph (1)(a) above is not satisfied.
      (6)
Any such appeal must be brought by giving written notice of appeal
to the officer of the Board identified for the purpose in the transfer
pricing notice in accordance with sub-paragraph (4) above.
      (7)
The notice of appeal must be given before the end of the period of 30
25
days beginning with the day on which the transfer pricing notice is
given.
      (8)
A person to whom a transfer pricing notice is given may amend his
tax return for the purpose of complying with the notice at any time
before the end of the period of 90 days beginning with—
30
(a)
the day on which the notice is given, or
(b)
if he appeals against the notice, the day on which the appeal
is finally determined or abandoned.
      (9)
Where a transfer pricing notice is given in the case of any tax return,
no closure notice may be given in relation to that tax return until—
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(a)
the end of the period of 90 days specified in sub-paragraph
(8) above, or
(b)
the earlier amendment of the tax return for the purpose of
complying with the notice.
     (10)
So far as relating to any provision made or imposed by or in relation
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to a person—
(a)
who is a medium-sized enterprise for a chargeable period,
(b)
who does not make an election under paragraph 5B(3) above
for that period, and
(c)
who is not excepted from paragraph 5B(1) above by virtue of
45
paragraph 5B(4) above in relation to that provision for that
period,

the tax return required to be made for that period is a return that
disregards paragraph 1(2) above.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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     (11)
Sub-paragraph (10) above does not prevent a tax return for a period
becoming incorrect if, in the case of any provision made or
imposed,—
(a)
a transfer pricing notice is given which has effect in relation
to that provision for that period,
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(b)
the return is not amended in accordance with sub-paragraph
(8) above for the purpose of complying with the notice, and
(c)
the return ought to have been so amended.
     (12)
In this paragraph—
“closure notice” means a notice under—
10
(a)
section 28A or 28B of the Management Act, or
(b)
paragraph 32 of Schedule 18 to the Finance Act 1998;
“company tax return” means the return required to be
delivered pursuant to a notice under paragraph 3 of
Schedule 18 to the Finance Act 1998, as read with paragraph
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4 of that Schedule;
“notice of enquiry” means a notice under—
(a)
section 9A or 12AC of the Management Act, or
(b)
paragraph 24 of Schedule 18 to the Finance Act 1998;
“tax return” means—
20
(a)
a return under section 8, 8A or 12AA of the
Management Act, or
(b)
a company tax return.”.
Meaning of “small enterprise” and “medium-sized enterprise”
5D    (1)
In this Schedule—
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(a)
“small enterprise” means a small enterprise as defined in the
Annex to the Commission Recommendation,
(b)
“medium-sized enterprise” means an enterprise which—
(i)
falls within the category of micro, small and medium-
sized enterprises as defined in that Annex, and
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(ii)
is not a small enterprise as defined in that Annex,

but for these purposes that Annex has effect with the modifications
set out in sub-paragraphs (3) to (6) of this paragraph.
      (2)
In this paragraph—
“the Annex” means the Annex to the Commission
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Recommendation;
“the Commission Recommendation” means Commission
Recommendation 2003/361/EC of 6th May 2003
(concerning the definition of micro, small and medium-
sized enterprises).
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      (3)
Where any enterprise is in liquidation or administration, the rights of
the liquidator or administrator (in that capacity) shall be left out of
account when applying Article 3(3)(b) of the Annex in determining
for the purposes of this Schedule whether—
(a)
that enterprise, or
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(b)
any other enterprise (including that of the liquidator or
administrator),

is a small or medium-sized enterprise.