Finance Bill

House of Commons

Session 2002 - 03
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Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 4 — Amendments relating to the rate applicable to trusts
284

subsection substitute “charged; or
(c)
the amount of tax paid by the trustees on the grossed-up
amount of so much of the amount of income available up to
the end of the year, in relation to the capital sum, as is taken
into account under subsection (1) above in relation to that
5
sum in that year (see subsections (7A) to (7C) below),
whichever is the least.”.
      (4)
After subsection (7) insert—
“(7A)
For the purposes of subsection (7)(c) above—
(a)
any reduction falling to be made under subsection (2)(h)
10
above shall be treated as made against income arising under
the settlement in an earlier year of assessment before income
arising under the settlement in a later year of assessment; and
(b)
income arising under the settlement in an earlier year of
assessment shall be regarded as being taken into account
15
under subsection (1) above before income arising under the
settlement in a later year of assessment.
(7B)
For the purposes of subsection (7)(c) above—
(a)
the grossed-up amount of any sum is such amount as, after
the deduction of tax at the appropriate rate for each part of
20
that sum, would be equal to that sum; and
(b)
the amount of tax paid by the trustees on that grossed-up
amount is the amount of tax falling to be deducted under
paragraph (a) above.
(7C)
For the purposes of subsection (7B) above—
25
(a)
the appropriate rate for any part of a sum is 0% if—
(i)
the income that falls to be regarded in accordance
with subsection (7A) above as representing that part
of the sum is income from a source outside the United
Kingdom, and
30
(ii)
the trustees were not resident in the United Kingdom
for the relevant year of assessment;
(b)
the appropriate rate for any part of a sum in relation to which
paragraph (a) above does not apply is—
(i)
34%, if the relevant year of assessment is the year
35
2003-04 or any earlier year of assessment,
(ii)
40%, if the relevant year of assessment is the year
2004-05 or any subsequent year of assessment.

For the purposes of this subsection the relevant year of assessment in
relation to any part of a sum is the year of assessment in which the
40
income to be regarded in accordance with subsection (7A) above as
representing that part of the sum arose under the settlement.”.
Trustees chargeable to income tax at 30 per cent in certain cases
2
The side-note to section 694 of the Taxes Act 1988 becomes “Trustees
chargeable to income tax in certain cases at higher rate reduced by rate
45
applicable to trusts”.

Finance Bill
Schedule 5 — Provision not at arm’s length: related amendments
285

Commencement
3
The amendments made by paragraph 1 have effect for the purpose of
determining the amount to be set off under section 677(7) of the Taxes Act
1988 in the year 2004-05 or any subsequent year of assessment (whenever the
undistributed income arose).
5
Schedule 5
Section 30

Provision not at arm’s length: related amendments
Taxes Management Act 1970
Notice of enquiry
1     (1)
Section 9A of the Taxes Management Act 1970 (c. 9) is amended as follows.
10
      (2)
For subsection (4) (scope of inquiry) substitute—
“(4)
An enquiry extends to—
(a)
anything contained in the return, or required to be contained
in the return, including any claim or election included in the
return,
15
(b)
consideration of whether to give the taxpayer a transfer
pricing notice under paragraph 5C of Schedule 28AA to the
principal Act (provision not at arm’s length: medium-sized
enterprise),

but this is subject to the following limitation.”.
20
Income and Corporation Taxes Act 1988
Valuation of trading stock at discontinuance of trade
2     (1)
Section 100 of the Taxes Act 1988 is amended as follows.
      (2)
After subsection (1) insert—
“(1ZA)
This section does not apply in relation to any trading stock if
25
paragraph 1(2) of Schedule 28AA (provision not at arm’s length) has
effect in relation to any provision made or imposed in relation to that
stock and having effect in connection with the discontinuance of the
trade.”.
Petroleum extraction activities: ring fence trade: charges on income
30
3     (1)
Section 494 of the Taxes Act 1988 (charges on income) is amended as follows.
      (2)
In subsection (2) (which restricts the loan relationship debits that may be
brought into account in a manner resulting in reduction of ring fence
profits)—
(a)
at the end of paragraph (b) insert “and”;
35
(b)
omit paragraph (d) (which imposes a restriction by reference to a
reasonable commercial rate of return and is superseded by the
application of paragraphs 1A and 1B of Schedule 28AA to the Taxes
Act 1988 by virtue of paragraph 11 of that Schedule);

Finance Bill
Schedule 5 — Provision not at arm’s length: related amendments
286

(c)
omit the third sentence (which defines “net debit” for the purposes of
paragraph (d)).
      (3)
Omit subsection (2B) (which relates to the net debit within the meaning of
subsection (2)(d)).
Assumptions for calculating chargeable profits etc: transfer pricing
5
4
In Schedule 24 to the Taxes Act 1988, paragraph 20 shall cease to have effect.
Finance Act 1996
Loan relationships: introductory
5
Schedule 9 to the Finance Act 1996 (c. 8) (loan relationships: special
computational provisions) is amended as follows.
10
Transactions not at arm’s length
6     (1)
Paragraph 11 is amended as follows.
      (2)
In sub-paragraph (1) (which is expressed to be subject to sub-paragraphs (2)
to (3A)) for “(2)” substitute “(1A)”.
      (3)
After sub-paragraph (1) insert—
15
“(1A)
Notwithstanding section 80(5) of this Act, sub-paragraph (1) above
shall not apply to debits or credits in respect of amounts which—
(a)
fall to be adjusted for tax purposes under Schedule 28AA to
the Taxes Act 1988 (provision not at arm’s length), or
(b)
fall within that Schedule without falling to be so adjusted.
20
(1B)
For the purposes of sub-paragraph (1A) above, an amount falls
within Schedule 28AA to the Taxes Act 1988 without falling to be
adjusted under that Schedule in a case where—
(a)
the conditions in paragraph 1(1) of that Schedule are met, and
(b)
the actual provision does not differ from the arm’s length
25
provision.”.
Continuity of treatment: groups etc.
7     (1)
Paragraph 12 is amended as follows.
      (2)
After sub-paragraph (2) insert—
“(2ZA)
Where the debits or credits to be brought into account for the
30
purposes of this Chapter in respect of any amounts fall to be
determined in accordance with sub-paragraph (2) above, Schedule
28AA to the Taxes Act 1988 (provision not at arm’s length) does not
apply in relation to those amounts.”.

Finance Bill
Schedule 5 — Provision not at arm’s length: related amendments
287

Amounts imputed under Schedule 28AA to the Taxes Act 1988
8
For paragraph 16 (imputed interest) substitute—
“Amounts imputed under Schedule 28AA to the Taxes Act 1988
16    (1)
This paragraph applies where, in pursuance of Schedule 28AA to
the Taxes Act 1988 (provision not at arm’s length), an amount falls
5
to be treated as any of the following—
(a)
an amount of profits, gains or losses (whether or not of a
capital nature) arising to a company from any of its loan
relationships or related transactions;
(b)
interest payable under any of a company’s loan
10
relationships;
(c)
charges or expenses incurred by a company under or for
the purposes of any of its loan relationships or related
transactions.
      (2)
That Schedule shall have effect, notwithstanding the provisions of
15
any authorised accounting method, so as to require credits or
debits relating to the amount so treated to be brought into account
for the purposes of this Chapter to the same extent as they would
be in the case of an actual amount of—
(a)
profits, gains or losses (whether or not of a capital nature)
20
arising to the company from the loan relationship or
related transaction,
(b)
interest accruing or becoming due and payable under the
loan relationship, or
(c)
charges or expenses incurred under or for the purposes of
25
the loan relationship or related transaction,

as the case may be.”.
Finance Act 1998
Introductory
9
The Finance Act 1998 (c. 36) is amended as follows.
30
Scope of enquiry
10    (1)
In Schedule 18 (company tax returns, assessments and related matters)
paragraph 25 is amended as follows.
      (2)
In sub-paragraph (1), for the words following paragraph (b) substitute—

“and also extends to consideration of whether to give the company a
35
transfer pricing notice under paragraph 5C of Schedule 28AA to the
Taxes Act 1988 (provision not at arm’s length: medium-sized
enterprise).

But this is subject to the following limitation.”.

Finance Bill
Schedule 5 — Provision not at arm’s length: related amendments
288

Finance Act 2000
Introductory: tonnage tax: transactions not at arm’s length
11
Schedule 22 to the Finance Act 2000 (c. 17) (tonnage tax) is amended as
follows.
Transactions between tonnage tax company and another person
5
12    (1)
Paragraph 58 is amended as follows.
      (2)
In sub-paragraph (1) (Schedule 28AA to the Taxes Act 1988 to apply with
certain omissions) for the words following paragraph (b) substitute—

“Schedule 28AA to the Taxes Act 1988 (transactions not at arm’s
length) has effect with the omission of paragraphs 6 to 7A
10
(elimination of double counting etc).”.
Transactions between tonnage tax trade and other activities of same company
13    (1)
Paragraph 59 is amended as follows.
      (2)
For sub-paragraph (2) (Schedule 28AA to the Taxes Act 1988 to apply with
certain omissions) substitute—
15
“(2)
As applied by sub-paragraph (1), Schedule 28AA has effect with the
omission of paragraphs 6 to 7A (elimination of double counting
etc).”.
Finance Act 2002
Introductory
20
14
The Finance Act 2002 (c. 23) is amended as follows.
Derivative contracts
15    (1)
Schedule 26 (derivative contracts) is amended as follows.
      (2)
In Part 6 (special computational provisions) in paragraph 28 (transactions
within groups) after sub-paragraph (3) insert—
25
    “(3A)
Where the debits or credits to be brought into account for the
purposes of this Schedule in respect of any amounts fall to be
determined in accordance with sub-paragraph (3), Schedule 28AA
to the Taxes Act 1988 (provision not at arm’s length) does not
apply in relation to those amounts.”.
30
      (3)
After paragraph 31 insert—
“Amounts imputed under Schedule 28AA to the Taxes Act 1988
31A   (1)
This paragraph applies where, in pursuance of Schedule 28AA to
the Taxes Act 1988 (provision not at arm’s length), an amount falls
to be treated as any of the following—
35
(a)
an amount of profits or losses (disregarding any charges or
expenses) arising to a company from any of its derivative
contracts or related transactions;

Finance Bill
Schedule 6 — Expenses of companies with investment business and insurance companies
289

(b)
charges or expenses incurred by a company under or for
the purposes of any of its derivative contracts or related
transactions.
      (2)
That Schedule shall have effect, notwithstanding the provisions of
any authorised accounting method, so as to require credits or
5
debits relating to the amount so treated to be brought into account
for the purposes of this Chapter to the same extent as they would
be in the case of an actual amount of—
(a)
profits or losses (disregarding any charges or expenses)
arising to the company from the derivative contract or
10
related transaction, or
(b)
charges or expenses incurred under or for the purposes of
the derivative contract or related transaction,

as the case may be.”.
Intangible fixed assets
15
16    (1)
Schedule 29 (gains and losses of a company from intangible fixed assets) is
amended as follows.
      (2)
In paragraph 55 (transfers within a group), after sub-paragraph (1) insert—
“(1A)
Where this paragraph applies in relation to the transfer of an asset,
Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length)
20
does not apply in relation to the transfer.”.
      (3)
In paragraph 92 (transfer between company and related party treated as
being at market value) in sub-paragraph (3) (cases where consideration for
transfer falls within Schedule 28AA without falling to be adjusted)—
(a)
at the end of paragraph (a) insert “, but”,
25
(b)
at the end of paragraph (b) omit “, and”,
(c)
omit paragraph (c) (which refers to paragraph 5(2) of Schedule 28AA
to the Taxes Act 1988).
Schedule 6
Section 41

Expenses of companies with investment business and insurance companies
30
Income and Corporation Taxes Act 1988
Levies and repayments under Financial Services and Markets Act 2000: investment companies
1     (1)
Section 76B of the Taxes Act 1988 is amended as follows.
      (2)
In subsection (1) (certain sums paid by an investment company to be treated
as expenses of management) for “an investment company” substitute “a
35
company with investment business”.
      (3)
In subsection (2) (repayment to investment company to be charged under
Case VI of Schedule D)—
(a)
at the beginning, insert “For the purposes of corporation tax,”, and
(b)
for “an investment company” substitute “a company with
40
investment business”.

Finance Bill
Schedule 6 — Expenses of companies with investment business and insurance companies
290

Incidental costs of obtaining loan finance
2     (1)
Section 77 of the Taxes Act 1988 is amended as follows.
      (2)
In subsection (1) (which does not apply for the purposes of corporation tax
but which includes provision for the costs in question to be treated as
expenses of management) omit the words from “and the incidental costs” to
5
the end of the subsection.
Change in ownership of investment company: deductions generally.
3     (1)
Section 768B of the Taxes Act 1988 is amended as follows.
      (2)
In subsection (1) (case where section applies) for “an investment company”
substitute “a company with investment business”.
10
      (3)
In subsection (6) (treatment of expenses of management disbursed in the
accounting period)—
(a)
for “are disbursed or treated as disbursed as expenses of
management in the accounting period” substitute “are, or are treated
as, expenses of management referable to the accounting period”;
15
(b)
in the words following paragraph (b), for “as disbursed in that part”
substitute “expenses of management referable to that part”.
      (4)
In subsection (8) (treatment of capital allowances apportioned to either part
of the accounting period) for “75(4)” substitute “75(7)”.
      (5)
In subsection (9) (which prevents certain sums being deducted under section
20
75 of the Taxes Act 1988) in paragraph (a) for “sums disbursed” substitute
“expenses of management deductible”.
      (6)
In subsection (14) (meaning of “investment company”) for “ “investment
company” ” substitute “ “company with investment business” ”.
      (7)
The sidenote to the section accordingly becomes “Change in ownership of
25
company with investment business: deductions generally”.
Deductions: assets transferred within group
4     (1)
Section 768C of the Taxes Act 1988 is amended as follows.
      (2)
In subsection (1) (case where section applies) in paragraph (a) for “an
investment company” substitute “a company with investment business”.
30
      (3)
In subsection (7) (no deduction under section 75 from an amount of total
profits equal to the amount of the relevant gain) in paragraph (a) for “sums
disbursed” substitute “expenses of management deductible”.
      (4)
In subsection (12), for the definition of “investment company” substitute—

““company with investment business” has the same meaning as
35
in Part 4.”.
Change in ownership of company carrying on property business
5     (1)
Section 768D of the Taxes Act 1988 is amended as follows.
      (2)
In subsection (1) (case where section applies)—
(a)
in paragraph (a) (investment company) for “an investment
40
company” substitute “a company with investment business”, and