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 4 — Personal taxation
83

arrangements under which the option was granted or is
exercised.”.
(8)
Section 701 (PAYE: meaning of “asset”) is amended as follows.
(9)
In subsection (2)(c)—
(a)
in sub-paragraph (ia), for the words after “employee” substitute “under
5
a scheme approved under Schedule 4 (approved CSOP schemes) in
circumstances in which Condition A or B as set out in section 524(2) or
(2A) is met;”,
(b)
omit sub-paragraph (ii), and
(c)
in sub-paragraph (iii), after “1996” insert “where the avoidance of tax or
10
national insurance contributions is not the main purpose (or one of the
main purposes) of any arrangements under which the right was
obtained or is exercised”.
(10)
After subsection (3) insert—
“(3A)
Paragraph (c) of subsection (2) does not apply to shares after their
15
acquisition as mentioned in that paragraph.”.
(11)
This section has effect on and after 18th June 2004 and (so far as it does not
relate to the award or acquisition of shares) applies in relation to shares
awarded or acquired before that date as well as in relation to those awarded or
acquired on or after that date.
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(12)
Where section 431A(1) of the Income Tax (Earnings and Pensions) Act 2003
(c. 1) (as inserted by subsection (3)) has effect (by virtue of subsection (11)) in
relation to shares acquired before 18th June 2004, it applies in relation to them
so as to treat an election under section 431(1) of that Act as made in relation to
them on that date.
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(13)
For the purposes of the application of Chapter 3B of Part 7 of that Act
(securities with artificially enhanced market value) by reason of subsections (2)
and (11) in relation to shares acquired before 18th June 2004, section 446O of
that Act (meaning of “relevant period”) has effect as if they were acquired on
that date.
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89
Shares acquired on public offer
(1)
Section 421F of the Income Tax (Earnings and Pensions) Act 2003 (exclusion
from Chapters 2 to 4 of Part 7 of shares acquired under terms of offer to the
public) is amended as follows.
(2)
In subsection (1), for “Chapters 2 to 4” substitute “Chapters 2, 3 and 3C”.
35
(3)
After that subsection insert—
“(1A)
But subsection (1) does not disapply those Chapters if the main purpose
(or one of the main purposes)—
(a)
of the arrangements under which the right or opportunity
under which the shares were acquired, or
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(b)
for which the shares are held,

is the avoidance of tax or national insurance contributions.”.
(4)
This section has effect on and after 18th June 2004 and applies in relation to
shares acquired before that date as well as in relation to those acquired on or
after that date.
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Personal taxation
84

(5)
For the purposes of the application of Chapter 3B of Part 7 of the Income Tax
(Earnings and Pensions) Act 2003 (c. 1) (securities with artificially enhanced
market value) by reason of subsections (2) and (4) in relation to shares acquired
before that date, section 446O of that Act (meaning of “relevant period”) has
effect as if they were acquired on that date.
5
90
Associated persons etc.
(1)
Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (employment
income: securities) is amended as follows.
(2)
In section 421C(2) (meaning of “relevant linked person” for purposes of
Chapters 1 to 4), for “are connected or, although not connected, are” substitute
10
“are or have been connected or (without being or having been connected) are
or have been”.
(3)
In section 472(2) (meaning of “relevant linked person” for purposes of Chapter
5), for “are connected or, although not connected, are” substitute “are or have
been connected or (without being or having been connected) are or have been”.
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(4)
In section 477(3)(c) (chargeable events in relation to employment-related
securities options), for the words after “benefit” substitute “in connection with
the employment-related securities option (other than one within paragraph (a)
or (b)).”
(5)
This section has effect on and after 18th June 2004 and applies in relation to
20
securities, interests and options that were employment-related securities or
employment-related securities options on that date (as well as those acquired
on or after that date).
Miscellaneous
91
Income of spouses: jointly held property
25
(1)
Section 282A of the Taxes Act 1988 is amended as follows.
(2)
After subsection (4) insert—
“(4A)
Subsection (1) above shall not apply to income consisting of a
distribution arising from property consisting of—
(a)
close company shares to which either the husband or the wife is
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beneficially entitled to the exclusion of the other, or
(b)
close company shares to which they are beneficially entitled in
equal or unequal shares.

In this subsection “close company shares” means shares in or securities
of a close company; and for this purpose “shares” and “securities” have
35
the same meaning as in Part 6 (see section 254).”.
(3)
This section has effect in relation to the year 2004-05 and subsequent years of
assessment.
92
Minor amendments of or connected with ITEPA 2003
Schedule 17 to this Act contains minor amendments of or connected with the
40
Income Tax (Earnings and Pensions) Act 2003.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Enterprise incentives
85

Chapter 5
Enterprise incentives
93
Enterprise investment scheme
Schedule 18 (which makes amendments to the enterprise investment scheme)
has effect.
5
94
Venture capital trusts
(1)
In relation to shares issued on or after 6th April 2004 but before 6th April 2006,
paragraph 1(5)(a) of Schedule 15B to the Taxes Act 1988 (calculation of income
tax relief by reference to lower rate) is to have effect as if the reference to the
lower rate were a reference to the higher rate.
10
(2)
Accordingly, paragraph 3(4) of that Schedule (loss of investment relief) is to
have effect in relation to such shares as if the reference to the lower rate were a
reference to the higher rate.
(3)
Schedule 19 (which makes amendments relating to venture capital trusts) has
effect.
15
95
Corporate venturing scheme
Schedule 20 (which makes amendments relating to the corporate venturing
scheme) has effect.
96
Enterprise management incentives: subsidiaries
(1)
Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003 (c. 1)
20
(enterprise management incentives) is amended as follows.
(2)
In paragraph 8 (qualifying companies: introduction) after “having only
qualifying subsidiaries (see paragraphs 10 and 11),” insert—

“property managing subsidiaries (see paragraphs 11A and 11B),”.
(3)
In paragraph 10 (the qualifying subsidiaries requirement) for sub-paragraph
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(2) substitute—
     “(2)
In this paragraph “subsidiary” means any company which the
company controls, either on its own or together with any person
connected with it.
      (3)
For the purpose of sub-paragraph (2), the question whether a person
30
controls a company is to be determined in accordance with section
416(2) to (6) of ICTA (“control” in the context of close companies).”.
(4)
In paragraph 11 (meaning of “qualifying subsidiary”)—
(a)
in sub-paragraph (2), omit paragraphs (a) to (c),
(b)
before paragraph (d) of that sub-paragraph insert—
35
“(ca)
that the subsidiary is a 51% subsidiary of the
holding company;”,
(c)
in paragraph (d) of that sub-paragraph, after “company” insert “or
another of its subsidiaries”,

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Enterprise incentives
86

(d)
in paragraph (e) of that sub-paragraph, for “the conditions in
paragraphs (a) to” substitute “either of the conditions in paragraphs
(ca) and”,
(e)
omit sub-paragraph (3),
(f)
after sub-paragraph (7) insert—
5
     “(8)
Sub-paragraph (9) applies at a time when the subsidiary or
another company is in administration or receivership.
      (9)
The subsidiary is not to be regarded, by reason only of
anything done as a consequence of the company concerned
being in administration or receivership, as having ceased to
10
be a company in relation to which the conditions in sub-
paragraph (2) are met if—
(a)
the entry into administration or receivership, and
(b)
everything done as a consequence of the company
concerned being in administration or receivership,
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is for commercial reasons and is not part of a scheme or
arrangement the main purpose (or one of the main purposes)
of which is the avoidance of tax.
     (10)
Section 312(2A) of ICTA (meaning of being in administration
or receivership) applies for the purposes of sub-paragraphs
20
(8) and (9) as it applies for the purposes of Chapter 3 of Part
7 of ICTA (enterprise investment scheme).”.
(5)
After paragraph 11 insert—
“The property managing subsidiaries requirement
11A   (1)
A company is not a qualifying company if it has a property
25
managing subsidiary which is not a qualifying 90% subsidiary of the
company (see paragraph 11B).
      (2)
“Property managing subsidiary” means a qualifying subsidiary of a
company whose business consists wholly or mainly in the holding or
managing of land or any property deriving its value from land.
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      (3)
In sub-paragraph (2) “land” and “property deriving its value from
land” have the same meaning as in section 776 of ICTA.
Meaning of “qualifying 90% subsidiary”
11B   (1)
A company (“the subsidiary”) is a qualifying 90% subsidiary of a
company (“the holding company”) if the following conditions are
35
met.
      (2)
The conditions are—
(a)
that the holding company possesses not less than 90% of the
issued share capital of, and not less than 90% of the voting
power in, the subsidiary;
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(b)
that the holding company would—
(i)
in the event of a winding up of the subsidiary, or
(ii)
in any other circumstances,

be beneficially entitled to not less than 90% of the assets of the
subsidiary which would then be available for distribution to
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the shareholders of the subsidiary;

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
87

(c)
that the holding company is beneficially entitled to not less
than 90% of any profits of the subsidiary which are available
for distribution to the shareholders of the subsidiary;
(d)
that no person other than the holding company has control of
the subsidiary; and
5
(e)
that no arrangements are in existence by virtue of which any
of the conditions in paragraphs (a) to (d) would cease to be
met.
      (3)
Sub-paragraphs (4) to (10) of paragraph 11 (but not sub-paragraph
(6)(b)) apply in relation to the conditions in sub-paragraph (2) above
10
as they apply in relation to the conditions in sub-paragraph (2) of
that paragraph.”.
(6)
The amendments made by this section have effect in relation to any right to
acquire shares granted on or after 17th March 2004.
Chapter 6
15
Exemption from income tax for certain interest and royalty payments
Introductory
97
Introductory
(1)
This Chapter has effect for the purpose of implementing provisions of Council
Directive 2003/49/EC of 3rd June 2003 on a common system of taxation
20
applicable to interest and royalty payments made between associated
companies of different member States (“the Directive”).
(2)
In this Chapter—

“company” has the same meaning as the expression “company of a
member State” has for the purposes of the Directive (see Article 3(a) of
25
the Directive);

“debt-claim” has the same meaning as in the Directive;

“the Directive” has the meaning given by subsection (1);

“EU company” means a company resident in a member State other than
the United Kingdom;
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“interest” and “royalties” have the meaning given by Article 2 of the
Directive;

“non-EU permanent establishment” means a permanent establishment in
a territory other than a member State;

“UK company” means a company resident in the United Kingdom;
35

“UK permanent establishment” means a permanent establishment in the
United Kingdom.
(3)
The Treasury may by order make such provision amending any reference in
this Chapter to, or to a provision of,—
(a)
the Directive, or
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(b)
any instrument referred to in this Chapter by virtue of an order under
this subsection,

as appears to them appropriate for the purpose of giving effect to any Council
Directive adopted after 8th April 2004 amending or replacing the Directive.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
88

(4)
The first order under subsection (3) may make provision having effect for
periods before the making of the order.
(5)
Subject to subsection (6), this Chapter has effect in relation to payments made
on or after 1st January 2004.
(6)
The following provisions have effect in relation to payments made on or after
5
8th April 2004—
(a)
in section 100(2)(b), the words “and that section 104 (anti-avoidance)
does not apply”, and
(b)
section 104.
Exemption from income tax
10
98
Exemption from income tax for certain interest and royalty payments
(1)
No liability to income tax arises in respect of a payment of interest or a
payment of a royalty if, at the time the payment is made, the following
conditions are satisfied.
(2)
Condition 1 is that the person making the payment is—
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(a)
a UK company (but not such a company’s permanent establishment in
a territory other than the United Kingdom), or
(b)
a UK permanent establishment of an EU company.

See section 99(2) as to when a permanent establishment is to be treated as the
person making the payment.
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(3)
Condition 2 is that the person beneficially entitled to the income in respect of
which the payment is made is an EU company (but not such a company’s UK
permanent establishment or non-EU permanent establishment).

See section 99(3) as to when a permanent establishment is to be treated as the
person beneficially entitled to the income in respect of which the payment is
25
made.
(4)
Condition 3 is that the company in Condition 1 and the company in Condition
2 are 25% associates (see section 99(4)).
(5)
Condition 4 is that, if the payment is a payment of interest, the Board has issued
an exemption notice in accordance with regulations under section 100.
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(6)
This section is subject to—

section 103 (special relationships), and

section 104 (anti-avoidance).
99
Permanent establishments and “25% associates”
(1)
This section has effect for supplementing section 98 and is to be construed as
35
one with it.
(2)
For the purposes of Condition 1, a permanent establishment in a territory of a
company that is resident in another territory is to be treated as the person
making the payment (instead of the company) if, and to the extent that, (within
the meaning of Article 1(3) of the Directive) the payment represents a tax-
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deductible expense for the permanent establishment in the territory in which it
is situated.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
89

(3)
For the purposes of Condition 2, an EU company’s UK permanent
establishment or non-EU permanent establishment is to be treated as the
person beneficially entitled to the income in respect of which the payment is
made (instead of the company) if, and to the extent that, (within the meaning
of Article 1(5) of the Directive)—
5
(a)
the debt-claim, right or use of information in respect of which the
payment arises is effectively connected with the permanent
establishment, and
(b)
the payment represents income in respect of which the permanent
establishment is subject in the territory in which it is situated to United
10
Kingdom corporation tax or a tax corresponding to that tax.
(4)
For the purposes of Condition 3, two companies are “25% associates” if—
(a)
one holds directly—
(i)
25% or more of the capital in the other, or
(ii)
25% or more of the voting rights in the other, or
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(b)
a third company holds directly—
(i)
25% or more of the capital in each of them, or
(ii)
25% or more of the voting rights in each of them.
Exemption notices
100
Interest payments: exemption notices
20
(1)
The Board may make regulations about exemption notices under section 98(5).
(2)
The provision that may be made by the regulations includes provision for or in
connection with any of the following—
(a)
enabling an exemption notice to be issued only on the request of a
person of a prescribed description;
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(b)
requiring a person requesting the issue of an exemption notice to certify
that Conditions 1 to 3 in section 98 are satisfied and that section 104
(anti-avoidance) does not apply;
(c)
the information to be provided in the certificate;
(d)
the person to whom an exemption notice is to be given;
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(e)
in a case where section 103 (special relationships) applies or may apply
to a payment of interest, an exemption notice to specify the amount of
the payment, or to specify the method to be used for determining the
amount of the payment, in relation to which the notice has effect;
(f)
imposing a time limit for the issue of an exemption notice;
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(g)
imposing notification requirements;
(h)
the cancellation of exemption notices by the Board;
(i)
exemption notices to become ineffective in prescribed circumstances;
(j)
the making of appeals (for example, against a refusal to grant, or the
cancellation of, an exemption notice);
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(k)
authorising, in cases where—
(i)
an exemption notice has been issued,
(ii)
tax has not been deducted from a payment of interest, and
(iii)
any of the Conditions in section 98 was not satisfied in the case
of the payment,
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