Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 6 — Qualifying scheme
Part 3 — Schemes involving hybrid effect
168

(b)
the occurrence of the event is within the reasonable expectation of
the company at the relevant time.
      (3)
For the purposes of sub-paragraph (2) the relevant time is—
(a)
the time when the shares are issued, or
(b)
if at the time when the shares are issued the occurrence of the event
5
is not within the company’s reasonable expectation and the rights
attaching to the shares are later amended as described in sub-
paragraph (1)(b), the time when the rights attaching to the shares are
so amended.
      (4)
In this paragraph “security” has the same meaning as in Part 6 of ICTA.
10
Securities subject to conversion
7     (1)
A scheme satisfies the requirements of this paragraph if it includes—
(a)
the issuing by a company of securities subject to conversion, or
(b)
the amendment of rights attaching to securities issued by a company
such that the securities become securities subject to conversion.
15
      (2)
For the purposes of sub-paragraph (1) a company’s securities are securities
subject to conversion if—
(a)
the rights attached to the securities include provision by virtue of
which a holder of such securities is entitled, on the occurrence of an
event, to acquire by conversion or exchange shares in the company
20
or another company, and
(b)
the occurrence of the event is within the reasonable expectation of
the company at the relevant time.
      (3)
For the purposes of sub-paragraph (2) the relevant time is—
(a)
the time when the securities are issued, or
25
(b)
if at the time when the securities are issued the occurrence of the
event is not within the company’s reasonable expectation and the
rights attaching to the securities are later amended as described in
sub-paragraph (1)(b), the time when the rights attaching to the
securities are so amended.
30
      (4)
In this paragraph “security” has the same meaning as in Part 6 of ICTA.
Debt instruments treated as equity
8     (1)
A scheme satisfies the requirements of this paragraph if it includes a debt
instrument issued by a company that is treated as equity in the company
under generally accepted accounting practice.
35
      (2)
For the purposes of this paragraph, a debt instrument is an instrument
issued by a company that represents a loan relationship of the company or,
if the company were a company resident in the United Kingdom, would
represent a loan relationship of the company.

Finance Bill
Schedule 6 — Qualifying scheme
Part 4 — Schemes involving hybrid effect and connected persons
169

Part 4
Schemes involving hybrid effect and connected persons
Schemes involving hybrid effect and connected persons
9
A scheme falls within this Part if it satisfies the requirements of paragraph
10 or 11.
5
Scheme including issue of shares not conferring a qualifying beneficial entitlement
10    (1)
A scheme satisfies the requirements of this paragraph if it includes the issue
by a company to a person connected with the company of shares other than
shares falling within sub-paragraph (2).
      (2)
Shares issued by a company fall within this sub-paragraph if—
10
(a)
on their issue, the shares are ordinary shares that are fully paid-up,
and
(b)
at all times in the accounting period of the company in which the
issue takes place, the shares confer a qualifying beneficial
entitlement.
15
      (3)
A share in a company confers a qualifying beneficial entitlement if it confers
a beneficial entitlement to the relevant proportion of—
(a)
any profits available for distribution to equity holders of the
company, and
(b)
any assets of the company available for distribution to its equity
20
holders on a winding-up.
      (4)
For the purposes of sub-paragraph (3) the relevant proportion, in relation to
a share, is the same as the proportion of the issued share capital represented
by that share.
      (5)
Schedule 18 to ICTA (meaning of equity holders etc) applies for the purposes
25
of sub-paragraph (3) as it applies for the purposes of section 403C of ICTA.
Scheme including transfer of rights under a security
11    (1)
A scheme satisfies the requirements of this paragraph if it includes a
transaction or a series of transactions under which a person (“the
transferor”)—
30
(a)
transfers rights to receive a payment under a relevant security to one
or more other persons, or
(b)
otherwise secures that one or more other persons are similarly
benefited,

and sub-paragraphs (3) and (4) are satisfied.
35
      (2)
A person is similarly benefited for these purposes if he receives a payment
which would, but for the transaction or series of transactions, have arisen to
the transferor.
      (3)
This sub-paragraph is satisfied if—
(a)
the transferor, and
40
(b)
at least one of the persons to whom a transfer of rights is made or a
similar benefit is secured,

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
170


are connected with each other.
      (4)
This sub-paragraph is satisfied if following the transfer of rights or the
securing of the similar benefit—
(a)
two or more persons either hold rights to receive a payment under
the security or enjoy a similar benefit, and
5
(b)
the rights held and benefits enjoyed by such of those persons as are
connected have, taken together, a value equal to or greater than the
value of any other rights to receive a payment under the security and
of any other similar benefits, taken together.
      (5)
In sub-paragraph (4)(b) references to the value of rights to receive a payment
10
under a relevant security are references to the market value of those rights;
and references to the value of similar benefits are to be construed
accordingly.
      (6)
In this paragraph a relevant security is—
(a)
a security (within the meaning of Part 6 of ICTA), or
15
(b)
any agreement under which a person receives an annuity or other
annual payment (whether it is payable annually or at shorter or
longer intervals) for a term which is not contingent on the duration
of a human life or lives.
Interpretation
20
12
Section 839 of ICTA has effect for the purposes of this Part.
Schedule 7
Section 111

Accounting practice and related matters
Part 1
Bad debts and related matters
25
ICTA
1
In section 74 of ICTA (general rules as to deductions not allowable), omit
subsection (1)(j) and subsection (2) (bad debts and related matters).
2
Before section 89 of ICTA insert—
“88D
Restriction of deductions in respect of certain debts
30
(1)
This section applies to debts to which the following provisions do
not apply—
(a)
Chapter 2 of Part 4 of the Finance Act 1996 (loan
relationships, etc);
(b)
Schedule 26 to the Finance Act 2002 (derivative contracts);
35
(c)
Schedule 29 to that Act (intangible fixed assets).
(2)
In calculating the profits of a company’s trade for the purposes of
corporation tax, no deduction is allowed in respect of a debt owed to
the company, except—

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
171

(a)
by way of impairment loss, or
(b)
to the extent that the debt is released wholly and exclusively
for the purposes of that trade as part of a statutory insolvency
arrangement.
(3)
In this section “debt” includes an obligation or liability that falls to be
5
discharged otherwise than by the payment of money.
(4)
In this section “trade” has the meaning given by section 6(4).”.
3     (1)
Section 89 of ICTA (debts proving to be irrecoverable after discontinuance
etc) is amended as follows.
      (2)
In that section as it had effect before ITTOIA 2005—
10
(a)
make the existing provision subsection (1),
(b)
for “deduction allowed in respect of them under section 74(j)”
substitute “relevant deduction in respect of them”, and
(c)
at the end add—
“(2)
In this section “debt” includes an obligation or liability that
15
falls to be discharged otherwise than by the payment of
money.

The references to a debt being irrecoverable shall be read
accordingly.
(3)
For the purposes of this section “relevant deduction”, in
20
relation to a debt, means a deduction made for tax purposes
in respect of an impairment loss or release.”.
      (3)
In that section as substituted by ITTOIA 2005—
(a)
in subsection (3), for the words from “deduction allowed” to
“ITTOIA 2005” substitute “relevant deduction in respect of them”,
25
and
(b)
after that subsection add—
“(4)
In this section “debt” includes an obligation or liability that
falls to be discharged otherwise than by the payment of
money.
30

The references to a debt being irrecoverable shall be read
accordingly.
(5)
For the purposes of this section “relevant deduction”, in
relation to a debt, means a deduction made for tax purposes
in respect of an impairment loss or release.”.
35
4     (1)
Section 94 of ICTA (debts deducted and subsequently released) is amended
as follows.
      (2)
In subsection (1) for “relevant arrangement or compromise” substitute
“statutory insolvency arrangement”.
      (3)
Omit subsection (2).
40
5     (1)
Section 103 of ICTA (receipts after discontinuance) is amended as follows.
      (2)
In subsection (4)(b) for “relevant arrangement or compromise” substitute
“statutory insolvency arrangement”.
      (3)
Omit subsection (4A).

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
172

      (4)
In subsection (5) as it had effect before the ITTOIA 2005 for “a deduction has
been allowed in respect of that sum under section 74(j)” substitute “a
deduction has been made for tax purposes in respect of an impairment loss
or a release of liability”.
      (5)
In subsection (5) as amended by ITTOIA 2005 for “a deduction has been
5
allowed in respect of that sum under section 74(j) or section 35 of ITTOIA
2005” substitute “a deduction has been made for tax purposes in respect of
an impairment loss or a release of liability”.
6     (1)
Section 109A of ICTA (relief for post-cessation expenditure) is amended as
follows.
10
      (2)
In subsection (4) for “relevant arrangement or compromise (within the
meaning of section 74)” substitute “statutory insolvency arrangement”.
      (3)
After subsection (4A) insert—
“(4B)
In subsections (4) and (4A) “debt” includes an obligation or liability
that falls to be discharged otherwise than by the payment of money.
15

The references to a debt being bad shall be read accordingly.”.
7
In section 799 of ICTA (double taxation relief: computation of underlying
loss), in subsection (6)(b) after “bad debts” insert “, impairment losses”.
8
In section 834(1) of ICTA (interpretation of the Corporation Tax Acts), at the
appropriate place insert—
20
““statutory insolvency arrangement” means—
(a)
a voluntary arrangement that has taken effect under
or as a result of the Insolvency Act 1986, Schedule 4 or
5 to the Bankruptcy (Scotland) Act 1985 or the
Insolvency (Northern Ireland) Order 1989,
25
(b)
a compromise or arrangement that has taken effect
under section 425 of the Companies Act 1985 or
Article 418 of the Companies (Northern Ireland)
Order 1986, or
(c)
any arrangement or compromise of a kind
30
corresponding to any of those mentioned in
paragraph (a) or (b) above that has taken effect under
or by virtue of the law of a country or territory outside
the United Kingdom;”.
FA 1996
35
9     (1)
Section 100 of FA 1996 (interest, and exchange gains and losses, on debts etc
not arising from the lending of money) is amended as follows.
      (2)
For the heading substitute “Money debts etc not arising from the lending
of money”.
      (3)
In subsection (1)(c) (money debts to which the section applies), after sub-
40
paragraph (ii) insert—

“or
(iii)
in respect of which a payment would fall to be
brought into account for the purposes of corporation
tax as a receipt of a trade, Schedule A business or
45
overseas property business carried on by the

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
173

company, and in relation to which an impairment loss
(or a credit in respect of the reversal of an impairment
loss) arises to the company;”.
      (4)
In subsection (2) for paragraphs (a) and (b) substitute—
“(a)
this Chapter has effect in relation to the matters mentioned in
5
subsection (1)(c) above as it has effect in relation to such
matters arising under or in relation to a loan relationship, but
(b)
the only credits or debits to be brought into account for the
purposes of this Chapter in respect of the relationship are
those relating to those matters;”.
10
      (5)
After subsection (13) add—
“(14)
This section does not apply to a debt in respect of which profits, gains
or losses (if any) fall to be brought into account under—
(a)
Schedule 26 to the Finance Act 2002 (derivative contracts), or
(b)
Schedule 29 to that Act (gains and losses from intangible
15
fixed assets).”.
10    (1)
In Schedule 9 to FA 1996 (loan relationships: special computational
provisions), before paragraph 5 insert—
“Deemed release of liability on impaired debt becoming held by connected company
4A    (1)
This paragraph applies—
20
(a)
in the case specified in sub-paragraph (2), subject to the
exception in sub-paragraph (3); and
(b)
in the case specified in sub-paragraph (4).
      (2)
The first case is where—
(a)
a company (“the debtor company”) is party as debtor to a
25
loan relationship,
(b)
another company (“the creditor company”) becomes party
as creditor to the loan relationship,
(c)
the debtor company and the creditor company—
(i)
are connected immediately before the latter
30
becomes party to the loan relationship, or
(ii)
become connected as a result of its doing so, and
(d)
the amount remaining payable under the debtor
relationship at the time the creditor company becomes
party to the loan relationship exceeds the amount or value
35
of any consideration given by the creditor company for its
rights under the loan relationship.
      (3)
The exception to the first case is where—
(a)
the creditor company acquires its rights under the loan
relationship under an arm’s length transaction,
40
(b)
there was no connection between the creditor company
and the person from whom it acquired the asset in the
period of account in which it acquired those rights, and
(c)
there had been no connection between the creditor
company and the debtor company at any time in the
45
period—

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
174

(i)
beginning four years before the date on which the
creditor company acquired those rights, and
(ii)
ending twelve months before that date.
      (4)
The second case is where—
(a)
a company (“the debtor company”) is party as debtor to a
5
loan relationship,
(b)
another company (“the creditor company”) that—
(i)
is party to the loan relationship as creditor, and
(ii)
is not connected with the debtor company,

becomes connected with the debtor company, and
10
(c)
the amount remaining payable under the debtor
relationship at the time the companies become connected
exceeds its value.

Its “value” means the amount that would have been its carrying
value in the accounts of the creditor company if a period of
15
account had ended immediately before the companies became
connected.
      (5)
Where this paragraph applies there is deemed to be a release by
the creditor company of its rights under the loan relationship.
      (6)
In the first case the release is deemed to be of the amount of the
20
excess referred to in sub-paragraph (2)(d) and to take place when
the creditor company acquires its rights under the loan
relationship.
      (7)
In the second case the release is deemed to be of the amount of the
excess referred to in sub-paragraph (4)(c) and to take place when
25
the creditor company becomes connected with the debtor
company.”.
      (2)
The amendment in sub-paragraph (1) has effect where the deemed release
occurs on or after 16th March 2005.
11    (1)
Paragraph 5 of Schedule 9 to FA 1996 (release of liability under debtor
30
relationship) is amended as follows.
      (2)
In the heading, at the end add “: cases in which credit need not be brought into
account”.
      (3)
In sub-paragraph (3) for “four” substitute “five”.
      (4)
In sub-paragraph (4) for “relevant arrangement or compromise within the
35
meaning given by section 74(2) of the Taxes Act 1988” substitute “statutory
insolvency arrangement”.
      (5)
In sub-paragraph (5) at the end add—

“This condition does not apply in the case of a credit required to
be brought into account by virtue of paragraph 4A (deemed
40
release on impaired debt becoming held by connected
company).”.