Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
230

      (2)
Section 43C(1) (section 43B not to apply where term over which financial
obligation is to be reduced exceeds 15 years) shall cease to have effect.
      (3)
In section 43E (interposed lease: exceptions etc) in subsection (1), omit
paragraphs (a) and (b) (which relate to certain periods exceeding 15 years).
      (4)
The amendments made by this paragraph have effect in relation to finance
5
agreements entered into on or after 16th March 2005.
      (5)
But where—
(a)
a finance agreement was entered into on or after 20th March 2000
and before 16th March 2005, and
(b)
section 43D of ICTA (interposed lease) would apply in relation to the
10
agreement but for section 43E(1)(a) or (b) of that Act,

sub-paragraph (6) has effect.
      (6)
In any such case, any rent paid on or after 16th March 2005 which, apart from
this sub-paragraph, would—
(a)
be deductible as an expense in computing profits charged under
15
Case I of Schedule D, or
(b)
be deductible under section 75 of ICTA (expenses of management),
or
(c)
fall to be brought into account under section 76 of that Act (expenses
of insurance companies) at Step 1 in subsection (7) of that section,
20

shall not be so deductible or brought into account for any accounting period
ending on or after 16th March 2005.
      (7)
If a payment of rent is made on or after 16th March 2005 in respect of a rental
period that falls—
(a)
partly before that date, and
25
(b)
partly on or after it,

sub-paragraph (6) has effect in relation to only so much of the payment as
relates to the period falling on or after 16th March 2005.
      (8)
In this paragraph “rent”, in the case of a finance agreement, means rent
payable under a lease, payment of which reduces the amount of the financial
30
obligation mentioned in section 43A(1) of ICTA.
Section 730: restriction to income consisting of distributions in respect of company shares etc
2     (1)
Section 730 of ICTA (transfers of income arising from securities) is amended
as follows.
      (2)
In each place where it occurs—
35
(a)
for “interest” substitute “distribution”;
(b)
for “securities” substitute “shares”.
      (3)
In subsection (1) (interest deemed to be income of owner etc)—
(a)
in paragraph (a) for “deemed to be” substitute “treated as”,
(b)
in paragraph (b) for “deemed to be” substitute “treated as”, and
40
(c)
omit paragraph (c).
      (4)
For subsection (2) (sale etc where proceeds chargeable to tax by virtue of

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Schedule 13 — Avoidance involving financial arrangements
231

section 18(3B) of ICTA) substitute—
“(2)
This section does not have effect in relation to a sale or transfer if the
proceeds of the sale or transfer are chargeable to tax.”.
      (5)
Omit subsection (2A) (loan relationships).
      (6)
For subsection (3) substitute—
5
“(3)
The proceeds of any subsequent sale or other realisation of the right
to receive the distribution shall not, for any of the purposes of the Tax
Acts, be regarded as the income of the seller or the person on whose
behalf the right is otherwise realised.”.
      (7)
In subsection (4), in the words following paragraph (b) after their
10
substitution by paragraph 300(3)(b) of Schedule 1 to ITTOIA 2005, for
“interest” substitute “distribution”.
      (8)
In subsection (4A), for “interest arising” substitute “distribution”.
      (9)
In subsection (4B), for “interest” substitute “distribution”.
     (10)
For subsection (7) (definitions) substitute—
15
“(7)
In this section—
“distribution”, in relation to shares in a company,—
(a)
has the same meaning as it has in the Corporation Tax
Acts (see section 209), but
(b)
also includes any amount that would be a distribution
20
if the company paying it were resident in the United
Kingdom;
“shares” means shares in a company.”.
     (11)
In subsection (8) (information powers) omit from “and for the purpose” to
the end of the subsection.
25
     (12)
The heading to the section becomes “Transfers of rights to receive
distributions in respect of shares”.
     (13)
The amendments made by this paragraph have effect in relation to sales or
transfers on or after 2nd December 2004.
Change in ownership of company with investment business
30
3     (1)
In section 768B(10) of ICTA (Part 4 of Schedule 28A to have effect for
restricting the debits to be brought into account in respect of loan
relationships) after “debits”, where first occurring, insert “and non-trading
deficits”.
      (2)
In section 768C(9) of ICTA (Part 4 of Schedule 28A to have effect for
35
restricting the debits to be brought into account in respect of loan
relationships) after “debits”, where first occurring, insert “and non-trading
deficits”.
      (3)
Schedule 28A to ICTA (change in ownership of investment company:
deductions) is amended as follows.
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Schedule 13 — Avoidance involving financial arrangements
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      (4)
In paragraph 7(b) (apportionment of excess in paragraph 6(c), or of non-
trading deficit, to first part of accounting period) after “the whole amount of
the excess” insert “or, as the case may be, of the deficit”.
      (5)
After paragraph 9 insert—
“9A   (1)
This paragraph has effect in any case to which section 768B applies
5
where the non-trading deficit mentioned in paragraph 6(dc) above
is apportioned by paragraph 7(b) above to the first part of the
accounting period being divided.
      (2)
In any such case, none of that non-trading deficit shall be carried
forward to—
10
(a)
the accounting period beginning immediately after the
change in the ownership of the company, or
(b)
any subsequent accounting period.”.
      (6)
After paragraph 10 insert—
“10A  (1)
This paragraph has effect in any case to which section 768C
15
applies where the non-trading deficit mentioned in paragraph
13(1)(ec) below is apportioned by paragraph 16(1)(b) below to the
first part of the accounting period being divided.
      (2)
In any such case, none of that non-trading deficit shall be carried
forward to—
20
(a)
the accounting period beginning immediately after the
change in the ownership of the company, or
(b)
any subsequent accounting period.”.
      (7)
In paragraph 16(1)(b) (apportionment of excess in paragraph 13(1)(ec), or of
non-trading deficit, to first part of accounting period) after “the whole
25
amount of the excess” insert “or, as the case may be, of the deficit”.
      (8)
The title of Part 4 of the Schedule becomes “Disallowed debits and non-
trading deficits”.
      (9)
The amendments made by this paragraph have effect in any case where the
change in ownership is on or after 10th February 2005.
30
Transfers of rights to receive annual payments
4     (1)
After section 775 of ICTA (sale by individual of income derived from his
personal activities) insert—
“775A
  Transfers of rights to receive annual payments
(1)
This section applies in any case where—
35
(a)
a person sells or transfers the right to receive an annual
payment to which this section applies (see subsection (4)),
and
(b)
the consideration (if any) for the sale or transfer would not,
apart from this section, be chargeable to tax.
40
(2)
In any such case, tax is charged—
(a)
in the case of income tax, under this section; or
(b)
in the case of corporation tax, under Case III of Schedule D.

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Schedule 13 — Avoidance involving financial arrangements
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(3)
Where this section applies—
(a)
the tax is charged on an amount equal to the market value of
the right to receive the annual payment;
(b)
the tax is charged for the chargeable period in which the sale
or transfer takes place;
5
(c)
the person liable for the tax is the person who sells or
transfers the right to the annual payment.
(4)
This section applies to any annual payment other than—
(a)
an annual payment under a life annuity;
(b)
an annual payment under a pension annuity;
10
(c)
an annual payment to which section 347A applies (annual
payments that are not charges on income);
(d)
an annual payment in respect of which, by virtue of section
727 of ITTOIA 2005 (payments by individuals arising in UK),
no liability to income tax arises under Part 5 of that Act.
15
(5)
This section applies in relation to part of an annual payment as it
applies in relation to the whole of an annual payment.
(6)
For the purposes of this section, a sale or transfer of all rights under
an agreement for annual payments, or under an annuity, is a sale or
transfer of the rights to each individual payment under the
20
agreement or annuity.
(7)
In this section—
“life annuity” means—
(a)
a life annuity, as defined in section 657(1); or
(b)
a life annuity, as defined in section 473(2) of ITTOIA
25
2005;
“pension annuity” means an annuity which is pension income
within the meaning of Part 9 of ITEPA 2003 (see section 566(2)
of that Act).”.
      (2)
The amendment made by this paragraph has effect in relation to sales or
30
transfers on or after 16th March 2005.
Manufactured interest and the accrued income scheme
5     (1)
In Schedule 23A to ICTA (manufactured dividends and interest) paragraph
3 (manufactured interest on UK securities) is amended as follows.
      (2)
In sub-paragraph (2A) (restriction on relief under sub-paragraph (2)(c))—
35
(a)
in paragraph (a) (receipt of interest or payment representative of it)
after “is chargeable to income tax” insert “(and see section 714(5) for
the amount so chargeable in a case where section 714(4) applies)”,
and
(b)
for paragraph (b) (accrued income scheme) substitute—
40
“(b)
is, by virtue of section 714(2), chargeable to income
tax on annual profits or gains in respect of transfers
of securities which are subject to the arrangement
giving rise to the payment of manufactured
interest; or”.
45

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Schedule 13 — Avoidance involving financial arrangements
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      (3)
In sub-paragraph (2A), in the paragraph (b) so substituted, for “annual
profits or gains” substitute “income”.
      (4)
The amendment made by sub-paragraph (3) has effect in relation to
payments of manufactured interest made on or after 6th April 2005.
      (5)
The other amendments made by this paragraph have effect in relation to
5
payments of manufactured interest made on or after 16th March 2005.
Consideration due after time of disposal: creditor relationships etc
6     (1)
Section 48 of TCGA 1992 (consideration due after time of disposal) is
amended as follows.
      (2)
At the beginning insert “(1)”.
10
      (3)
At the end add—
“(2)
Subsection (1) above does not apply in relation to so much of any
consideration as consists of an asset representing a creditor
relationship to which a company becomes party as a result of the
disposal.
15
(3)
In the computation of the gain in a case where subsection (2) above
has effect in relation to any consideration, the amount to be brought
into account in respect of that consideration is the fair value of the
creditor relationship.
(4)
In this section—
20
“creditor relationship” has the same meaning as in Chapter 2 of
Part 4 of the Finance Act 1996;
“fair value” has the meaning given in section 103(1) of the
Finance Act 1996.”.
Corporate strips: manipulation of price: associated payment giving rise to loss
25
7
In TCGA 1992, after section 151C (strips: manipulation of price: associated
payment giving rise to loss) insert—
“151D
Corporate strips: manipulation of price: associated payment giving
rise to loss
(1)
This section applies if—
30
(a)
as a result of any scheme or arrangement which has an
unallowable purpose, the circumstances are, or might have
been, as mentioned in paragraph (a), (b) or (c) of section
452G(2) of ITTOIA 2005,
(b)
under the scheme or arrangement, a payment falls to be made
35
otherwise than in respect of the acquisition or disposal of a
corporate strip, and
(c)
as a result of that payment or the circumstances in which it is
made, a loss accrues to any person.
(2)
The loss shall not be an allowable loss.
40
(3)
For the purposes of this section 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

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Schedule 13 — Avoidance involving financial arrangements
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of, the scheme or arrangement (apart from section 452G of ITTOIA
2005 and this section) is—
(a)
the obtaining of a tax advantage by any person, or
(b)
the accrual to any person of an allowable loss.
(4)
The reference in subsection (1)(b) to the acquisition or disposal of a
5
corporate strip shall be construed as if it were in Chapter 8 of Part 4
of ITTOIA 2005 (profits from deeply discounted securities) (see, in
particular, sections 437 and 452F of that Act for the meaning of
“disposal” and section 452E of that Act for the meaning of “corporate
strip”).
10
(5)
In subsection (3)(a) “tax advantage” has the meaning given by
section 709(1) of the Taxes Act.
(6)
This section applies to losses accruing on or after 6th April 2005.”.
Transactions within a group: shares subject to third party obligations
8     (1)
Section 171 of TCGA 1992 (transfers within a group: general provisions) is
15
amended as follows.
      (2)
After subsection (3) insert—
“(3A)
Subsection (1) above does not apply—
(a)
if section 91A of the Finance Act 1996 (shares subject to third
party obligations)—
20
(i)
does not apply in the case of the asset in relation to
company A immediately before the disposal, but
(ii)
does apply in the case of the asset in relation to
company B immediately after its acquisition, or
(b)
if that section—
25
(i)
applies in the case of the asset in relation to company
A immediately before the disposal, but
(ii)
does not apply in the case of the asset in relation to
company B immediately after its acquisition.”.
      (3)
The amendment made by this paragraph has effect in any case where the
30
disposal is on or after 16th March 2005.
Shares treated as loan relationships
9     (1)
After section 91 of FA 1996 insert the following heading—
“Shares treated as loan relationships”
      (2)
After that heading insert the following section—
35
“91A
Shares subject to outstanding third party obligations
(1)
This section applies for the purposes of corporation tax in relation to
a company if at any time in an accounting period—
(a)
that company (“the investing company”) holds a share in
another company (“the issuing company”),
40
(b)
the share is subject to outstanding third party obligations (see
subsection (5)), and

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Schedule 13 — Avoidance involving financial arrangements
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(c)
the share is an interest-like investment (see subsections (7)
and (8)).
(2)
This Chapter shall have effect for the accounting period of the
investing company in accordance with subsection (3) below as if—
(a)
the share were rights under a creditor relationship of that
5
company, and
(b)
any distribution in respect of the share were a payment of
interest and were not a distribution falling within section
209(2)(a) or (b) of the Taxes Act 1988.

In this subsection “distribution” includes any amount that would be
10
a distribution if the company paying it were resident in the United
Kingdom.
(3)
The debits and credits to be brought into account by the investing
company for the purposes of this Chapter as respects the share must
be determined on the basis of fair value accounting.
15
(4)
The only debits to be so brought into account are those falling within
section 84(1)(b) above which are not in respect of interest.
(5)
For the purposes of this section, the cases where a share is subject to
outstanding third party obligations are those cases where—
(a)
the share is subject to obligations of any description in
20
subsection (6) below,
(b)
the obligations are obligations of a person other than the
investing company, and
(c)
the obligations are yet to be discharged,

and where a share is subject to any such obligations, they are for the
25
purposes of this section the “third party obligations” in the case of
that share.
(6)
The descriptions of obligation are—
(a)
an obligation to meet unpaid calls on the share;
(b)
an obligation (not falling within paragraph (a) above) to
30
make a contribution to the capital of the issuing company
that could affect the value of the share.
(7)
In this section “interest-like investment” means a share whose nature
is such that the fair value of the share—
(a)
is likely to increase at a rate which represents a return on an
35
investment at interest, and
(b)
is unlikely to deviate to a substantial extent from that rate of
increase.

Fluctuations in value resulting from changes in exchange rates are to
be left out of account for the purposes of paragraph (b) above.
40
(8)
For the purposes of subsection (7) above, it shall be assumed —
(a)
that any third party obligations will be met in the amounts,
and at the time, at which they are due, and
(b)
that no transaction (or series of transactions) that would have
the effect of causing the condition in paragraph (a) or (b) of
45
that subsection not to be satisfied will be entered into
between the investing company and any person who is under
any of the third party obligations.