Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
237

(9)
For the purposes of this section, the fair value of a share that is
subject to outstanding third party obligations must include the fair
value of the obligations.
(10)
For the purposes of this section a company shall be treated as
continuing to hold a share notwithstanding that the share has been
5
transferred to another person —
(a)
under a repo or stock lending arrangement, or
(b)
under a transaction which is treated by section 26 of the
Taxation of Chargeable Gains Act 1992 as not involving any
disposal.”.
10
      (3)
After section 91A insert—
“91B
Non-qualifying shares
(1)
This section applies for the purposes of corporation tax in relation to
a company if at any time in an accounting period—
(a)
the company (“the investing company”) holds a share in
15
another company,
(b)
that other company (“the issuing company”) is not an open-
ended investment company, and
(c)
the share is a non-qualifying share (see subsection (5) below),

and at no time in the accounting period does section 91A above
20
apply in relation to the company in the case of that share.
(2)
This Chapter shall have effect for that accounting period in
accordance with subsection (3) below as if—
(a)
the share were rights under a creditor relationship of the
investing company, and
25
(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
a distribution if the company paying it were resident in the United
30
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.
(4)
The only debits to be so brought into account are those falling within
35
section 84(1)(b) above which are not in respect of interest.
(5)
A share is a non-qualifying share for the purposes of this section if—
(a)
it is not one where section 95 of the Taxes Act 1988 (dealers
etc) applies in relation to distributions in respect of the share,
and
40
(b)
one or more of the Conditions in section 91C below is
satisfied.
(6)
Subsection (10) of section 91A above (company treated as holding a
share) also applies for the purposes of this section.
(7)
In this section “open-ended investment company” has the same
45
meaning as in paragraph 8 of Schedule 10 to this Act.”.

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Schedule 13 — Avoidance involving financial arrangements
238

      (4)
After section 91B insert—
“91C
The Conditions mentioned in section 91B
(1)
The Conditions mentioned in section 91B above are those set out
below.
(2)
Condition 1 is that the assets of the issuing company are of such a
5
nature that the value of the share—
(a)
is likely to increase at a rate which represents a return on an
investment at interest, and
(b)
is unlikely to deviate to a substantial extent from that rate of
increase.
10

Fluctuations in value resulting from changes in exchange rates are to
be left out of account for the purposes of paragraph (b) above.
(3)
For the purposes of subsection (2) above, it shall be assumed that no
transaction (or series of transactions) that would have the effect of
causing the condition in paragraph (a) or (b) of that subsection not to
15
be satisfied will be entered into by the investing company.
(4)
Condition 2 is that the share is redeemable and is designed to
produce a return which equates, in substance, to the return on an
investment of money at interest.
(5)
Condition 3 is that the share and one or more derivative contracts are
20
together designed to produce a return which equates, in substance,
to the return on an investment of money at interest.
(6)
In this section “derivative contract” has the same meaning as in
Schedule 26 to the Finance Act 2002.
(7)
This section shall be construed as one with section 91B above.”.
25
      (5)
After section 91C insert—
“91D
Power to amend section 91C
(1)
The Treasury may by regulations amend section 91C above.
(2)
The provision that may be made by regulations under this section
includes adding, varying or removing Conditions.
30
(3)
Regulations under this section may provide for any provision made
by the regulations to have effect in relation to accounting periods
ending on or after the day on which the regulations come into force
(whenever beginning).
(4)
Regulations under this section may provide for any provision made
35
by the regulations —
(a)
which removes a Condition, or
(b)
which varies a Condition so as to reduce its application,

to have effect in relation to accounting periods which end before the
day on which the regulations come into force and which include 16th
40
March 2005.
(5)
The power to make regulations under this section includes power—
(a)
to make different provision for different cases, and

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
239

(b)
to make such consequential, supplementary, incidental or
transitional provisions, or savings, as appear to the Treasury
to be necessary or expedient (including provision amending
any enactment or any instrument made under an
enactment).”.
5
      (6)
After section 91D insert—
“91E
Shares beginning or ceasing to be subject to section 91A or 91B
(1)
Where at any time on or after 16th March 2005 the conditions in
section 91A(1) or 91B(1) above become satisfied in the case of any
share, otherwise than in the circumstances described in subsection
10
(3) below, the investing company shall be deemed for the purposes
of the Taxation of Chargeable Gains Act 1992—
(a)
to have disposed of the share immediately before that time
for a consideration of an amount equal to its fair value at that
time, and
15
(b)
to have immediately reacquired it for a consideration of the
same amount.
(2)
Where at any time the conditions in section 91A(1) or 91B(1) above
cease to be satisfied in the case of any share, the investing company
shall be deemed for the purposes of the Taxation of Chargeable
20
Gains Act 1992 and of this Chapter—
(a)
to have disposed of the share immediately before that time
for a consideration of an amount equal to its fair value at that
time, and
(b)
to have immediately reacquired it for a consideration of the
25
same amount.
(3)
In any case where—
(a)
a share is held by a company both—
(i)
at the end of 15th March 2005, and
(ii)
at the beginning of 16th March 2005, and
30
(b)
section 91A or 91B above applies in relation to that share at
the beginning of 16th March 2005,

subsection (4) below applies.
(4)
In any such case section 116 of the Taxation of Chargeable Gains Act
1992 (reorganisations etc involving qualifying corporate bonds) shall
35
have effect in accordance with the assumptions in subsections (5)
and (6) below.
(5)
The share shall be assumed to have become an asset representing a
creditor relationship of the company (and, accordingly, a qualifying
corporate bond) in consequence of the occurrence on 16th March
40
2005 of a transaction such as is mentioned in section 116(1) of the
Taxation of Chargeable Gains Act 1992.
(6)
In relation to the transaction that is deemed to have occurred as
mentioned in sub-paragraph (5) above—
(a)
the share immediately before 16th March 2005 shall be
45
assumed to be the old asset for the purposes of section 116 of
the Taxation of Chargeable Gains Act 1992, and

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
240

(b)
the asset representing a creditor relationship immediately
after the beginning of 16th March 2005 shall be assumed for
those purposes to be the new asset.”.
      (7)
The amendments made by this paragraph have effect in relation to shares
held by a company on or after 16th March 2005.
5
      (8)
In any case where—
(a)
section 91B of FA 1996 would, apart from this sub-paragraph, apply
in the case of a share on 16th March 2005,
(b)
that section would so apply by virtue only of Condition 2 in section
91C of that Act,
10
(c)
the first date on which the issuing company is entitled to redeem the
share falls more than 5 years after the issue of the share, and
(d)
on 15th March 2005 the investing company and the issuing company
were not connected,

sub-paragraph (9) shall have effect.
15
      (9)
In any such case—
(a)
section 91B of FA 1996 has effect in the case of the share on and after
1st July 2005, and
(b)
section 91E of that Act has effect as if—
(i)
for “15th March 2005”, in each place, there were substituted
20
“30th June 2005”, and
(ii)
for “16th March 2005”, in each place, there were substituted
“1st July 2005”.
     (10)
Section 839 of ICTA (connected persons) applies for the purposes of this
paragraph.
25
Related transactions in relation to right to receive manufactured interest
10    (1)
Section 97 of FA 1996 (manufactured interest) is amended as follows.
      (2)
In subsection (2) (consequences of company having relationship to which
the section applies)—
(a)
paragraph (b) (which restricts the debits and credits to be brought
30
into account to those relating to the manufactured interest) shall
cease to have effect, and
(b)
in the closing words, for “paragraphs (a)(ii) and (b)” substitute
“paragraph (a)(ii)”.
      (3)
After subsection (2) insert—
35
“(2A)
Where a company—
(a)
has a relationship to which this section applies, but
(b)
enters into a related transaction in respect of the right to
receive manufactured interest,

then, for the purpose of bringing credits into account by virtue of
40
subsection (2) above in respect of that or any other related
transaction, the company shall continue to be treated as having a
relationship to which this section applies even though the
manufactured interest is not payable to the company.”.

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Schedule 13 — Avoidance involving financial arrangements
241

      (4)
Omit subsections (3) and (3A) (which relate to whether debits or credits are
trading or non-trading etc and which are unnecessary, in view of the
application of sections 82(2) and 103(2) of FA 1996 by virtue of section 97(2)
of that Act).
      (5)
The amendments made by this paragraph have effect in relation to related
5
transactions on or after 16th March 2005.
Money debts etc not arising from lending of money: discounts and profits from transactions
11    (1)
Section 100 of FA 1996 (money debts etc not arising from the lending of
money) is amended as follows.
      (2)
In subsection (1)(c) (money debts to which the section applies) after sub-
10
paragraph (iii) insert “or
(iv)
as respects which the conditions in subsection (1A)
below are satisfied and from which there arises to the
company a discount (whether of an income or capital
nature) which does not fall to be brought into account
15
under section 74 of the Finance Act 2005 by virtue of
section 71 of that Act (alternative finance return);”.
      (3)
After subsection (1) insert—
“(1A)
The conditions mentioned in subsection (1)(c)(iv) above are that—
(a)
the company stands in the position of creditor in relation to
20
the money debt;
(b)
if the money debt is some or all of the consideration payable
for a disposal of property, the money debt (on the
assumption that it will be paid in full) does not fall to be
brought into account for the purposes of corporation tax as a
25
trading receipt of the company;
(c)
if the money debt is some or all of the consideration payable
for a disposal of property, the property in question is not any
of the following—
(i)
an asset representing a loan relationship;
30
(ii)
a derivative contract, within the meaning of Schedule
26 to the Finance Act 2002.”.
      (4)
In subsection (2), as it has effect for periods of account beginning on or after
1st January 2005, in paragraph (a), after “matters mentioned in subsection
(1)(c) above” insert “or subsection (2ZA) below”.
35
      (5)
After subsection (2) insert—
“(2ZA)
The matters are profits (but not losses) arising to the company from
any of the following related transactions—
(a)
in the case of a money debt falling within subsection (1)(c)(i)
above, any related transaction in respect of the right to
40
receive interest;
(b)
in the case of a money debt falling within subsection (1)(c)(iv)
above, any related transaction.
(2ZB)
Where a company—
(a)
has a relationship to which this section applies by virtue of
45
subsection (1)(c)(i) above, but

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Schedule 13 — Avoidance involving financial arrangements
242

(b)
enters into a related transaction in respect of the right to
receive interest,

then, for the purpose of bringing credits into account by virtue of
subsection (2ZA)(a) above in respect of that or any other related
transaction, the company shall continue to be treated as having a
5
relationship to which this section so applies even though the interest
is not payable to the company.”.
      (6)
After subsection (3) (amounts treated as interest under Schedule 28AA to
ICTA) insert—
“(3A)
For the purposes of this section, a discount shall, in particular, be
10
taken to arise from a money debt in any case where—
(a)
there is a disposal of property for a consideration some or all
of which is money that falls to be paid after the sale;
(b)
the amount or value of the whole consideration exceeds what
the purchaser would have paid for the property if he had
15
been required to pay in full at the time of the disposal; and
(c)
some or all of the excess can reasonably be regarded as
representing a return on an investment of money at interest
(and, accordingly, as being a discount arising from the
money debt).
20
(3B)
The credits to be brought into account for the purposes of this
Chapter in respect of a discount arising from a money debt must be
determined using an amortised cost basis of accounting (see section
103).”.
      (7)
Omit subsections (4) to (6) and (8) (which relate to whether debits or credits
25
are trading or non-trading etc and which are unnecessary, in view of the
application of sections 82(2) and 103(2) of FA 1996 by virtue of section 100(2)
of that Act).
      (8)
Omit subsection (13) (express subjection to Schedules 9 and 11 to FA 1996,
which is unnecessary in view of the closing words of subsection (2) of the
30
section).
      (9)
In consequence of the amendments made by this paragraph, paragraph (c)
of the Case III of Schedule D substituted for the purposes of corporation tax
by section 18(3A) of ICTA (tax in respect of discount arising otherwise than
in respect of a loan relationship) shall not have effect in relation to any
35
discount arising in an accounting period beginning on or after the
commencement date.
     (10)
Subject to sub-paragraph (9), the amendments made by this paragraph have
effect in relation to any money debt to which a company is party as a creditor
on or after the commencement date.
40
     (11)
Where, on or after the commencement date but in a period of account
beginning before 1st January 2005, a company is party to a relationship to
which section 100 of FA 1996 applies, then, in the application of that section
for that period of account, subsection (2) of it shall have effect as follows—
(a)
paragraph (a) shall have effect in relation to—
45
(i)
any discount arising to the company from the money debt,
and
(ii)
any profits arising to the company as mentioned in
subsection (2ZA) of that section,

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Schedule 13 — Avoidance involving financial arrangements
243


as it has effect (or would have effect) in relation to interest payable to
the company under the relationship,
(b)
paragraph (b) shall have effect as if the reference to interest included
a reference to the matters mentioned in paragraph (a)(i) and (ii)
above, and
5
(c)
the closing words shall have effect accordingly.
     (12)
No credits shall be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 by virtue of this paragraph in respect of—
(a)
discount arising from a money debt, to the extent that the discount
accrued before the commencement date, or
10
(b)
profits arising as mentioned in section 100(2ZA) of that Act where
the related transaction took place before that date.
     (13)
In this paragraph “the commencement date” means 16th March 2005.
Capital redemption policies: removal of exclusion from loan relationships computations
12    (1)
Schedule 9 to FA 1996 (loan relationships: special computational provisions)
15
is amended as follows.
      (2)
In paragraph 1A (credits and debits relating to life policies and capital
redemption policies not to be brought into account) paragraph (b) (capital
redemption policies) shall cease to have effect.
      (3)
This paragraph has effect in relation to a capital redemption policy on and
20
after 10th February 2005 (whenever the capital redemption policy was
effected).
      (4)
Where a capital redemption policy—
(a)
is held by a company immediately before 10th February 2005, and
(b)
on or after that date, is, for the purposes of Chapter 2 of Part 4 of FA
25
1996, a creditor relationship of the company,

sub-paragraphs (5) and (6) apply.
      (5)
In any such case, Chapter 2 of Part 13 of ICTA (life policies etc: chargeable
events) shall have effect as if—
(a)
immediately before 10th February 2005, the company had assigned
30
the whole of the rights conferred by the policy for money or money’s
worth, and
(b)
the value of the consideration for the assignment had been equal to
what the carrying value of the creditor relationship would have been
had an accounting period of the company ended on that date;
35

and Chapter 2 of Part 4 of FA 1996 shall have effect as if, immediately after
9th February 2005, the company had acquired the creditor relationship at a
cost equal to that carrying value.
      (6)
But if—
(a)
the accounting period in which the assignment is deemed to have
40
happened (“the assignment period”), and
(b)
the accounting period in which the company ceases to be party to the
creditor relationship (“the cessation period”),

are not the same accounting period, any gain which, by virtue of the deemed
assignment, would have fallen to be brought into account in accordance
45