Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
244

with section 547(1)(b) of ICTA for the assignment period shall instead be
brought into account for the cessation period.
      (7)
In this paragraph—
“assignment”, in relation to Scotland, means an assignation;
“carrying value” has the same meaning as it has for the purposes of
5
paragraph 19A of Schedule 9 to FA 1996, as it has effect for periods
of account beginning on or after 1st January 2005.
Deemed disposal of assets and liabilities on company ceasing to be resident in UK etc
13    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 10A is amended as
follows.
10
      (2)
After sub-paragraph (1) (cases where the paragraph applies) insert—
   “(1A)
But this paragraph does not apply if—
(a)
paragraph 12A below (transferee company leaving group)
applies in relation to the company, and
(b)
the cessation in sub-paragraph (1)(a) or (b) above occurs at
15
the same time as the cessation in sub-paragraph (1)(b) of
that paragraph.”.
      (3)
In sub-paragraph (2) (Schedule to have effect as if there had been an
assignment and reacquisition) for “Schedule” substitute “Chapter”.
      (4)
The amendment made by this paragraph has effect on and after 16th March
20
2005.
Transactions not at arm’s length: exceptions relating to groups of companies
14    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 11 (transactions not
at arm’s length) is amended as follows.
      (2)
For sub-paragraph (3) (exceptions relating to groups of companies)
25
substitute—
    “(3)
Sub-paragraph (1) above does not apply if the related
transaction—
(a)
is a transaction as a result of which paragraph 12 below
(groups)—
30
(i)
applies by virtue of sub-paragraph (1)(a) of it, or
(ii)
would so apply, apart from sub-paragraph (2A) of
it (transferor using fair value accounting), or
(b)
is part of a series of transactions as a result of which that
paragraph—
35
(i)
applies by virtue of sub-paragraph (1)(b) of it, or
(ii)
would so apply, apart from sub-paragraph (2A) of
it.”.
      (3)
In consequence, omit sub-paragraph (5) (construction of references to a
member of a group).
40
      (4)
The amendments made by this paragraph have effect where the related
transaction is on or after 16th March 2005.

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Schedule 13 — Avoidance involving financial arrangements
245

Continuity of treatment of groups etc: treatment of transferee company
15    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 12 (continuity of
treatment of groups etc) is amended as follows.
      (2)
For sub-paragraph (2) (the credits and debits to be brought into account)
substitute—
5
    “(2)
For the purpose of determining the credits and debits to be
brought into account for the purposes of this Chapter in respect of
the loan relationship—
(a)
for the accounting period in which the transaction or, as
the case may be, the first of the series of transactions takes
10
place, the transferor company shall be treated as having
entered into that transaction for a consideration equal to
the notional carrying value of the asset or liability
representing the relationship; and
(b)
for any accounting period in which it is a party to the
15
relationship, the transferee company shall be treated as if it
had acquired the asset or liability representing the
relationship for a consideration equal to the notional
carrying value of the asset or liability.

For the purposes of this sub-paragraph, the notional carrying
20
value is the amount that would have been the carrying value of the
asset or liability in the accounts of the transferor company if a
period of account had ended immediately before the date when
the company ceased to be party to the loan relationship.”.
      (3)
In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair
25
value accounting) for paragraph (aa) (treatment of transferee in respect of
the transaction) substitute—
“(aa)
paragraph (b) of sub-paragraph (2) above shall have effect
in relation to the transferee company.”.
      (4)
For sub-paragraph (8) (which applies paragraph 11(5) for construction of
30
references to a member of a group) substitute—
    “(8)
In this paragraph references to a company which is a member of a
group of companies shall be construed in accordance with section
170 of the Taxation of Chargeable Gains Act 1992.”.
      (5)
In sub-paragraph (9) (interpretation) insert the following definition at the
35
appropriate place—
“ “carrying value” has the same meaning as it has for the
purposes of paragraph 19A below;”.
      (6)
Where the period of account mentioned in the second sentence of the sub-
paragraph (2) substituted by sub-paragraph (2) begins before 1st January
40
2005, “carrying value” shall be construed as if the period had begun on or
after that date.
      (7)
The amendments made by this paragraph have effect in any case where the
relevant transaction is on or after 16th March 2005.
      (8)
In this paragraph “the relevant transaction” means—
45
(a)
the related transaction mentioned in sub-paragraph (1)(a) of
paragraph 12 of Schedule 9 to FA 1996,

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Schedule 13 — Avoidance involving financial arrangements
246

(b)
the first of the series of related transactions mentioned in sub-
paragraph (1)(b) of that paragraph, or
(c)
the transfer mentioned in sub-paragraph (1)(c) or (1)(d) of that
paragraph,

by virtue of which that paragraph applies or would apply apart from sub-
5
paragraph (2A) of it.
Transferee leaving group after replacing transferor as party to loan relationship
16    (1)
In Schedule 9 to FA 1996 (loan relationships) after paragraph 12 insert—
“Transferee leaving group after replacing transferor as party to loan relationship
12A   (1)
This paragraph applies in any case where—
10
(a)
paragraph 12 above—
(i)
applies by virtue of sub-paragraph (1)(a) of that
paragraph (“case A”), or
(ii)
applies by virtue of sub-paragraph (1)(b) of that
paragraph (“case B”), but
15
(b)
before the end of the relevant 6 year period, the transferee
company ceases to be a member of the relevant group.
      (2)
In any such case, this Chapter shall have effect as if the transferee
company had—
(a)
immediately before that cessation, assigned the asset or
20
liability representing the relevant loan relationship for a
consideration of an amount equal to its fair value at that
time, and
(b)
immediately reacquired it for a consideration of the same
amount,
25

but only if a credit would in consequence of paragraph (a) above
fall to be brought into account for the purposes of this Chapter by
the transferee company.
      (3)
In this paragraph—
“the relevant 6 year period” means the period of 6 years
30
following—
(a)
in case A, the transaction mentioned in paragraph
12(1)(a) above, or
(b)
in case B, the last of the series of transactions
mentioned in paragraph 12(1)(b) above;
35
“the relevant group” means—
(a)
in case A, the group mentioned in paragraph 12(1)(a)
above, or
(b)
in case B, the group mentioned in paragraph 12(1)(b)
above;
40
“the relevant loan relationship” means the loan relationship
mentioned in paragraph 12(1) above;
“the transferee company” means the company referred to as
such in paragraph 12(1) above.”.
      (2)
The amendment made by this paragraph has effect where a company ceases
45
to be a member of a group on or after 16th March 2005.

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Schedule 13 — Avoidance involving financial arrangements
247

Avoidance involving repos or stock lending
17    (1)
In Schedule 9 to the FA 1996 (loan relationships) paragraph 15 is amended
as follows.
      (2)
At the end of sub-paragraph (2) (disposals and acquisitions to which the
paragraph applies) add “and as is, in the case of those arrangements, the
5
disposal or acquisition effected by—
(a)
the transfer by A to B mentioned in sub-paragraph (3)(a)
below, or
(b)
any transfer to A that gives effect to the entitlement or
requirement described in sub-paragraph (3)(b) below.”.
10
      (3)
In sub-paragraph (3) (meaning of “repo or stock-lending arrangements”)—
(a)
in paragraph (a), after “one person” insert “(“A”)” and after
“another” insert “(“B”)”;
(b)
in paragraph (b), for “the transferor” substitute “A”.
      (4)
In sub-paragraph (4A) (which states certain consequences of sub-paragraph
15
(1) for each party), omit paragraph (b) (transferee not to be regarded as a
party to the loan relationship) and the word “and” before it, and for the
words following that paragraph substitute—

“but nothing in sub-paragraph (1) above prevents the person to
whom those rights are transferred from being regarded for the
20
purposes of this Chapter as being party to the loan relationship as a
result of the transfer.”.
      (5)
The amendments made by this paragraph have effect in any case where the
transfer mentioned in paragraph 15(3)(a) of Schedule 9 to FA 1996 is on or
after 2nd December 2004, whenever the repo or stock-lending arrangements
25
in question were entered into.
      (6)
In any case involving an arrangement for the sale and repurchase of
securities where the arrangement—
(a)
falls within section 737E(1)(b) of ICTA, and
(b)
involves securities (“substituted securities”) being substituted for
30
other securities,

the substitution of any securities on or after 2nd December 2004 shall be
treated for the purposes of sub-paragraph (5) as if it were a transfer falling
within paragraph 15(3)(a) of Schedule 9 to FA 1996.
Capital redemption policies: computations on the I minus E basis
35
18    (1)
In Schedule 11 to FA 1996 (loan relationships: special provision for insurers)
paragraph 1 (I minus E basis) is amended as follows.
      (2)
After sub-paragraph (1B) insert—
   “(1C)
In applying the I minus E basis for any accounting period in
respect of any life assurance business carried on by an insurance
40
company, no credits or debits shall be brought into account in
respect of any debtor relationship that represents a capital
redemption policy, within the meaning of Chapter 2 of Part 13 of
the Taxes Act 1988.”.

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Schedule 13 — Avoidance involving financial arrangements
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      (3)
The amendment made by this paragraph has effect in relation to a debtor
relationship on and after 10th February 2005 (whenever the capital
redemption policy was effected).
Relevant discounted securities: corporate strips
19    (1)
Schedule 13 to FA 1996 (discounted securities: income tax) is amended as
5
follows.
      (2)
In paragraph 3 (meaning of “relevant discounted security”) in sub-
paragraph (1), for “paragraph 14(1)” substitute “paragraphs 13B(1) and
14(1)”.
      (3)
In paragraph 4 (meaning of “transfer”)—
10
(a)
in sub-paragraph (1), after “Subject to sub-paragraph (2)” insert “and
paragraph 13B(4)”;
(b)
in sub-paragraph (5), after “without prejudice to paragraph” insert
“13B(2) to (5) or”.
      (4)
In paragraph 5 (redemption to include conversion), in sub-paragraph (3),
15
after “This paragraph does not apply to” insert “—
“(a)
the conversion of an interest-bearing corporate security
into corporate strips (see paragraph 13A(2) to (7) below),
or
(b)
”.
20
      (5)
After paragraph 13 (excluded indexed securities) insert—
Meaning of corporate strip and conversion into corporate strips
13A   (1)
In this Schedule “corporate strip” means any asset—
(a)
which is, or has at any time been, one of the separate assets
mentioned in sub-paragraph (2) below, and
25
(b)
which is not prevented from being a corporate strip by
sub-paragraph (9) below.
      (2)
For the purposes of this Schedule a person converts an interest-
bearing corporate security into corporate strips of the security if he
has an interest-bearing corporate security (“the converted
30
corporate security”) but—
(a)
as a result of any scheme or arrangements, he comes to
have two or more separate assets in place of the converted
corporate security,
(b)
each of those separate assets satisfies condition A,
35
(c)
those separate assets, taken together, satisfy condition B,
and
(d)
at least one of those separate assets is not prevented from
being a corporate strip by sub-paragraph (9) below,

and related expressions shall be construed accordingly.
40
      (3)
Condition A is that the asset—
(a)
represents the right to, or
(b)
secures,

one or more stripped payments.

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Schedule 13 — Avoidance involving financial arrangements
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      (4)
For the purposes of this paragraph, a “stripped payment” is—
(a)
the payment of, or
(b)
a payment corresponding to,

the whole or a part of one or more payments (whether of interest
or principal) remaining to be made under the converted corporate
5
security.
      (5)
Condition B is that the assets, taken together,—
(a)
represent the right to, or
(b)
secure,

every payment (whether of interest or principal) remaining to be
10
made under the converted corporate security (or payments
corresponding to every such payment).
      (6)
Where a person—
(a)
has an interest-bearing corporate security, but
(b)
sells or transfers the right to one or more payments
15
remaining to be made under it (so that, as a result, there are
two or more separate assets which, taken together, satisfy
condition B),

this Schedule has effect as if, as a result of a scheme or
arrangements, the person had come to have the separate assets in
20
place of the security immediately before the sale or transfer.
      (7)
For the purposes of this Schedule, sub-paragraphs (2) to (6) above
also have effect in relation to each of the separate assets mentioned
in sub-paragraph (2) above as if it were itself an interest-bearing
corporate security (if that is not in fact the case).
25
      (8)
Where sub-paragraphs (2) to (6) above have effect by virtue of sub-
paragraph (7) above—
(a)
any reference in this Schedule to converting an interest-
bearing corporate security into corporate strips of the
security shall be construed accordingly, and
30
(b)
sub-paragraph (1) above (meaning of “corporate strip”)
has effect accordingly.
      (9)
An asset is not a corporate strip if it—
(a)
represents the right to, or
(b)
secures,
35

payments of, or corresponding to, a part of every payment
remaining to be made under an interest-bearing corporate security
or a corporate strip.
     (10)
After a balance has been struck for a dividend on an interest-
bearing corporate security, any payment to be made in respect of
40
that dividend shall, at times falling after that balance has been
struck, be treated for the purposes of this paragraph as not being
a payment remaining to be made under the security.

References to payments the right to which a separate asset
represents or secures shall be construed accordingly.
45
Corporate strips deemed to be relevant discounted securities
13B   (1)
Every corporate strip is a relevant discounted security.

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Schedule 13 — Avoidance involving financial arrangements
250

      (2)
Where a person converts an interest-bearing corporate security
into corporate strips of the security, he shall be deemed to have
paid, in respect of his acquisition of each corporate strip, an
amount determined in accordance with sub-paragraph (3) below.
      (3)
The amount is that which bears to the acquisition cost of the
5
converted corporate security the proportion that SMV bears to
TMV, where—
SMV is the market value of the corporate strip, and
TMV is the total of the market values of all the separate assets
resulting from the conversion.
10
      (4)
If the converted corporate security is a relevant discounted
security—
(a)
its conversion into corporate strips is deemed to be a
transfer of the security, and
(b)
the amount payable on the transfer is deemed to be an
15
amount equal to the acquisition cost of the converted
corporate security.
      (5)
Where corporate strips are consolidated into a single security—
(a)
by being exchanged by any person for that security, or
(b)
by being otherwise converted by any person into that
20
security under any arrangements,

each of the corporate strips shall be deemed to have been
redeemed, at the time of the exchange or other conversion, by the
payment to that person of an amount equal to its market value.
      (6)
Sub-paragraphs (2) to (5) above have effect for the purposes of this
25
Schedule.
      (7)
For the purposes of this paragraph, the acquisition cost of the
converted corporate security is the amount paid in respect of his
acquisition of the security by the person who has it immediately
before the conversion (no account being taken of any costs
30
incurred in connection with that acquisition).
      (8)
References in this paragraph to the market value of a security
given or received in exchange for, or otherwise converted into,
another are references to its market value at the time of the
exchange or conversion.
35
Corporate strips: manipulation of acquisition, sale or redemption price
13C   (1)
This paragraph applies in any case where, as a result of any
scheme or arrangement,—
(a)
the amount paid by a person in respect of his acquisition of
a corporate strip is or was more than the market value of
40
the corporate strip at the time of that acquisition,
(b)
the amount payable to a person on a transfer of a corporate
strip by him is less than the market value of the corporate
strip at the time of the transfer, or
(c)
on redemption of a corporate strip, the amount payable to
45
a person, as the person holding the corporate strip, is less