Finance Bill

House of Commons

Session 2004 - 05
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
251

than the market value of the corporate strip on the day
before redemption,

and the obtaining of a tax advantage by any person is the main
benefit, or one of the main benefits, that might have been expected
to accrue from, or from any provision of, the scheme or
5
arrangement.
      (2)
In a case falling within sub-paragraph (1)(a) above, the person
shall be treated for the purposes of paragraph 1(2)(b) above on a
transfer of the corporate strip by him as if he had paid in respect
of his acquisition of the corporate strip an amount equal to the
10
market value of the corporate strip at the time of that acquisition.
      (3)
In a case falling within sub-paragraph (1)(b) above, the person
shall be treated for the purposes of paragraph 1(2)(b) above as if
the amount payable to him on the transfer were an amount equal
to the market value of the corporate strip at the time of the
15
transfer.
      (4)
In a case falling within sub-paragraph (1)(c) above, the person
shall be treated for the purposes of paragraph 1(2)(b) above as if
the amount payable to him on redemption were an amount equal
to the market value of the corporate strip on the day before
20
redemption.
      (5)
The market value of a corporate strip at any time shall be
determined for the purposes of this paragraph without regard to
any increase or diminution in the value of the corporate strip as a
result of the scheme or arrangement mentioned in sub-paragraph
25
(1) above.
      (6)
For the purposes of this paragraph, no account shall be taken of
any costs incurred in connection with any transfer or redemption
of a corporate strip or its acquisition.
      (7)
In this paragraph “tax advantage” has the meaning given by
30
section 709(1) of the Taxes Act 1988.
Corporate strips: manipulation of price: associated payment giving rise to CGT loss
13D   (1)
Where—
(a)
as a result of any scheme or arrangement which has an
unallowable purpose, the circumstances are, or might have
35
been, as mentioned in paragraph (a), (b) or (c) of paragraph
13C(1) above,
(b)
under the scheme or arrangement, a payment falls to be
made otherwise than in respect of the acquisition or
disposal of a corporate strip, and
40
(c)
as a result of that payment or the circumstances in which it
is made, a loss accrues to any person for the purposes of
capital gains tax,

the loss shall not be an allowable loss for the purposes of capital
gains tax.
45
      (2)
For the purposes of this paragraph 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

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
252

provision of, the scheme or arrangement (apart from paragraph
13C above and this paragraph) is—
(a)
the obtaining of a tax advantage by any person, or
(b)
the accrual to any person of an allowable loss for the
purposes of capital gains tax.
5
      (3)
In this paragraph “tax advantage” has the meaning given by
section 709(1) of the Taxes Act 1988.”.
      (6)
In paragraph 15(1) (general interpretation) insert each of the following
definitions at the appropriate place—
“ “corporate strip” has the meaning given by paragraph 13A
10
above;”;
“ “interest-bearing corporate security” means any interest-
bearing security other than—
(a)
a security issued by the government of a territory;
(b)
a share in a company;”;
15
“ “interest-bearing security” includes any loan stock or similar
security;”.
      (7)
In paragraph 15(1)—
(a)
in the definition of “relevant discounted security”, after “paragraphs
3” insert “, 13B(1)”;
20
(b)
in the definition of “strip”, after ““strip”” insert “, except in the
expression “corporate strip”,”.
      (8)
The amendments made by this paragraph have effect in any case where a
person acquires a corporate strip on or after 2nd December 2004 otherwise
than in pursuance of an agreement entered into before that date.
25
Transactions within groups: treatment of transferee company
20    (1)
In Schedule 26 to FA 2002 (derivative contracts) paragraph 28 (transactions
within groups) is amended as follows.
      (2)
For sub-paragraph (3) (the credits and debits to be brought into account)
substitute—
30
    “(3)
For the purpose of determining the credits and debits to be
brought into account for the purposes of this Schedule in respect
of the derivative contract—
(a)
for the accounting period in which the transaction or, as
the case may be, the first of the series of transactions takes
35
place, the transferor company shall be treated as having
entered into that transaction for a consideration equal to
the notional carrying value of the contract; and
(b)
for any accounting period in which it is a party to the
contract, the transferee company shall be treated as if it
40
had acquired the contract for a consideration equal to its
notional carrying value.

For the purposes of this sub-paragraph the notional carrying value
is the amount that would have been the carrying value of the
derivative contract in the accounts of the transferor company if a
45
period of account had ended immediately before the date when
the company ceased to be party to the contract.”.

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
253

      (3)
In sub-paragraph (5), after “In this paragraph” insert the following
definition—
““carrying value” has the same meaning as it has for the
purposes of paragraph 50A;”.
      (4)
Where the period of account mentioned in the second sentence of the sub-
5
paragraph (3) substituted by sub-paragraph (2) begins before 1st January
2005, “carrying value” shall be construed as if the period had begun on or
after that date.
      (5)
The amendments made by this paragraph have effect in any case where the
relevant transaction is on or after 16th March 2005.
10
      (6)
In this paragraph “the relevant transaction” means—
(a)
the related transaction mentioned in sub-paragraph (2)(a) of
paragraph 28 of Schedule 26 to FA 2002,
(b)
the first of the series of related transactions mentioned in sub-
paragraph (2)(b) of that paragraph, or
15
(c)
the transfer mentioned in sub-paragraph (2)(c) or (2)(d) of that
paragraph,

by virtue of which that paragraph applies or would apply apart from
paragraph 30 of that Schedule.
Transactions within groups: fair value accounting
20
21    (1)
In Schedule 26 to FA 2002 (derivative contracts) paragraph 30 (transactions
with groups: fair value accounting) is amended as follows.
      (2)
In sub-paragraph (1), for paragraph (b) (treatment of transferee in respect of
the transaction) substitute—
“(b)
paragraph 28(3)(b) shall have effect in relation to the
25
transferee company.”.
      (3)
The amendment made by this paragraph has effect in any case where the
relevant transaction is on or after 16th March 2005.
      (4)
In this paragraph “the relevant transaction” has the same meaning as in
paragraph 20.
30
Transferee leaving group after replacing transferor as party to derivative contract
22    (1)
In Schedule 26 to FA 2002 (derivative contracts) after paragraph 30 insert—
“Transferee leaving group after replacing transferor as party to derivative contract
30A   (1)
This paragraph applies in any case where—
(a)
paragraph 28—
35
(i)
applies by virtue of sub-paragraph (2)(a) of that
paragraph (“case A”), or
(ii)
applies by virtue of sub-paragraph (2)(b) of that
paragraph (“case B”), but
(b)
before the end of the relevant 6 year period, the transferee
40
company ceases to be a member of the relevant group.
      (2)
In any such case, this Schedule shall have effect as if the transferee
company had—

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
254

(a)
immediately before that cessation, assigned its rights and
liabilities under the relevant derivative contract for a
consideration of an amount equal to their fair value at that
time, and
(b)
immediately reacquired them for a consideration of the
5
same amount,

but only if a credit would in consequence of paragraph (a) fall to
be brought into account for the purposes of this Schedule by the
transferee company.
      (3)
In this paragraph—
10
“the relevant 6 year period” means the period of 6 years
following—
(a)
in case A, the transaction mentioned in paragraph
28(2)(a), or
(b)
in case B, the last of the series of transactions
15
mentioned in paragraph 28(2)(b);
“the relevant derivative contract” means the derivative
contract mentioned in paragraph 28(1);
“the relevant group” means—
(a)
in case A, the group mentioned in paragraph 28(2)(a),
20
or
(b)
in case B, the group mentioned in paragraph 28(2)(b);
“the transferee company” means the company referred to as
such in paragraph 28(1).”.
      (2)
The amendment made by this paragraph has effect where a company ceases
25
to be a member of a group on or after 16th March 2005.
Deeply discounted securities: corporate strips
23    (1)
Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted
securities) is amended as follows.
      (2)
In section 430 (meaning of “deeply discounted security”) in subsection (6)
30
(subjections) omit “and” before the entry relating to section 443(1) and at the
end of that entry add “; and
section 452A(1) (corporate strips).”
      (3)
In section 437 (transactions which are disposals) after subsection (4) insert—
“(5)
In the case of interest-bearing corporate securities, further provision
35
about occasions counting as disposals is made by section 452F(2)(a).
(6)
In the case of corporate strips, further provision about occasions
counting as disposals is made by section 452F(2)(a) and (3)(a).”.
      (4)
In section 438 (timing of transfers and acquisitions) for subsection (4)
substitute—
40
“(4)
This section is subject to—
section 445(7) (exchanges for and consolidation of strips);
section 452F(4) (conversion into and consolidations of corporate
strips).”.

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
255

      (5)
In section 440 (market value disposals) for subsection (5) substitute—
“(5)
Subsection (4) is subject to—
section 445(8) (exchanges for and consolidations of strips);
section 452F(5) (conversion into and consolidation of corporate
strips).”.
5
      (6)
In section 441 (market value acquisitions) for subsection (3) substitute—
“(3)
Subsection (2) is subject to—
section 445(8) (exchanges for and consolidations of strips);
section 452F(5) (conversion into and consolidations of corporate
strips).”.
10
      (7)
Section 444 (meaning of “strip” in Chapter 8) after subsection (5) insert—
“(6)
Nothing in this section affects the meaning of the expression
“corporate strip” in this Chapter (see section 452E).”.
      (8)
After section 452 insert—
“Special rules for corporate strips
15
“452A
Application of this Chapter to corporate strips
(1)
All corporate strips are treated as deeply discounted securities for
the purposes of this Chapter, whether or not they would otherwise
be so.
(2)
This Chapter applies to corporate strips subject to the rules in—
20
(a)
section 452F (corporate strips: acquisitions and disposals),
and
(b)
section 452G (corporate strips: manipulation of acquisition,
transfer or redemption payments).
452B
Meaning of “interest-bearing corporate security” in Chapter 8
25
(1)
In this Chapter “interest-bearing corporate security” means any
interest-bearing security other than—
(a)
a security issued by the government of a territory, or
(b)
a share in a company.
(2)
In this section “interest-bearing security” includes any loan stock or
30
similar security.
(3)
Section 452D(4)(a) gives an extended meaning to references to
converting an interest-bearing corporate security into corporate
strips (and related expressions).
452C
Conversion of interest-bearing corporate securities into corporate
35
strips
(1)
For the purposes of this Chapter a person converts an interest-
bearing corporate security into corporate strips of the security if he
has an interest-bearing corporate security (“the converted corporate
security”) but—
40
(a)
as a result of any scheme or arrangements, he acquires two or
more separate assets in place of the converted corporate
security,

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
256

(b)
each of those separate assets satisfies condition A,
(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 section 452E(2) or (3),

and related expressions shall be construed accordingly.
5
(2)
Condition A is that the asset—
(a)
represents the right to, or
(b)
secures,

one or more stripped payments.
(3)
For the purposes of this section, a “stripped payment” is—
10
(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
security.
15
(4)
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
made under the converted corporate security (or payments
20
corresponding to every such payment).
(5)
Where a person—
(a)
has an interest-bearing corporate security, but
(b)
sells or transfers the right to one or more payments remaining
to be made under it (so that, as a result, there are two or more
25
separate assets which, taken together, satisfy condition B),

this Chapter has effect as if, as a result of a scheme or arrangements,
the person had acquired the separate assets in place of the security
immediately before the sale or transfer.
(6)
After a balance has been struck for a dividend on an interest-bearing
30
corporate security, any payment to be made in respect of 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.
452D
Conversion into corporate strips: lower level conversions
35
(1)
For the purposes of this Chapter, section 452C also has effect in
relation to each of the separate assets mentioned in subsection (1) of
that section as if that separate asset were itself an interest-bearing
corporate security (if that is not in fact the case).
(2)
In subsection (1), the reference to section 452C includes a reference to
40
that section has it has effect by virtue of this section.
(3)
In the application of section 452C by virtue of this section, references
to payments the right to which a separate asset represents or secures
shall be construed in accordance with subsection (6) of that section.
(4)
Where section 452C has effect by virtue of subsection (1)—
45

Finance Bill
Schedule 13 — Avoidance involving financial arrangements
257

(a)
any reference in this Chapter to converting an interest-
bearing corporate security into corporate strips of the
security shall be construed accordingly, and
(b)
section 452E (meaning of “corporate strip”) has effect
accordingly.
5
452E
Meaning of “corporate strip” in Chapter 8
(1)
In this Chapter “corporate strip” means any asset—
(a)
which is, or has at any time been, one of the separate assets
mentioned in section 452C(1), and
(b)
which is not prevented from being a corporate strip by
10
subsection (2) or (3).
(2)
An asset is not a corporate strip if it—
(a)
represents the right to, or
(b)
secures,

payments of, or corresponding to, a part of every payment remaining
15
to be made under an interest-bearing corporate security or a
corporate strip.
(3)
An asset is a corporate strip in the case of any person only if he
acquired it—
(a)
on or after 2nd December 2004, and
20
(b)
otherwise than in pursuance of an agreement entered into
before that date.
452F
Corporate strips: acquisitions and disposals
(1)
A person who converts an interest-bearing corporate security into
corporate strips of the security, is treated as having acquired each
25
corporate strip by the payment of an amount equal to—

where—
A is acquisition cost of the converted corporate security;
B is the market value of the corporate strip;
C is the total of the market values of all the separate assets
30
resulting from the conversion.
(2)
If the converted corporate security is a deeply discounted security—
(a)
its conversion into corporate strips is to be treated for the
purposes of this Chapter as a transfer of the security, but
(b)
the amount payable on the transfer is taken to be an amount
35
equal to the acquisition cost of the converted corporate
security.
(3)
For the purposes of this Chapter—
(a)
the consolidation of a corporate strip with other corporate
strips into a single security is a disposal of the corporate strip
40
by the person consolidating it (whether or not it would be
apart from this subsection), and
(b)
an amount equal to the market value of the corporate strip at
the consolidation is treated as payable on the disposal.