Finance Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
81

the trade”) at the end insert—
“(7)
This section is subject to provision made by regulations under section
122A (partners: meaning of “capital contribution to the trade”).”
(3)
In section 123(1) of FA 2004 (definition of “film-related losses”) for “and 121”
substitute “, 121 and 122A”.
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(4)
The amendments made by this section are deemed to have come into force on
2nd December 2004.
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Avoidance involving tax arbitrage
104
Deduction cases
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(1)
If the Board consider, on reasonable grounds, that conditions A to D are or may
be satisfied in relation to a transaction to which a company falling within
subsection (2) is party, they may give the company a notice under this section.
(2)
A company falls within this subsection if—
(a)
it is resident in the United Kingdom, or
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(b)
it is resident outside the United Kingdom but is within the charge to
corporation tax.
(3)
Condition A is that the transaction to which the company is party forms part
of a scheme that is a qualifying scheme.
(4)
Condition B is that for the purposes of corporation tax an amount is allowed as
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a deduction in respect of the transaction or an amount relating to the
transaction is set off against profits in an accounting period.
(5)
Condition C is that the main purpose, or one of the main purposes of, the
scheme is to achieve a UK tax advantage for the company.
(6)
Condition D is that the amount of the UK tax advantage so achieved is more
25
than a minimal amount.
(7)
A notice under this section is a notice—
(a)
specifying the transaction or transactions in relation to which the Board
considers that conditions A to D are satisfied,
(b)
specifying the period in relation to which condition B is satisfied, and
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(c)
informing the company that as a consequence section 105 (rules
relating to deductions) has effect in relation to the transaction or
transactions.
(8)
Schedule 6 makes provision about what constitutes a qualifying scheme.
105
Rules relating to deductions
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(1)
The following provisions of this section apply in relation to a transaction if—
(a)
a notice specifying the transaction is given to a company under section
104, and
(b)
conditions A to D of section 104 are satisfied in relation to the
transaction.
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
82

(2)
The company must compute (or recompute) for the purposes of corporation
tax the company’s income or chargeable gains arising from, or its liability to
corporation tax in relation to, the specified transaction—
(a)
for the accounting period specified in the notice under section 104, and
(b)
for any subsequent accounting period,
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in accordance with the following rules.
(3)
Rule A is that, in respect of the specified transaction, no amount is allowable as
a deduction for the purposes of the Corporation Tax Acts to the extent that, in
relation to the same expense, an amount may be deducted or otherwise
allowed in computing any income, profits or losses for the purposes of any tax
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(including any foreign tax) other than—
(a)
petroleum revenue tax, or
(b)
the tax chargeable under section 501A(1) of ICTA (supplementary
charge in respect of ring fence trades).
(4)
The reference in subsection (3) to an amount deducted or otherwise allowed in
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computing any income, profits or losses for the purposes of any other tax
includes a reference to an amount that would be so deducted or allowed but
for any rule that has the same effect as Rule A.
(5)
For the purposes of subsection (4) “rule” means—
(a)
a provision of the Tax Acts, or
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(b)
a rule having effect under the tax law of any territory outside the
United Kingdom.
(6)
Rule B applies if—
(a)
a transaction, or a series of transactions, forming part of the scheme
makes or imposes provision as a result of which one person (“the
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payer”) makes a payment and another person (“the payee”) receives, or
becomes entitled to receive, a payment or payments,
(b)
in respect of the payment by the payer, an amount may be deducted or
otherwise allowed to the payer, or to another person who is party to, or
concerned in, the scheme, in computing any profits or losses for tax
30
purposes, and
(c)
in respect of the payment or payments that the payee receives or is
entitled to receive as a result of the transaction or series of transactions,
or part of such payment or payments, the payee is not liable to tax or, if
liable, his liability to tax is reduced as a result of provision made or
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imposed by the scheme.
(7)
For the purposes of subsection (6)(c), the payee’s liability to tax in respect of the
payment or payments that he receives or is entitled to receive as a result of the
transaction or series of transactions is reduced as a result of provision made or
imposed by the scheme if—
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(a)
an amount arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
transactions forming part of the scheme, falls to be deducted or
otherwise allowed to the payee in computing for tax purposes any
profits or losses arising from the payment or payments or the
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entitlement to receive the payment or payments, or
(b)
an amount of relief arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
transactions forming part of the scheme, may be deducted from the

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
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amount of income or gains arising from the payment or payments or
the entitlement to receive the payment or payments.
(8)
The requirement in subsection (6)(c) is not satisfied if the payee is not liable to
tax because he is not liable to tax on any income or gains received by him or for
his benefit under the tax law of any territory.
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(9)
The requirement in subsection (6)(c) is not satisfied if, or to the extent that, the
payee is not subject to tax because his liability to tax is subject to an exemption
falling within subsection (10).
(10)
An exemption falls within this subsection if—
(a)
it exempts a person from being liable to tax in respect of income or
10
gains, without providing for that income or those gains to be treated as
the income or gains of one or more other persons, and
(b)
it is conferred by a provision contained in or having the force of an Act
or by a provision of the tax law of any territory outside the United
Kingdom.
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(11)
Rule B is that the aggregate of the amounts allowable as a deduction for the
purposes of the Corporation Tax Acts in computing any profits to the company
arising from—
(a)
the specified transaction, and
(b)
any other transaction that forms part of the scheme and to which the
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company is party,

is to be reduced in accordance with subsections (12) and (13).
(12)
If, in respect of the payment or payments that the payee receives or is entitled
to receive, the payee is not liable to tax for the purposes of the requirement in
subsection (6)(c), the aggregate is to be reduced to nil.
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(13)
If, in respect of the payment or payments, the payee is liable to tax as regards
part or his liability to tax is reduced as described in subsection (6)(c), the
aggregate is to be reduced to such proportion of the aggregate as is equal to the
proportion of the payment or payments on which the payee is liable to tax; and
for this purpose the amount by which the payee’s liability is reduced is to be
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treated as an amount on which the payee is not liable to tax.
(14)
In this section, references to tax purposes include a reference to the purposes
of any foreign tax; and foreign tax has the meaning given by section 403D of
ICTA.
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Receipts cases
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(1)
If the Board consider, on reasonable grounds that conditions A to E are or may
be satisfied in relation to a company resident in the United Kingdom, they may
give the company a notice under this section.
(2)
Condition A is that a scheme makes or imposes provision (“the actual
provision”) as between the company and another person (“the paying party”)
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by means of a transaction or series of transactions.
(3)
Condition B is that the actual provision includes the making by the paying
party, by means of a transaction or series of transactions, of a payment that is
a qualifying payment in relation to the company.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
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(4)
Condition C is that as regards the qualifying payment made by the paying
party—
(a)
an amount is available in respect of the payment as a deduction for the
purposes of the Tax Acts, or
(b)
an amount may be deducted or otherwise allowed in respect of the
5
payment under the tax law of any territory outside the United
Kingdom,

and the amount that is so available or may be so deducted or allowed is not, or
part of that amount is not, for tax purposes, set against any income arising to
the paying party from a transaction or transactions forming part of the scheme.
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(5)
Condition C is not to be treated as satisfied if—
(a)
the paying party is a dealer,
(b)
in the ordinary course of his business, he incurs losses in respect of the
transaction or transactions forming part of the scheme to which he is
party, and
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(c)
the amount, or the part of the amount, that is not set against income
arising to the dealer from the transaction or transactions, is an amount
in respect of those losses.
(6)
In subsection (5), “dealer” means a person who is a dealer in relation to a
distribution within the meaning of section 95(2) of ICTA or who would, if he
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were resident in the United Kingdom, be such a dealer.
(7)
Condition D is that the qualifying payment is not, or part of the qualifying
payment is not, an amount to which subsection (8) applies.
(8)
This subsection applies to an amount that is, for the purposes of the
Corporation Tax Acts—
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(a)
income or gains arising to the company in the accounting period in
which the qualifying payment was made in relation to the company,
(b)
income arising to any other company resident in the United Kingdom
in a corresponding accounting period, or
(c)
brought into account by a company as a credit for the purposes of
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Chapter 2 of Part 2 of FA 1996 by virtue of section 91A of FA 1996
(avoidance involving shares subject to outstanding third party
obligations).
(9)
Condition E is that the company and the paying party expected on entering
into the scheme that a benefit would arise as a result of condition D being
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satisfied (whether by reference to all or part of the qualifying payment).
(10)
A notice under this section is a notice—
(a)
informing the company of the Board’s view under subsection (1),
(b)
specifying the qualifying payment in relation to which the Board
consider that conditions A to E are or may be satisfied,
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(c)
specifying the accounting period of the company in which the
qualifying payment is made, and
(d)
informing the company that as a consequence section 107 has effect in
relation to the payment.
(11)
For the purposes of this section a payment is a qualifying payment in relation
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to a company if it constitutes a contribution to the capital of the company.
(12)
For the purposes of this section the accounting period of a company (“company
A”) corresponds to the accounting period of another company (“company B”)

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
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if at least one day of company A’s accounting period falls within company B’s
accounting period.
107
Rule as to qualifying payment
(1)
The following provisions of this section apply in relation to a qualifying
payment if—
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(a)
a notice specifying that payment is given to a company under section
106, and
(b)
conditions A to E of section 106 are satisfied in relation to the payment.
(2)
The company must compute (or recompute) for the purposes of corporation
tax for the accounting period specified in the notice its income or chargeable
10
gains, or its liability to corporation tax, as if—
(a)
the qualifying payment, or
(b)
where part of the qualifying payment falls within subsection (3), the
remaining part of the qualifying payment,

were an amount of income chargeable under Case VI of Schedule D arising to
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the company in that period.
(3)
A qualifying payment falls within this subsection if and to the extent that—
(a)
an amount in respect of the qualifying payment, that is available as a
deduction for the purposes of the Tax Acts or may be deducted or
otherwise allowed under the tax law of any territory outside the United
20
Kingdom, is set against income arising as described in section 106(4), or
(b)
the qualifying payment is an amount to which section 106(8) applies.
(4)
In this section “qualifying payment” has the same meaning as in section 106.
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Notices under sections 104 and 106
(1)
Subsection (2) applies if the Board give a notice to a company under section 104
25
or 106 before the company has made its company tax return for the accounting
period specified in the notice.
(2)
If the company makes its return for that period before the end of the period of
90 days beginning with the day on which the notice is given, it may—
(a)
make a return that disregards the notice, and
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(b)
at any time after making the return and before the end of the period of
90 days, amend the return for the purpose of complying with the notice.
(3)
If a company has made a company tax return for an accounting period, the
Board may only give the company a notice under section 104 or 106 in relation
to that period if a notice of enquiry has been given to the company in respect
35
of its return for that period.
(4)
After any enquiries into the return for that period have been completed, the
Board may only give the company a notice under section 104 or 106 if the
requirements in subsections (5) and (7) are satisfied.
(5)
The first requirement is that at the time the enquiries into the return were
40
completed, the Board could not have been reasonably expected, on the basis of
information made available to them or to an officer of theirs before that time,
to have been aware that the circumstances were such that a notice under
section 104 or 106 could have been given to the company in relation to that
period.
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance involving tax arbitrage
86

(6)
Paragraph 44(2) and (3) of Schedule 18 to the Finance Act 1998 (information
made available) applies for the purposes of subsection (5) as it applies for the
purposes of paragraph 44(1).
(7)
The second requirement is that—
(a)
the company was requested to produce or provide information during
5
an enquiry into the return for that period, and
(b)
if the company had duly complied with the request, the Board could
have been reasonably expected to give the company a notice under
section 104 or 106 in relation to that period.
(8)
If a company is given a notice under section 104 or 106 in relation to an
10
accounting period after having made a company tax return for that period, the
company may amend the return for the purpose of complying with the notice
at any time before the end of the period of 90 days beginning with the day on
which the notice is given.
(9)
If the notice under section 104 or 106 is given to the company after it has been
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given a notice of enquiry in respect of its return for the period, no closure notice
may be given in relation to the company’s tax return until—
(a)
the end of the period of 90 days beginning with the day on which the
notice under section 104 or 106 is given, or
(b)
the earlier amendment of the company tax return for the purpose of
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complying with the notice.
(10)
If the notice under section 104 or 106 is given to the company after any
enquiries into the return for the period are completed, no discovery assessment
may be made as regards the income or chargeable gain to which the notice
relates until—
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(a)
the end of the period of 90 days beginning with the day on which the
notice under section 104 or 106 is given, or
(b)
the earlier amendment of the company tax return for the purpose of
complying with the notice.
(11)
Subsections (2)(b) and (8) do not prevent a company tax return for a period
30
becoming incorrect if—
(a)
a notice under section 104 or 106 is given to the company in relation to
that period,
(b)
the return is not amended in accordance with subsection (2)(b) or (8) for
the purpose of complying with the notice, and
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(c)
the return ought to have been so amended.
(12)
In this section—
“closure notice” means a notice under paragraph 32 of Schedule 18 to FA
1998;
“company tax return” means the return required to be delivered pursuant
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to a notice under paragraph 3 of Schedule 18 to FA 1998, as read with
paragraph 4 of that Schedule;
“discovery assessment” means an assessment under paragraph 41 of
Schedule 18 to FA 1998;
“notice of enquiry” means a notice under paragraph 24 of Schedule 18 to
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FA 1998.