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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 12 — International matters

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(2)   

In making the computations required by section 796(1)(a) and (b) there

shall be deducted from the amount of the income in respect of which

the credit is to be allowed deductions, charges or expenses which

would be allowable in a computation of the taxpayer’s liability in

respect of that income.

5

(3)   

The reference in subsection (2) to allowable deductions, charges or

expenses includes a reference to a reasonable apportionment of

allowable deductions or expenses which relate partly to the income and

partly to other matters.

(4)   

Where royalties (as defined in arrangements having effect by virtue of

10

section 788) are paid in respect of an asset in more than one jurisdiction

outside the United Kingdom, for the purposes of section 796(1)—

(a)   

royalty income arising in different jurisdictions (other than the

United Kingdom) in a year of assessment in respect of that asset

shall be treated as a single item of income, and

15

(b)   

credits available for foreign tax in respect of the royalty income

shall be aggregated accordingly.

(5)   

In this section “trade income” means income chargeable to tax under—

(a)   

Chapter 2 or 18 of Part 2 of ITTOIA 2005 (trade profits and post-

cessation receipts),

20

(b)   

Chapter 3 or 10 of Part 3 of ITTOIA 2005 (profits of property

businesses and post-cessation receipts), or

(c)   

Chapter 11 of Part 3 of ITTOIA 2005 (overseas property

income).

798A    

Section 797: trade income

25

(1)   

This section has effect in relation to the application of section 797(1) to

the allowance of credit for foreign tax against corporation tax in respect

of trade income.

(2)   

The reference in section 797(1) to the relevant income or gain shall be

treated as referring only to income arising or gains accruing out of the

30

transaction, arrangement or asset in connection with which the credit

for foreign tax arises.

(3)   

In determining for the purposes of section 797(1) the amount of

corporation tax attributable to any income or gain, there shall be taken

into account—

35

(a)   

deductions or expenses which would be allowable in the

computation of the taxpayer’s liability,

(b)   

a reasonable apportionment of allowable deductions or

expenses which relate partly to the transaction, arrangement or

asset from which the income or gain arises and partly to other

40

matters, and

(c)   

expenses of a company connected (within the meaning given by

section 839) with the taxpayer, in so far as reasonably

attributable to the income or gain.

(4)   

In this section and section 798B “trade income” means—

45

(a)   

income or profits chargeable to tax under Case I, II or V of

Schedule D,

 
 

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Part 3 — Income tax, corporation tax and capital gains tax
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(b)   

profits of a Schedule A business computed in same way as the

profits of a trade in accordance with section 21A of ICTA,

(c)   

sums charged to tax under Case VI of Schedule D in accordance

with section 104 of ICTA, and

(d)   

any other income or profits which by a provision of ICTA is

5

chargeable to tax under, or computed in accordance with, Case

I of Schedule D;

   

but this section shall not apply in relation to income to which section

804C below applies.

798B    

Section 798A: special cases

10

(1)   

Where—

(a)   

a credit for foreign tax arises in connection with an asset, and

(b)   

the asset is in a hedging relationship with a derivative contract,

   

in the application of section 798A(2) the reference to the income arising

out of the asset shall be taken as a reference to the income arising out of

15

the asset and the derivative contract taken together (but taking account

of the income or loss from the derivative contract only in so far as

reasonably attributable to the hedging relationship).

(2)   

For the purposes of subsection (1)(b) an asset is in a hedging

relationship with a derivative contract if—

20

(a)   

the asset is acquired as a hedge of risk in connection with the

contract, or

(b)   

the contract is entered into as a hedge of risk in connection with

the asset;

   

and if an asset or a contract is wholly or partly designated as a hedge

25

for the purposes of a person’s accounts, that shall be conclusive for the

purpose of this subsection.

(3)   

Where royalties (as defined in arrangements having effect by virtue of

section 788) are paid in respect of an asset in more than one jurisdiction

outside the United Kingdom, for the purposes of section 798A(2)—

30

(a)   

royalty income arising in more than one jurisdiction (other than

the United Kingdom) in a year of assessment in respect of that

asset shall be treated as income arising from a single

transaction, arrangement or asset, and

(b)   

credits available for foreign tax in respect of the royalty income

35

shall be aggregated accordingly.

(4)   

If a person (“A”) carrying on a trade giving rise to trade income enters

into a scheme or arrangement with another person (“B”) a main

purpose of which is to alter the effect of section 798A in relation to A,

income received in pursuance of the scheme or arrangement shall be

40

treated for the purposes of section 798A as trade income of B (and not

as income of A).

(5)   

Where—

(a)   

transactions, arrangements or assets are treated by a taxpayer as

a series or group (the “portfolio”),

45

(b)   

a number of credits for foreign tax arise in respect of the

portfolio, and

(c)   

either—

 
 

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 12 — International matters

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(i)   

it is not reasonably practicable to prepare a separate

computation of income or gain for the purposes of

section 798A(2) in respect of each transaction,

arrangement or asset, or

(ii)   

a separate computation of income or gain in respect of

5

each transaction, arrangement or asset for the purposes

of section 798A(2) would not, compared with an

aggregated computation, make a material difference to

the amount of credit for foreign tax which is allowable,

   

the income or gains arising from the portfolio, or part of the portfolio,

10

may be aggregated and apportioned for the purposes of section 798A(2)

in a fair and reasonable manner.

798C    

Disallowed credit: use as deduction

(1)   

This section applies where the application of section 796(1) or 797(1)

prevents an amount of credit for foreign tax from being allowable

15

against income tax or corporation tax.

(2)   

The amount of disallowed credit may be taken into account as a

deduction in computing the taxpayer’s liability for income tax or

corporation tax, but only in so far as it does not exceed the amount of

any loss attributable to the income or gain in respect of which the

20

foreign tax was paid (for which purpose payment of the foreign tax is

to be taken into account, despite section 795(2)).”

(2)   

In section 803 of ICTA (underlying tax reflecting interest on loans)—

(a)   

in subsection (1)(d) for “section 798” substitute “section 798A”, and

(b)   

subsections (4) to (9) shall cease to have effect.

25

(3)   

Subsections (1) and (2) shall have effect—

(a)   

for the purposes of corporation tax, in relation to a credit for foreign tax

which relates to—

(i)   

a payment of foreign tax on or after 16th March 2005, or

(ii)   

income received on or after that date in respect of which foreign

30

tax has been deducted at source, and

(b)   

for the purposes of income tax, in relation to a credit for foreign tax

which relates to—

(i)   

a payment of foreign tax on or after 6th April 2005, or

(ii)   

income received on or after that date in respect of which foreign

35

tax has been deducted at source.

(4)   

In subsection (3) a reference to tax deducted at source is a reference to tax

deducted or treated as deducted from income, or treated as paid in respect of

income.

(5)   

In respect of dividends paid before 1st January 2006, the effect of section 798 or

40

798A in respect of credit for foreign tax shall be disregarded to the extent that

it would otherwise reduce the allowable credit to less than 50% of the foreign

tax; but this subsection shall not apply to tax paid as part of a scheme or

arrangement designed or entered into for the purposes of causing this

subsection to apply.

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Chapter 12 — International matters

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119     

Schemes and arrangements designed to increase relief

(1)   

After section 804 of ICTA insert—

“804ZA  

Schemes and arrangements designed to increase relief

(1)   

If the Board consider, on reasonable grounds, that conditions A to D are

or may be satisfied in relation to any income or chargeable gain taken

5

or to be taken into account for the purposes of determining a person’s

liability to tax in a chargeable period, they may give the person a notice

under this section.

(2)   

Condition A is that, in the case of the person, there is in respect of the

income or gain an amount of foreign tax for which, under any

10

arrangements, credit is allowable against United Kingdom tax for that

chargeable period.

(3)   

Condition B is that there is a scheme or arrangement the main purpose,

or one of the main purposes, of which is to cause an amount of foreign

tax to be taken into account in the case of the person for that chargeable

15

period.

(4)   

Condition C is that the scheme or arrangement is a prescribed scheme

or arrangement.

(5)   

Condition D is that the amount referred to in subsection (6) is more than

a minimal amount.

20

(6)   

The amount is the aggregate of—

(a)   

the aggregate amount of the claims for credit that the person has

made, or is in a position to make, for the chargeable period; and

(b)   

for all the persons connected to that person, the aggregate

amount of the claims for credit that the connected person has

25

made, or is in a position to make, for a corresponding

chargeable period.

(7)   

A chargeable period of person (“A”) corresponds to a chargeable period

of another person (“B”) if at least one day of A’s chargeable period falls

within B’s chargeable period.

30

(8)   

A notice under this section is a notice—

(a)   

informing the person of the Board’s view under subsection (1),

(b)   

specifying the chargeable period in relation to which the Board

formed that view,

(c)   

if the amount of foreign tax considered by the Board to satisfy

35

condition B is an amount of underlying tax, specifying the body

corporate resident in a territory outside the United Kingdom

whose payment of foreign tax is relevant to that underlying tax,

and

(d)   

informing the person that as a consequence section 804ZB has

40

effect in relation to him.

(9)   

A notice under this section may specify the adjustments of a person’s

tax return that, in the view of the Board, fall to be made by him under

section 804ZB(2).

(10)   

The adjustments specified may, in a case where the notice given to a

45

person specifies a body corporate resident outside the United

 
 

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 12 — International matters

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Kingdom, include treating the body corporate as having paid or being

liable to pay only so much foreign tax as would have been allowed to it

as a credit if it were resident in the United Kingdom and a notice under

this section had been given to it as regards an amount of foreign tax.

(11)   

Schedule 28AB makes provision about what constitutes a prescribed

5

scheme or arrangement.

(12)   

In this section and sections 804ZB and 804ZC “tax return” means—

(a)   

a return under section 8, 8A or 12AA of the Management Act, or

(b)   

a company tax return;

   

and “company tax return” means the return required to be delivered

10

pursuant to a notice under paragraph 3 of Schedule 18 to the Finance

Act 1998, as read with paragraph 4 of that Schedule.

804ZB   

Effect of notice under section 804ZA

(1)   

The following provisions of this section apply in relation to a person

if—

15

(a)   

a notice under section 804ZA has been given to the person in

respect of a chargeable period specified in the notice, and

(b)   

the chargeable period specified is a chargeable period in

relation to which conditions A to D of section 804ZA are

satisfied.

20

(2)   

The person must in his tax return for the period make (or must amend

his return for the period so as to make) such adjustments as are

necessary for counteracting the effects of the scheme or arrangement in

that period that are referable to the purpose referred to in condition B

of section 804ZA.

25

804ZC   

Notices under section 804ZA: further provision

(1)   

Subsection (2) applies if the Board give a notice to a person under

section 804ZA before the person has made his tax return for the

chargeable period specified in the notice.

(2)   

If the person makes a tax return for that period before the end of the

30

period of 90 days beginning with the day on which the notice is given,

he may—

(a)   

make a tax return that disregards the notice, and

(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

35

complying with the notice.

(3)   

If a person has made a tax return for a chargeable period, the Board

may only give him a notice under section 804ZA in relation to that

period if a notice of enquiry has been given to him in respect of his tax

return for that period.

40

(4)   

After any enquiries into the person’s tax return for that period have

been completed, the Board may only give him a notice under section

804ZA in relation to that period if the requirements in subsections (5)

and (7) are satisfied.

(5)   

The first requirement is that at the time the enquiries were completed,

45

the Board could not have been reasonably expected, on the basis of the

information made available to them or to an officer of theirs before that

 
 

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time, to have been aware that the circumstances were such that a notice

under section 804ZA could have been given to the person in relation to

that period.

(6)   

For the purposes of subsection (5)—

(a)   

section 29(6) and (7) of the Management Act (information made

5

available) applies as it applies for the purposes of section 29(5),

and

(b)   

paragraph 44(2) and (3) of Schedule 18 to the Finance Act 1998

applies as it applies for the purposes of paragraph 44(1).

(7)   

The second requirement is that—

10

(a)   

the person was requested to produce, provide or furnish

information during an enquiry into the return for that period,

and

(b)   

if the person had duly complied with the request, the Board

could have been reasonably expected to give the person a notice

15

under section 804ZA in relation to that period.

(8)   

If a person is given a notice under section 804ZA in relation to a

chargeable period after having made a tax return for that period, the

person 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

20

with the day on which the notice is given.

(9)   

If the notice under section 804ZA is given to the person after he has

been given a notice of enquiry in respect of his tax return for the period,

no closure notice may be given in relation to his tax return until—

(a)   

the end of the period of 90 days beginning with the day on

25

which the notice under section 804ZA is given, or

(b)   

the earlier amendment of the return for the purpose of

complying with the notice.

(10)   

If the notice under section 804ZA is given to the person after any

enquiries into the return for the period are completed, no discovery

30

assessment may be made as regards the income or chargeable gain to

which the notice relates until—

(a)   

the end of the period of 90 days beginning with the day on

which the notice under section 804ZA is given, or

(b)   

the earlier amendment of the return for the purpose of

35

complying with the notice.

(11)   

Subsections (2)(b) and (8) do not prevent a person’s tax return for a

chargeable period becoming incorrect if—

(a)   

a notice under section 804ZA is given to the person in relation

to that period,

40

(b)   

the return is not amended in accordance with subsection (2)(b)

or (8) for the purpose of complying with the notice, and

(c)   

the return ought to have been so amended.

(12)   

In this section—

“closure notice” means a notice under—

45

(a)   

section 28A or 28B of the Management Act, or

(b)   

paragraph 32 of Schedule 18 to the Finance Act 1998;

“discovery assessment” means an assessment under—

 
 

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(a)   

section 29 of the Management Act, or

(b)   

paragraph 41 of Schedule 18 to the Finance Act 1998;

“notice of enquiry” means a notice under—

(a)   

section 9A or 12AC of the Management Act, or

(b)   

paragraph 24 of Schedule 18 to the Finance Act 1998.”

5

(2)   

Schedule 8 (which contains a Schedule to be inserted after Schedule 28AA to

ICTA) has effect.

(3)   

This section and Schedule 8 have effect in relation to a credit for foreign tax

which relates to—

(a)   

a payment of foreign tax on or after the commencement date, or

10

(b)   

income received on or after the commencement date in respect of which

foreign tax has been deducted at source.

(4)   

In subsection (3) a reference to tax deducted at source is a reference to tax

deducted or treated as deducted from income, or treated as paid in respect of

income.

15

(5)   

In subsection (3) “the commencement date” means—

(a)   

so far as the amount of the credit for foreign tax is affected by a scheme

or arrangement to which paragraph 5 of Schedule 28AB to ICTA (as

inserted by Schedule 8) applies, 10th February 2005, and

(b)   

so far as the amount of the credit for foreign tax is affected by any other

20

prescribed scheme or arrangement (within the meaning of Schedule

28AB), 16th March 2005.

Controlled foreign companies

120     

Territories with a lower level of taxation: reduction of amount of local tax

(1)   

Section 750 of ICTA (controlled foreign companies: territories with a lower

25

level of taxation) is amended as follows.

(2)   

In subsection (1) after “if” insert “, after giving effect to subsections (1A) and

(1B) below,”.

(3)   

After subsection (1) insert—

“(1A)   

If in the case of that accounting period there is any income, or any

30

income and any expenditure, of the company—

(a)   

which is brought into account in determining the profits of the

company in respect of which tax is paid under the law of that

territory, but

(b)   

which does not also fall to be brought into account in

35

determining the chargeable profits of the company,

   

the local tax shall be treated for the purposes of this Chapter as reduced

to what it would have been had that income and any such expenditure

not been so brought into account.

(1B)   

If—

40

(a)   

under the law of that territory any tax (“the company’s tax”)

falls to be paid by the company in respect of profits of the

company arising in that accounting period,

 
 

 
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