Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Finance (No. 2) Bill

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
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(b)
in subsection (4), for “on trusts” substitute “in a trust”.
(5)
In section 35—
(a)
in subsection (1), for “those trusts are qualifying trusts if they are”
substitute “the property is held in qualifying trust if the trust is”,
(b)
in that subsection, for paragraph (a) substitute—
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“(a)
constituted by the appointment of an executor dative to
administer an intestate estate where the relevant minor
has a right to any of the estate,”, and
(c)
in subsection (2), before “which” insert “the purposes of”.
(6)
In section 36, for “the trusts on which it is held are qualifying trusts” substitute
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“it is held in qualifying trust”.
(7)
In section 37—
(a)
in subsection (1), for paragraph (b) substitute—
“(b)
property held in the trust in relation to which the
election is made is held in qualifying trust.”,
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(b)
in subsection (3)(b), for “the trusts in relation to which the election is
made are qualifying trusts” substitute “property held in the trust in
relation to which the election is made is held in qualifying trust”, and
(c)
in subsection (5), for paragraph (b) substitute—
“(b)
property held in the trust in relation to which the
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election is made ceases to be held in qualifying trust,”.
(8)
Sections 34(3) and 35(4) do not apply to Scotland
(9)
Unless otherwise modified by this section, any reference to anything being
held on trusts is to be construed as a reference to it being held in trust.
(10)
Unless otherwise modified or disapplied by this section, any reference to trusts
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is to be construed as a reference to a trust or the trust (as appropriate).
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Penalties under TMA 1970
(1)
Section 98 of TMA 1970 (special returns, etc) is amended as follows.
(2)
In the first column of the table insert at the appropriate place—
“section 40(1) of the Finance Act 2005”.
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(3)
In the second column of the table insert at the appropriate place—
“section 37(3) of the Finance Act 2005;”, and
“section 37(6) of the Finance Act 2005;”.
(4)
For the purposes of that section, any information, statements or declarations
given or made jointly by trustees and a vulnerable person are to be treated as
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given or made by the trustees.
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Consequential amendments
(1)
In section 687(3) of ICTA (payments under discretionary trusts: amounts to be
set off against income tax assessable on trustees in respect of tax credit), after
paragraph (k) insert—
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“(l)
the amount of any income tax determined in accordance with
section 26 of the Finance Act 2005.”

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Alternative finance arrangements
31

(2)
In Schedule 4B to TCGA 1992 (transfers of value by trustees linked with trustee
borrowing), in paragraph 3(2), after “in that year” insert “(otherwise than by
virtue of section 31 of the Finance Act 2005)”.
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Commencement
This Chapter has effect for the tax year beginning on 6th April 2004 and
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subsequent tax years.
Chapter 5
Alternative finance arrangements
Introductory
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Alternative finance arrangements
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(1)
In this Chapter “alternative finance arrangements” means arrangements falling
within section 47 or 49.
(2)
In this Chapter “financial institution” means—
(a)
a bank as defined by section 840A of ICTA,
(b)
a building society within the meaning of the Building Societies Act 1986
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(c. 53),
(c)
a wholly-owned subsidiary of a bank within paragraph (a) or a
building society within paragraph (b),
(d)
a person authorised by a licence under Part 3 of the Consumer Credit
Act 1974 (c. 39) to carry on a consumer credit business or consumer hire
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business within the meaning of that Act, or
(e)
a person authorised in a jurisdiction outside the United Kingdom to
receive deposits or other repayable funds from the public and to grant
credits for its own account.
(3)
For the purposes of subsection (2)(c) a company is a wholly-owned subsidiary
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of a bank or building society (“the parent”) if it has no members except the
parent and the parent’s wholly-owned subsidiaries or persons acting on behalf
of the parent or the parent’s wholly-owned subsidiaries.
Arrangements giving rise to alternative finance return
47
Alternative finance arrangements: alternative finance return
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(1)
Subject to subsection (3) and section 52, arrangements fall within this section if
they are arrangements entered into between two persons under which—
(a)
a person (“X”) purchases an asset and sells it, either immediately or in
circumstances in which the conditions in subsection (2) are met, to the
other person (“Y”),
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(b)
the amount payable by Y in respect of the sale (“the sale price”) is
greater than the amount paid by X in respect of the purchase (“the
purchase price”),
(c)
all or part of the sale price is not required to be paid until a date later
than that of the sale, and
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Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Alternative finance arrangements
32

(d)
the difference between the sale price and the purchase price equates, in
substance, to the return on an investment of money at interest.
(2)
The conditions referred to in subsection (1)(a) are—
(a)
that X is a financial institution, and
(b)
that the asset referred to in that provision was purchased by X for the
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purpose of entering into arrangements falling within this section.
(3)
Arrangements do not fall within this section unless at least one of the parties is
a financial institution.
(4)
For the purposes of this section “the effective return” is so much of the sale
price as exceeds the purchase price.
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(5)
In this Chapter references to “alternative finance return” are to be read in
accordance with subsections (6) and (7).
(6)
If under arrangements falling within this section the whole of the sale price is
paid on one day, that sale price is to be taken to include alternative finance
return equal to the effective return.
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(7)
If under arrangements falling within this section the sale price is paid by
instalments, each instalment is to be taken to include alternative finance return
equal to the appropriate amount.
(8)
The appropriate amount, in relation to any instalment, is an amount equal to
the interest that would have been included in the instalment if—
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(a)
the effective return were the total interest payable on a loan by X to Y
of an amount equal to the purchase price,
(b)
the instalment were a part repayment of the principal with interest, and
(c)
the loan were made on arm’s length terms and accounted for under
generally accepted accounting practice.
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48
Arrangements within section 47: foreign currency and non-residents
(1)
If alternative finance return is paid in a currency other than sterling—
(a)
by or to a person other than a company, and
(b)
otherwise than for the purposes of a trade, profession or vocation or a
property business,
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then, as respects that person, the effective return for the purposes of section 47
and the appropriate amount for the purposes of subsection (7) of that section
are to be calculated in the other currency and the amount of each payment of
alternative finance return is to be translated into sterling at a spot rate of
exchange for the day on which the payment is made.
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(2)
In section 148 of FA 2003 (meaning of “permanent establishment”) after
subsection (5) insert—
“(5A)
Where alternative finance return as defined by subsection (5) of section
47 of the Finance Act 2005 is paid to a company that is not resident in
the United Kingdom, the company is not regarded as having a
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permanent establishment in the United Kingdom merely by virtue of
anything done for the purposes of the arrangements falling within that
section by the other party to the arrangements or by any other person
acting for the company in relation to the arrangements.”
(3)
In section 127 of FA 1995 (persons not treated as UK representatives) in
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Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Alternative finance arrangements
33

subsection (1), at the end of paragraph (c) but before the “and” insert—
“(cc)
where the income consists of alternative finance return, as
defined by subsection (5) of section 47 of the Finance Act 2005,
the other party to the arrangements falling within that section or
any other person acting for the non-resident in relation to the
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arrangements;”.
Arrangements giving rise to profit share return
49
Alternative finance arrangements: profit share return
(1)
Subject to section 52, arrangements fall within this section if they are
arrangements under which—
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(a)
a person (“the depositor”) deposits money with a financial institution,
(b)
the money, together with money deposited with the institution by
other persons, is used by the institution with a view to producing a
profit,
(c)
from time to time the institution makes or credits a payment to the
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depositor, in proportion to the amount deposited by him, out of any
profit resulting from the use of the money, and
(d)
the payments so made or credited by the institution equate, in
substance, to the return on an investment of money at interest.
(2)
In this Chapter references to “profit share return” are references to amounts
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paid or credited as mentioned in subsection (1)(c) by a financial institution
under arrangements falling within this section.
Treatment of alternative finance arrangements
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Treatment of alternative finance arrangements: companies
(1)
Where a company is a party to arrangements falling within section 47, Chapter
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2 of Part 4 of FA 1996 (loan relationships) has effect in relation to the
arrangements as if—
(a)
the arrangements were a loan relationship to which the company is a
party,
(b)
any amount which is the purchase price for the purposes of section
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47(1)(b) were the amount of a loan made (as the case requires) to the
company by, or by the company to, the other party to the arrangements,
and
(c)
alternative finance return payable to or by the company under the
arrangements were interest payable under that loan relationship.
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(2)
Where a company is a party to arrangements falling within section 49, Chapter
2 of Part 4 of FA 1996 (loan relationships) has effect in relation to the
arrangements as if—
(a)
the arrangements were a loan relationship to which the company is a
party,
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(b)
any amount deposited under the arrangements were—
(i)
in relation to a company which is the depositor under the
arrangements, the amount of a loan made by the company to
the financial institution, and

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Alternative finance arrangements
34

(ii)
in relation to a company which is the financial institution with
which the depositor deposits money under the arrangements,
the amount of a loan made to it by the depositor, and
(c)
profit share return payable to or by the company under the
arrangements were interest payable under that loan relationship.
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(3)
Accordingly, references in the Corporation Tax Acts to a loan relationship
include references to alternative finance arrangements.
(4)
In subsection (2)(b), “depositor” is to be read in accordance with section
49(1)(a).
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Treatment of alternative finance arrangements: persons other than companies
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(1)
Alternative finance return or profit share return is to be treated for the
purposes of ITTOIA 2005 as if it were interest.
(2)
Sections 353 to 368 of ICTA (relief for payments of interest) have effect as if—
(a)
arrangements falling within section 47 involved the making of a loan,
and
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(b)
alternative finance return were interest;

and section 366 (information) shall have effect accordingly.
(3)
Subsections (4) and (5) apply to the extent that a person other than a company
is a party to alternative finance arrangements for the purposes of a trade,
profession or vocation carried on by him or for the purposes of a property
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business of his.
(4)
Alternative finance return or profit share return paid by him is to be treated as
an expense of the trade, profession or vocation or of the property business.
(5)
Section 58 of ITTOIA 2005 (incidental costs of obtaining finance) has effect as
if—
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(a)
references to a loan included references to alternative finance
arrangements, and
(b)
references to interest included references to alternative finance return
or profit share return.
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Provision not at arm’s length
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(1)
This section applies where—
(a)
arrangements would apart from this section fall within section 47 or
section 49,
(b)
paragraph 1(2) of Schedule 28AA to ICTA (provision not at arm’s
length) requires the profits and losses of any person who is a party to
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the arrangements to be computed for tax purposes as if the arm’s length
provision referred to in paragraph 1(2)(a) of that Schedule had been
made or imposed instead of the arrangements, and
(c)
any person who is for the purposes of that Schedule an affected person
is entitled to—
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(i)
relevant return, or
(ii)
an amount representing relevant return,

but is not subject to income tax or corporation tax, or any
corresponding tax under the law of a territory outside the United
Kingdom, on the relevant return or the amount representing it.
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Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Alternative finance arrangements
35

(2)
In this section “relevant return”, in relation to any arrangements, means any
amount that would be alternative finance return or profit share return if the
arrangements were alternative finance arrangements.
(3)
The arrangements are not to be regarded as falling within section 47 or section
49.
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(4)
Where the arrangements would, but for subsection (3), fall within section 47,
the person paying relevant return under the arrangements is not entitled—
(a)
to any deduction in computing profits or gains for the purposes of
income tax or corporation tax, or
(b)
to any deduction against total income or, as the case may be, total
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profits,

in respect of the relevant return.
(5)
Where the arrangements would, but for subsection (3), fall within section 49,
the person paying relevant return under the arrangements is not entitled—
(a)
to any deduction in computing profits or gains for the purposes of
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income tax or corporation tax, or
(b)
to any deduction against total income or, as the case may be, total
profits,

in respect of the relevant return.
(6)
Where the person paying relevant return under the arrangements is a
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company, an amount may not be surrendered by way of group relief if a
deduction in respect of it is prohibited by subsection (4) or (5).
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Treatment of section 47 arrangements: sale and purchase of asset
(1)
Where under arrangements falling within section 47 an asset is sold by one
party to the arrangements to the other party, the effective return shall be
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excluded in determining for the purposes of the Tax Acts (apart from that
section) and of TCGA 1992 the consideration for the sale and purchase of the
asset.
(2)
Subsection (1) does not affect the operation of any provision of the Tax Acts or
TCGA 1992 which provides that the consideration for a sale or purchase is to
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be taken for any purpose to be an amount other than the actual consideration.
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Section 49 arrangements: profit share return not to be treated as distribution
Profit share return is not to be treated by virtue of section 209(2)(e)(iii) of ICTA
as being a distribution for the purposes of the Corporation Tax Acts.
Supplementary
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Further provisions
Schedule 2 (which contains further provision about the treatment of alternative
finance arrangements for the purposes of income tax, corporation tax and
capital gains tax) has effect.