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Finance (No. 2) Bill


Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 6 — Film relief

47

 

67      

Consequences of a chargeable event: exit event X or Y

(1)   

This section applies where a chargeable event occurs in relation to C by virtue

of section 66 and the exit event in question is exit event X or Y.

(2)   

C is to be treated for corporation tax purposes as receiving, immediately before

the exit event, an amount of income from the relevant trade equal to the

5

chargeable amount.

(3)   

Where the exit event is exit event X, an amount equal to the chargeable amount

is to be treated for corporation tax purposes as a loss of the relevant trade

brought forward under section 393 of ICTA (relief of trading losses against

future trading profits) to the exit accounting period.

10

(4)   

But that loss may only be set off against income which—

(a)   

derives directly from the rights to guaranteed income under the

guaranteed income agreement, and

(b)   

is brought into account by C for the relevant trade after the exit event,

   

and, in particular, may not be set off against the income which C is treated as

15

receiving under subsection (2) by virtue of the exit event.

(5)   

The “chargeable amount” is the value immediately before the exit event of the

rights to guaranteed income under the guaranteed income agreement

calculated in accordance with section 70.

(6)   

Any income received in, or losses brought forward to, an accounting period by

20

virtue of this section are in addition to any other income received in, or losses

brought forward to, that period.

(7)   

In this section “exit accounting period” means the accounting period of C in

which the exit event occurs.

(8)   

This section is deemed to have come into force on 2nd December 2004.

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68      

Exit event Z: a relevant disposal at an undervalue

(1)   

This section applies for the purposes of—

section 66(4)(c) (definition of exit event Z),

section 69 (consequences of a chargeable event: exit event Z), and

section 70 (valuation of the “disposed rights”).

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(2)   

A “relevant disposal” means a disposal by C directly or indirectly to a third

party (“TP”) of rights to guaranteed income under the guaranteed income

agreement.

(3)   

The “disposed rights” are the rights to guaranteed income under the

guaranteed income agreement which are the object of the relevant disposal.

35

(4)   

A relevant disposal is at an undervalue where the amount of the disposal

consideration (“V1”) is less than the value of the disposed rights immediately

before the disposal calculated in accordance with section 70 (“V2”).

(5)   

It does not matter whether the disposed rights are disposed of alone or as part

of a larger disposal.

40

(6)   

Where the disposed rights are disposed of as part of a larger disposal, the

amount of the disposal consideration for the larger disposal which is

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 6 — Film relief

48

 

attributable to the relevant disposal is to be determined on such basis as is just

and reasonable.

(7)   

In this section—

“disposal” means any surrender, giving up, assignment or other disposal;

“disposal consideration”, in relation to a disposal, means the amount of

5

the consideration for the disposal brought into account as income of the

relevant trade by C at the date of that disposal;

“third party” means a person who is not the principal company or a 75%

subsidiary of the principal company.

(8)   

This section is deemed to have come into force on 2nd December 2004.

10

69      

Consequences of a chargeable event: exit event Z

(1)   

This section applies where a chargeable event occurs in relation to C by virtue

of section 66 and the exit event in question is exit event Z.

(2)   

C is to be treated for corporation tax purposes as receiving, immediately before

the exit event, an amount of income from the relevant trade equal to the

15

chargeable amount.

(3)   

Where TP is within the charge to corporation tax, an amount equal to the

chargeable amount is to be treated for corporation tax purposes as a loss of TP’s

trade brought forward under section 393 of ICTA (relief of trading losses

against future trading profits) to the accounting period in which TP acquires

20

the disposed rights.

(4)   

Where TP is within the charge to income tax, an amount equal to the

chargeable amount is to be treated for income tax purposes as a loss of TP’s

trade brought forward under section 385 of ICTA (carry-forward against

subsequent profits) to the year of assessment in which TP acquires the

25

disposed rights.

(5)   

But a loss brought forward under subsection (3) or (4) may only be set off

against income which derives directly from the disposed rights.

(6)   

The “chargeable amount” is the difference between V1 and V2.

(7)   

Any income received in, or losses brought forward to, an accounting period by

30

virtue of this section are in addition to any other income received in, or losses

brought forward to, that period.

(8)   

This section is deemed to have come into force on 2nd December 2004.

70      

Valuation of the “rights to guaranteed income” and “disposed rights”

(1)   

For the purposes of section 67, the value immediately before the exit event of

35

the rights to guaranteed income under the guaranteed income agreement is

calculated as follows—

   

   

Step 1

   

Find the amount of each payment of income which at that time the guaranteed

40

income agreement is designed to secure is received by C but which at that time

has not been brought into account for the relevant trade by C (“RI”).

   

Step 2

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 6 — Film relief

49

 

   

For each payment find the day for payment which the agreement is designed

to secure (“the payment day”).

   

Step 3

   

For each payment find the number of days in the period (“P”) which—

(a)   

begins with the day on which the exit event occurs, and

5

(b)   

ends with the payment day.

   

Step 4

   

Calculate the net present value of each payment (“NPVRI”) by applying the

following formula—equation: over[times[char[R],char[I]],power[id[plus[num[1.0000000000000000,"1"],char[T]]],

char[i]]]

   

where—

10

T is the temporal discount rate, and

i is the number of days in P divided by 365.

   

Step 5

   

Add together each amount of NPVRI determined under step 4.

(2)   

For the purposes of section 68, in relation to a relevant disposal, the value of

15

the disposed rights immediately before the disposal is calculated as follows—

   

   

Step 1

   

Find the amount of each payment of income which at that time the guaranteed

income agreement is designed to secure is received by C by virtue of the

20

disposed rights but which at that time has not been brought into account for

the relevant trade by C (“DI”).

   

Step 2

   

For each payment find the day for payment which the agreement is designed

to secure (“the payment day”).

25

   

Step 3

   

For each payment find the number of days in the period (“P”) which—

(a)   

begins with the day on which the relevant disposal occurs, and

(b)   

ends with the payment day.

   

Step 4

30

   

Calculate the net present value of each payment (“NPVDI”) by applying the

following formula—equation: over[times[char[D],char[I]],power[id[plus[num[1.0000000000000000,"1"],char[T]]],

char[i]]]

   

where—

T is the temporal discount rate, and

i is the number of days in P divided by 365.

35

   

Step 5

   

Add together each amount of NPVDI determined under step 4.

(3)   

For the purposes of this section the “temporal discount rate” is 3.5% or such

other rate as may be specified by regulations made by the Treasury.

(4)   

Regulations under subsection (3) may make such provision as is mentioned in

40

subsection (3)(b) to (f) of section 178 of FA 1989 (power of Treasury to set rates

of interest).

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership

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(5)   

Subsection (5) of that section (power of Inland Revenue to specify rate by order

in certain circumstances) applies in relation to regulations under subsection (3)

as it applies in relation to regulations under that section.

(6)   

This section is deemed to have come into force on 2nd December 2004.

71      

Meaning of “company” and related terms

5

(1)   

For the purposes of sections 66 to 70, two companies are deemed to be

members of a group of companies if—

(a)   

one is the 75% subsidiary of the other, or

(b)   

both are 75% subsidiaries of a third company.

(2)   

For those purposes, the “principal company” of a group of companies means a

10

company—

(a)   

which is not a 75% subsidiary of another company to whom group

relief would be available under section 402 of ICTA if it were to make a

group claim under that section in respect of any trading losses

surrendered by C, and

15

(b)   

to whom group relief would be available under section 402 of ICTA if

it were to make a group claim under that section in respect of any

trading losses surrendered by C.

(3)   

For the purposes of sections 66 to 70 and this section—

(a)   

a company is to be treated as a 75% subsidiary of another company if it

20

would be such a subsidiary of that company for the purposes of section

402 of ICTA (surrender of relief between members of group), and

(b)   

“company” has the same meaning as it has for the purposes of that

section.

(4)   

This section is deemed to have come into force on 2nd December 2004.

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Chapter 7

Avoidance involving partnership

Partners: restrictions on relief

72      

Removal of restrictions on interest relief

(1)   

In section 117 of ICTA (restriction on interest relief and loss relief for limited

30

partners)—

(a)   

in subsection (1)—

(i)   

omit “353,”, and

(ii)   

in paragraph (a) omit “, or of interest paid by him in connection

with the carrying on of a trade,”,

35

(b)   

in subsection (2), in the definition of “the aggregate amount”—

(i)   

omit “353,”, and

(ii)   

in paragraph (a) omit “, or of interest paid by him in connection

with carrying it on,”, and

(c)   

in that subsection, in the definition of “the appropriate time” omit “or

40

the interest paid”.

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership

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(2)   

In section 118ZB of that Act (limited liability partnerships: restriction on relief),

in subsection (2) omit “, or interest paid by him in connection with the carrying

on of a trade,”.

(3)   

In section 118ZE of that Act (restriction on relief for non-active partners), in

subsection (1) omit “353,” and “, or interest paid by him in connection with the

5

carrying on of a trade,”.

(4)   

In section 118ZF of that Act (meaning of “the aggregate amount”), in

subsection (1) omit “353,” and “, or of interest paid by him in connection with

carrying it on,”.

(5)   

In section 118ZG of that Act (meaning of “the individual’s contribution to the

10

trade”), in subsection (2)(b)(ii) omit “353,” and “, or of interest paid by him in

connection with carrying it on,”.

(6)   

In section 118ZJ of that Act (commencement: the first restricted year)—

(a)   

in subsection (3) omit “353,” and “, and interest paid by him in

connection with carrying it on,”,

15

(b)   

in subsection (4)—

(i)   

omit “the sum of”, and

(ii)   

omit paragraph (b) and the word “and” immediately before it,

and

(c)   

in subsection (5) omit paragraph (b) and the word “and” immediately

20

before it.

(7)   

The amendments made by this section have effect in relation to the application

of section 117 of ICTA (including that section as applied by section 118ZB of

that Act) and section 118ZE of that Act in relation to—

(a)   

any loss sustained by an individual in a trade, or interest paid by him

25

in connection with the carrying on of a trade, in a year of assessment the

basis period for which begins on or after 2nd December 2004, and

(b)   

any post-announcement loss sustained by an individual in a trade, and

any post-announcement interest paid by him in connection with the

carrying on of a trade, in a straddling year of assessment.

30

(8)   

For the purposes of this section—

“basis period” means the basis period given by Chapter 15 of Part 2 of

ITTOIA 2005, as applied by section 853 of that Act, except that the basis

period for a year of assessment to which section 199(1) of that Act

applies is to be taken to be the period beginning with the date when the

35

individual first carried on the trade and ending with the end of the year

of assessment;

“post-announcement loss”, in relation to a straddling year of assessment,

means the loss (if any) sustained by the individual in the trade in the

period which—

40

(a)   

begins with 2nd December 2004, and

(b)   

ends with the end of the basis period for that straddling year of

assessment;

“post-announcement interest”, in relation to a straddling year of

assessment, means any interest paid by the individual, in connection

45

with carrying on the trade, in the period which—

(a)   

begins with 2nd December 2004, and

(b)   

ends with the end of the basis period for that straddling year of

assessment;

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership

52

 

“straddling year of assessment” means a year of assessment the basis

period for which begins before and includes 2nd December 2004.

(9)   

In the definition of “post-announcement loss” in subsection (8), the reference to

the loss sustained by the individual in the trade in a period is a reference to his

share of any losses of the partnership arising for that period from the trade,

5

and—

(a)   

the losses of the partnership arising for that period from the trade are

to be computed in the same way as if the period were one for which

profits and losses had to be computed for the purposes of section 849 of

ITTOIA 2005, and

10

(b)   

the individual’s share of the losses is to be determined according to his

interest in the partnership during that period.

(10)   

In subsection (9) the references to “the partnership” are to the partnership as a

member of which the individual carries on the trade.

(11)   

In relation to years of assessment which are before the year 2005-06,

15

subsections (7) to (9) have effect as if—

(a)   

in subsection (8) for the definition of “basis period” there were

substituted—

““basis period” means the basis period given by sections 60

to 63 of ICTA as applied by section 111(4) and (5) of that

20

Act, except that the basis period for a year of assessment

to which section 61(1) of that Act applies is to be taken

to be the period beginning with the date when the

individual first carried on the trade and ending with the

end of the year of assessment;”, and

25

(b)   

the reference in subsection (9)(a) to section 849 of ITTOIA 2005 were a

reference to section 111(2) of ICTA.

(12)   

The amendments made by this section are deemed to have come into force on

2nd December 2004.

73      

Meaning of “contribution to the trade”

30

(1)   

After section 118ZM of ICTA insert—

“Partners: meaning of “contribution to the trade”

118ZN   

Partners: meaning of “contribution to the trade”

(1)   

This section applies for the purposes of the application of any of the

following provisions (“the relevant provisions”)—

35

(a)   

section 117 (restriction on relief for limited partners),

(b)   

that section as applied by section 118ZB in relation to a member

of a limited liability partnership, and

(c)   

section 118ZE (restriction on relief for non-active partners),

   

to an amount which may be given to an individual under section 380 or

40

381 in respect of a relevant loss sustained by him in a trade (“the

relevant trade”).

(2)   

The Board may by regulations provide that, for those purposes, any

amount of a description specified in the regulations is to be excluded

 
 

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership

53

 

when computing the amount of the individual’s contribution to the

relevant trade at any time for the purposes of the relevant provisions.

(3)   

Regulations under this section may—

(a)   

make provision having effect before the date on which the

regulations are made,

5

(b)   

make such supplementary, incidental, consequential or

transitional provision as appears to the Board to be necessary or

expedient, and

(c)   

make different provision for different cases or different

purposes.

10

(4)   

The provision mentioned in subsection (3)(b) may include provision

amending or repealing any provision of an Act passed before the

passing of the Finance Act 2005.

(5)   

No regulations may be made under this section unless a draft has been

laid before and approved by a resolution of the House of Commons.

15

118ZO   

Meaning of “relevant loss” in section 118ZN

(1)   

For the purposes of section 118ZN a “relevant loss” means—

(a)   

a loss sustained by the individual in the relevant trade in a year

of assessment the basis period for which begins on or after 2nd

December 2004, or

20

(b)   

a post-announcement loss sustained by the individual in the

relevant trade in a straddling year of assessment.

(2)   

For the purposes of this section—

“basis period” means the basis period given by Chapter 15 of Part

2 of ITTOIA 2005, as applied by section 853 of that Act, except

25

that the basis period for a year of assessment to which section

199(1) of that Act applies is to be taken to be the period

beginning with the date when the individual first carried on the

relevant trade and ending with the end of the year of

assessment;

30

“post-announcement loss”, in relation to a straddling year of

assessment, means the loss (if any) sustained by the individual

in the relevant trade in the period which—

(a)   

begins with 2nd December 2004, and

(b)   

ends with the end of the basis period for that straddling

35

year of assessment;

“straddling year of assessment” means a year of assessment the

basis period for which begins before and includes 2nd

December 2004.

(3)   

In the definition of “post-announcement loss” in subsection (2), the

40

reference to the loss sustained by the individual in the relevant trade in

a period is a reference to his share of any losses of the partnership

arising for that period from the trade, and—

(a)   

the losses of the partnership arising for that period from the

trade are to be computed in the same way as if the period were

45

one for which profits and losses had to be computed for the

purposes of section 849 of ITTOIA 2005, and

 
 

 
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