Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Finance (No. 2) Bill

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership
58

78
Consequential amendments
(1)
In section 117(2) of ICTA (restriction on relief for limited partners)—
(a)
at the end of the definition of “the aggregate amount” insert—

“less the amount of any reclaimed relief at that time;”, and
(b)
after that definition insert—
5
““the amount of any reclaimed relief” at any time means
the total of any amounts at that time which the
individual has been treated as receiving under section
74 of the Finance Act 2005 (recovery of excess relief
given under section 380 or 381) as a result of the
10
application of that section of that Act to him in respect of
losses sustained by him in the trade;”.
(2)
In section 118ZF of ICTA (meaning of “the aggregate amount”)—
(a)
in subsection (1), after “subsection (2)” insert “, less the amount of any
reclaimed relief.”, and
15
(b)
after that subsection insert—
“(1A)
For the purposes of subsection (1) “the amount of any reclaimed
relief” means the total of any amounts which the individual has
been treated as receiving under section 74 of the Finance Act
2005 (recovery of excess relief given under section 380 or 381) as
20
a result of the application of that section of that Act to him in
respect of losses sustained by him in the trade.”
(3)
In section 121 of FA 2004 (definition of “the losses claimed”)—
(a)
at the end of subsection (1) insert—

“less the amount of any relevant reclaimed relief.”, and
25
(b)
after that subsection insert—
“(1A)
The “amount of any relevant reclaimed relief” means whichever
is the lesser of—
(a)
the total of any amounts which the individual has been
treated as receiving under section 74 of the Finance Act
30
2005 (recovery of excess relief given under section 380 or
381 of the Taxes Act 1988) as a result of the application
of that section of that Act to him in respect of losses
sustained by him in the trade, and
(b)
the total amount of any film-related losses sustained by
35
the individual in the trade in any eligible years of
assessment within the meaning of section 74 of the
Finance Act 2005 to the extent that they are losses in
respect of which he has at any time claimed relief as
described in paragraph (a) or (b) of subsection (1)
40
above.”
(4)
The amendments made by this section are deemed to have come into force on
2nd December 2004.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 7 — Avoidance involving partnership
59

Partners benefited by film relief
79
Meaning of “capital contribution to the trade”
(1)
After section 122 of FA 2004 insert—
"122A
Partners: meaning of “capital contribution to the trade”
(1)
This section applies for the purposes of section 119 where an individual
5
makes a relevant claim (within the meaning of subsection (1)(a) of that
section) in respect of a film-related loss sustained by him in a trade
carried on in partnership (“the relevant trade”).
(2)
The Board may by regulations provide that for the purposes of
determining under section 119—
10
(a)
whether an exit event within the meaning of subsection (2)(b) or
(c) of that section occurs on or after 2nd December 2004, and
(b)
where such an event occurs on or after that date, the chargeable
amount within the meaning of subsection (5) of that section,

any amount of a description specified in the regulations is to be
15
excluded when computing the amount of the individual’s capital
contribution to the relevant trade.
(3)
Regulations under this section may—
(a)
make provision having effect before the date on which the
regulations are made,
20
(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.
25
(4)
The provision mentioned in subsection (3)(b) may include provision
amending or repealing any provision of an Act passed before 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.”
30
(2)
In section 121 of FA 2004 (definition of “the individual’s capital contribution to
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”
35
substitute “, 121 and 122A”.
(4)
The amendments made by this section are deemed to have come into force on
2nd December 2004.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 8 — Accounting practice and related matters
60

Chapter 8
Accounting practice and related matters
80
Accounting practice and related matters
(1)
Schedule 4 (accounting practice and related matters) has effect.
(2)
In that Schedule—
5
Part 1 makes provision about bad debts and related matters;
Part 2 makes other provision connected with accounting practice.
(3)
Part 1 of the Schedule, so far as it amends provisions that have effect both for
income tax and corporation tax, has effect for the purposes of corporation tax
only.
10
(4)
Except as otherwise provided, the provisions of the Schedule have effect for
periods of account beginning on or after 1st January 2005.
81
Computation of profits: change of accounting basis
(1)
In section 64 of FA 2002 (computation of profits: adjustment on change of
basis), for subsection (3) (meaning of “relevant change of accounting
15
approach”) substitute—
“(3)
A “relevant change of accounting approach” means—
(a)
a change of accounting principle or practice that, in accordance
with generally accepted accounting practice, gives rise to a prior
period adjustment, or
20
(b)
a change from using UK generally accepted accounting practice
to using generally accepted accounting practice with respect to
accounts drawn up in accordance with international accounting
standards.”.
(2)
In paragraphs 4(3) and 5(2) of Schedule 22 to FA 2002 (adjustments treated as
25
arising on the last day of the first period of account for which the new basis is
adopted), for “last day” substitute “first day”.
(3)
The amendments in this section have effect for periods of account beginning on
or after 1st January 2005.
82
Change of accounting practice: deferment of transitional adjustments
30
(1)
This section applies where—
(a)
a company enters into a transaction on or after 14th December 2004,
otherwise than in the ordinary course of its business,
(b)
as a result of the transaction it incurs a loss in respect of a loan
relationship or derivative contract in respect of which, apart from this
35
section, a debit would fall to be brought into account for tax purposes
in a period of account beginning before 1st January 2005,
(c)
the sole or main purpose of the company in entering into the
transaction at the time it did was to enable it to bring a debit into
account for tax purposes in such a period, and
40
(d)
if the company had continued to hold the asset or liability representing
the loan relationship or derivative contract, as it was held immediately

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 8 — Accounting practice and related matters
61

before the transaction referred to in paragraph (a), in its first period of
account beginning on or after 1st January 2005, a debit would have
arisen in respect of the loan relationship or derivative contract in that
period that was a prescribed debit for the purposes of regulation 3 of
the Loan Relationship and Derivative Contracts (Change of Accounting
5
Practice) Regulations 2004 (S.I. 2004/3271) (debits not to be brought
into account until the company’s first period beginning on or after 1st
January 2006).
(2)
Where this section applies no such debit as is mentioned in subsection (1)(b)
shall be brought into account in the period of account mentioned there, but a
10
debit of the same amount shall instead be brought into account as if it were a
prescribed debit for the purposes of the regulation referred to in subsection
(1)(d) (even though the loss giving rise to the debit was incurred before 1st
January 2005).
(3)
In determining the sole or main purpose of a company for the purposes of
15
subsection (1)(c) regard shall be had to anything done by a connected company
that would be relevant for the purposes of that determination if done by the
company in question.

For this purpose companies are connected if they are connected persons within
the meaning of section 839 of ICTA.
20
(4)
For the purposes of subsection (1)(d) it shall be assumed that the loan
relationship or derivative contract has the same value at the beginning of the
company’s first period of account beginning on or after 1st January 2005 as it
had at the time of the transaction referred to in subsection (1)(a).
(5)
This section does not apply where the transaction is entered into in pursuance
25
of legally binding arrangements entered into before 14th December 2004.
(6)
In this section, references to a company entering into a transaction include a
reference to the company, or the directors of the company, taking a decision
about a loan relationship or derivative contract that affects its treatment for
accounting purposes (other than a decision to prepare some or all of the
30
company’s accounts in accordance with international accounting standards).
83
Application of accounting standards to securitisation companies
(1)
For the purposes of the Corporation Tax Acts as they apply to a securitisation
company in relation to a period of account—
(a)
beginning on or after 1st January 2005, and
35
(b)
ending before 1st January 2007,

generally accepted accounting practice shall be taken to be UK generally
accepted accounting practice as it applied for a period of account ending on
31st December 2004.
(2)
For the purposes of this section a “securitisation company” means a company
40
that is—
(a)
a note-issuing company,
(b)
an asset-holding company,
(c)
an intermediate borrowing company,
(d)
a warehouse company, or
45
(e)
a commercial paper funded company,

as defined below.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 8 — Accounting practice and related matters
62

(3)
A “note-issuing company” means a company in relation to which the following
conditions are met—
(a)
it is party as debtor to a capital market investment,
(b)
the securities that represent the capital market investment are issued
wholly or mainly to independent persons,
5
(c)
the capital market investment is part of a capital market arrangement,
and
(d)
the total value of the capital market investments made under that
capital market arrangement is at least £50 million.
(4)
An “asset-holding company” means a company—
10
(a)
whose business (apart from any incidental activities) consists in
acquiring, holding and managing assets forming the whole or part of
the security for a capital market arrangement entered into by a note-
issuing company, and
(b)
whose liabilities representing debtor relationships are owed wholly or
15
mainly to a note-issuing company or intermediate borrowing
company.
(5)
An “intermediate borrowing company” means a company—
(a)
whose only business is to enter into and be a party to creditor
relationships with an asset-holding company, and
20
(b)
whose liabilities representing debtor relationships are owed wholly, or
substantially wholly, to a note-issuing company.
(6)
A “warehouse company” means a company whose business consists wholly of
acquiring and holding financial assets for the purpose—
(a)
of transferring them to a company (whether or not yet in existence) that
25
at the time of the transfer is, or as a result of the transfer will become,
an asset-holding or note-issuing company, or
(b)
of itself becoming an asset-holding or note-issuing company.
(7)
A “commercial paper funded company” means—
(a)
a company that was an asset-holding company but whose obligations
30
under debtor relationships to a note-issuing company or intermediate
borrowing company—
(i)
have been transferred to, or
(ii)
have been replaced by obligations under debtor relationships
to,
35

one or more companies carrying on a business of banking, or
(b)
a company that was an intermediate borrowing company but whose
obligations under debtor relationships to a note-issuing company—
(i)
have been transferred to, or
(ii)
have been replaced by obligations under debtor relationships
40
to,

one or more companies carrying on a business of banking.
(8)
In this section—
“asset” includes any option, future or contract for differences as defined
for the purposes of Schedule 26 to FA 2002 (derivative contracts) (see
45
paragraph 12 of that Schedule);

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 8 — Accounting practice and related matters
63

“capital market investment” and “capital market arrangement” have the
same meaning as in section 72B(1) of the Insolvency Act 1986 (c. 45) (see
paragraphs 1, 2 and 3 of Schedule 2A to that Act);
“company” includes a partnership;
“financial asset” has the meaning it has for accounting purposes; and
5
“independent persons” means persons who are not connected with the
company.
(9)
Section 839 of ICTA (connected persons) applies for the purposes of the
definition above of “independent persons”, except that in applying the
definition of “control” in that section a person is not to be treated as a
10
participator in a company by reason only that he is a loan creditor of the
company.
84
Taxation of securitisation companies
(1)
The Treasury may make provision by regulations as to the application of the
Corporation Tax Acts in relation to a securitisation company.
15
(2)
For the purposes of this section a “securitisation company” means a
company—
(a)
in relation to which the following conditions are met—
(i)
it is party as debtor to a capital market investment,
(ii)
securities representing that capital market investment are
20
issued, and
(iii)
the capital market investment is part of a capital market
arrangement,

and which meets such other conditions as may be specified; or
(b)
of a description specified by reference to its relationship, direct or
25
indirect, with a company within paragraph (a).
(3)
The regulations may, in particular—
(a)
provide for the application, modification or non-application of any of
the provisions of the Corporation Tax Acts;
(b)
provide—
30
(i)
that the amount of profits of any specified description (before
any such adjustments as are mentioned in paragraph (c)) is to be
taken to be such amount, or is to be calculated on such basis, as
may be specified, and
(ii)
that that amount is to be brought into account for corporation
35
tax purposes instead of any specified amount that would
otherwise fall to be brought into account;
(c)
provide for specified adjustments to be made to the amount to be
brought into account for corporation tax purposes;
(d)
provide—
40
(i)
that the regulations apply to a company only if an election to
that effect is made,
(ii)
that any such election must be made in the company’s first
company tax return after the passing of this Act and has effect
in relation to every period of account of the company beginning
45
on or after 1st January 2005, and
(iii)
that once subject to the regulations a company shall continue to
be so for all subsequent periods of account;

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 9 — International matters
64

(e)
impose conditions that must be met if a company is to have, or continue
to have, the benefit of the regulations; and
(f)
provide for the consequences of failing to meet any specified condition
(which may include recalculating, on the basis that the regulations did
not apply, the company’s profits for previous periods).
5
(4)
The regulations may make different provision for different descriptions of
company.
(5)
Regulations under this section may—
(a)
in the case of—
(i)
regulations made before 1st January 2006, or
10
(ii)
the first regulations under this section (if made on or after that
date),

make provision having effect for periods of account beginning on or
after 1st January 2005;
(b)
in any case, make provision having effect from the beginning of periods
15
of account current when the regulations are made.
(6)
In this section—
“capital market investment” and “capital market arrangement” have the
same meaning as in section 72B(1) of the Insolvency Act 1986 (c. 45) (see
paragraphs 1, 2 and 3 of Schedule 2A to that Act); and
20
“specified” means specified in regulations under this section.
(7)
The first regulations under this section shall not be made unless a draft of the
regulations has been laid before and approved by a resolution of the House of
Commons.
Chapter 9
25
International matters
Double taxation relief: general
85
Dividends by reference to which a deduction is allowed: no underlying tax
(1)
In section 799 of ICTA (computation of underlying tax) after subsection (2)
insert—
30
“(2A)
No underlying tax shall be taken into account under subsection (1)
above in the case of a dividend if, under the law of any territory outside
the United Kingdom, a deduction is allowed to a resident of that
territory in respect of an amount determined by reference to the
dividend.”.
35
(2)
The amendment made by this section has effect in relation to dividends paid
on or after 16th March 2005.
Double taxation relief: restrictions
86
Limits on credit: income tax and corporation tax: trading profits
(1)
For sections 798 to 798B of ICTA (double taxation relief: foreign interest and
40