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 9 — International matters
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dividends) substitute—
“798
Section 796: trade income
(1)
This section has effect in relation to the application of section 796(1) to
the allowance of credit for foreign tax against income tax in respect of
trade income.
5
(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.
10
(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
15
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
20
(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),
25
(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
30
(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
35
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—
40
(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
45
matters, and

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(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—
(a)
income or profits chargeable to tax under Case I, II or V of
5
Schedule D,
(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
10
(d)
any other income or profits which by a provision of ICTA is
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.
15
798B
Section 798A: special cases
(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
20
out of the asset shall be taken as a reference to the income arising out of
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
25
relationship with a derivative contract if—
(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;
30

and if an asset or a contract is wholly or partly designated as a hedge
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
35
outside the United Kingdom, for the purposes of section 798A(2)—
(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
40
(b)
credits available for foreign tax in respect of the royalty income
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,
45
income received in pursuance of the scheme or arrangement shall be
treated for the purposes of section 798A as trade income of B (and not
as income of A).

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(5)
Where—
(a)
transactions, arrangements or assets are treated by a taxpayer as
a series or group (the “portfolio”),
(b)
a number of credits for foreign tax arise in respect of the
portfolio, and
5
(c)
either—
(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
10
(ii)
a separate computation of income or gain in respect of
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,
15

the income or gains arising from the portfolio, or part of the portfolio,
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)
20
prevents an amount of credit for foreign tax from being allowable
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
25
any loss attributable to the income or gain in respect of which the
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
30
(b)
subsections (4) to (9) shall cease to have effect.
(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
35
(ii)
income received on or after that date in respect of which foreign
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
40
(ii)
income received on or after that 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.
45
(5)
In respect of dividends paid before 1st January 2006, the effect of section 798 or
798A of ICTA 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

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Part 2 — Income tax, corporation tax and capital gains tax
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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.
87
Schemes and arrangements designed to increase relief
(1)
After section 804 of ICTA insert—
5
“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
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
10
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
arrangements, credit is allowable against United Kingdom tax for that
chargeable period.
15
(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
period.
(4)
Condition C is that the scheme or arrangement is a prescribed scheme
20
or arrangement.
(5)
Condition D is that the amount referred to in subsection (6) is more than
a minimal amount.
(6)
The amount is the aggregate of—
(a)
the aggregate amount of the claims for credit that the person has
25
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
made, or is in a position to make, for a corresponding
chargeable period.
30
(7)
A chargeable period of a 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.
(8)
A notice under this section is a notice—
(a)
informing the person of the Board’s view under subsection (1),
35
(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
condition B is an amount of underlying tax, specifying the body
corporate resident in a territory outside the United Kingdom
40
whose payment of foreign tax is relevant to that underlying tax,
and
(d)
informing the person that as a consequence section 804ZB has
effect in relation to him.

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(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
person specifies a body corporate resident outside the United
5
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
10
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
15
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)
This section applies in relation to a person if—
(a)
a notice under section 804ZA has been given to the person in
20
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.
(2)
The person must in his tax return for the period make (or must amend
25
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.
804ZC
Notices under section 804ZA: further provision
30
(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
period of 90 days beginning with the day on which the notice is given,
35
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
complying with the notice.
40
(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.
(4)
After any enquiries into the person’s tax return for that period have
45
been completed, the Board may only give him a notice under section

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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,
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
5
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
10
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—
15
(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
20
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
25
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
30
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
35
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
40
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,
45
(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.

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(12)
In this section—
“closure notice” means a notice under—
(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—
5
(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.”
10
(2)
Schedule 5 (which contains a Schedule to be inserted after Schedule 28AA to
ICTA) has effect.
(3)
This section and Schedule 5 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
15
(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.
20
(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 5) applies, 10th February 2005, and
(b)
so far as the amount of the credit for foreign tax is affected by any other
25
prescribed scheme or arrangement (within the meaning of Schedule
28AB), 16th March 2005.
88
Self-assessment amendments
(1)
In section 9A of TMA 1970 (notice of enquiry), in subsection (4) (matters to
which an enquiry extends) after paragraph (b) insert—
30
“(c)
consideration of whether to give the taxpayer a notice under
section 804ZA of the principal Act (schemes and arrangements
designed to increase relief),”.
(2)
In section 29 of TMA 1970 (assessment where loss of tax discovered), after
subsection (7) insert—
35
“(7A)
The requirement to fulfil one of the two conditions mentioned above
does not apply so far as regards any income or chargeable gains of the
taxpayer in relation to which the taxpayer has been given, after any
enquiries have been completed into the taxpayer’s return, a notice
under section 804ZA of the principal Act.”
40
(3)
In Schedule 18 to FA 1998 (company tax returns, assessments, etc), in
paragraph 25(1) (scope of enquiry) after “medium-sized enterprise)” insert “or
a notice under section 804ZA of the Taxes Act 1988 (schemes and arrangements
designed to increase relief)”.
(4)
In paragraph 42 of that Schedule (restrictions on power to make discovery
45