Finance Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
104

(a)
has a relationship to which this section applies by virtue of
subsection (1)(c)(i) above, but
(b)
enters into a related transaction in respect of the right to
receive interest,

then, for the purpose of bringing credits into account by virtue of
5
subsection (2ZA)(a) above in respect of that or any other related
transaction, the company shall continue to be treated as having a
relationship to which this section so applies even though the interest
is not payable to the company.”.
      (6)
After subsection (3) (amounts treated as interest under Schedule 28AA to
10
ICTA) insert—
“(3A)
For the purposes of this section, a discount shall, in particular, be
taken to arise from a money debt in any case where—
(a)
there is a disposal of property for a consideration some or all
of which is money that falls to be paid after the sale;
15
(b)
the amount or value of the whole consideration exceeds what
the purchaser would have paid for the property if he had
been required to pay in full at the time of the disposal; and
(c)
some or all of the excess can reasonably be regarded as
representing a return on an investment of money at interest
20
(and, accordingly, as being a discount arising from the
money debt).
(3B)
The credits to be brought into account for the purposes of this
Chapter in respect of a discount arising from a money debt must be
determined using an amortised cost basis of accounting (see section
25
103).”.
      (7)
Omit subsections (4) to (6) and (8) (which relate to whether debits or credits
are trading or non-trading etc and which are unnecessary, in view of the
application of sections 82(2) and 103(2) of FA 1996 by virtue of section 100(2)
of that Act).
30
      (8)
Omit subsection (13) (express subjection to Schedules 9 and 11 to FA 1996,
which is unnecessary in view of the closing words of subsection (2) of the
section).
      (9)
In consequence of the amendments made by this paragraph, paragraph (c)
of the Case III of Schedule D substituted for the purposes of corporation tax
35
by section 18(3A) of ICTA (tax in respect of discount arising otherwise than
in respect of a loan relationship) shall not have effect in relation to any
discount arising in an accounting period beginning on or after the
commencement date.
     (10)
Subject to sub-paragraph (9), the amendments made by this paragraph have
40
effect in relation to any money debt to which a company is party as a creditor
on or after the commencement date.
     (11)
Where, on or after the commencement date but in a period of account
beginning before 1st January 2005, a company is party to a relationship to
which section 100 of FA 1996 applies, then, in the application of that section
45
for that period of account, subsection (2) of it shall have effect as follows—
(a)
paragraph (a) shall have effect in relation to—
(i)
any discount arising to the company from the money debt,
and

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
105

(ii)
any profits, impairment of discount, or reversal of
impairment of discount, arising to the company as
mentioned in subsection (2ZA) of that section,

as it has effect (or would have effect) in relation to interest payable to
the company under the relationship,
5
(b)
paragraph (b) shall have effect as if the reference to interest included
a reference to the matters mentioned in paragraph (a)(i) and (ii)
above, and
(c)
the closing words shall have effect accordingly.
     (12)
None of the following shall be brought into account for the purposes of
10
Chapter 2 of Part 4 of FA 1996 by virtue of this paragraph—
(a)
credits in respect of discount arising from a money debt, to the extent
that the discount accrued before the commencement date;
(b)
credits in respect of profits arising as mentioned in section
100(2ZA)(a) or (b)(ii) of that Act where the related transaction took
15
place before the commencement date;
(c)
debits in respect of any impairment arising in respect of discount
arising from a money debt, to the extent that the discount accrued
before the commencement date;
(d)
credits in respect of any reversal of any such impairment, to the
20
extent that the discount accrued before the commencement date.
     (13)
In this paragraph “the commencement date” means 16th March 2005.
Meaning of “commercial rate of interest”
13    (1)
In section 103 of FA 1996 (interpretation) after subsection (3) insert—
“(3A)
For the purposes of this Chapter, a commercial rate of interest, in the
25
case of a company and any asset, is—
(a)
a rate (“the simple commercial rate”) that is reasonably
comparable to the rate that the company could obtain by
placing on deposit the money it invested in the asset, or
(b)
in any case where—
30
(i)
the likely rate of increase in the value of the asset is in
question, and
(ii)
that likely rate is a lower rate than the simple
commercial rate, and
(iii)
the difference is a result of an expectation that the
35
company would also obtain a tax advantage as a
result of investing in the asset,

that lower rate.
(3B)
In subsection (3A) above, “tax advantage” has the meaning given by
section 709(1) of the Taxes Act 1988.”.
40
      (2)
The amendment made by this paragraph has effect in relation to assets held
on or after 16th March 2005 (whenever acquired).
Capital redemption policies: removal of exclusion from loan relationships computations
14    (1)
Schedule 9 to FA 1996 (loan relationships: special computational provisions)
is amended as follows.
45

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Schedule 7 — Avoidance involving financial arrangements
106

      (2)
In paragraph 1A(1) (credits and debits relating to life policies and capital
redemption policies not to be brought into account) paragraph (b) (capital
redemption policies) shall cease to have effect.
      (3)
This paragraph has effect in relation to a capital redemption policy on and
after 10th February 2005 (whenever the capital redemption policy was
5
effected).
      (4)
Where a capital redemption policy—
(a)
is held by a company immediately before 10th February 2005, and
(b)
on or after that date, is, for the purposes of Chapter 2 of Part 4 of FA
1996, a creditor relationship of the company,
10

sub-paragraphs (5) and (6) apply.
      (5)
In any such case, Chapter 2 of Part 13 of ICTA (life policies etc: chargeable
events) shall have effect as if—
(a)
immediately before 10th February 2005, the company had assigned
the whole of the rights conferred by the policy for money or money’s
15
worth, and
(b)
the value of the consideration for the assignment had been equal to
what the carrying value of the creditor relationship would have been
had an accounting period of the company ended on that date;

and Chapter 2 of Part 4 of FA 1996 shall have effect as if, immediately after
20
9th February 2005, the company had acquired the creditor relationship at a
cost equal to that carrying value.
      (6)
But if—
(a)
the accounting period in which the assignment is deemed to have
happened (“the assignment period”), and
25
(b)
the accounting period in which the company ceases to be party to the
creditor relationship (“the cessation period”),

are not the same accounting period, any gain which, by virtue of the deemed
assignment, would have fallen to be brought into account in accordance
with section 547(1)(b) of ICTA for the assignment period shall instead be
30
brought into account for the cessation period.
      (7)
In this paragraph—
“assignment”, in relation to Scotland, means an assignation;
“carrying value” has the same meaning as it has for the purposes of
paragraph 19A of Schedule 9 to FA 1996, as it has effect for periods
35
of account beginning on or after 1st January 2005.
Deemed disposal of assets and liabilities on company ceasing to be resident in UK etc
15    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 10A is amended as
follows.
      (2)
After sub-paragraph (1) (cases where the paragraph applies) insert—
40
   “(1A)
But this paragraph does not apply if—
(a)
paragraph 12A below (transferee company leaving group)
applies in relation to the company, and
(b)
the cessation in sub-paragraph (1)(a) or (b) above occurs at
the same time as the cessation in sub-paragraph (1)(b) of
45
that paragraph.”.

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Schedule 7 — Avoidance involving financial arrangements
107

      (3)
In sub-paragraph (2) (Schedule to have effect as if there had been an
assignment and reacquisition) for “Schedule” substitute “Chapter”.
      (4)
The amendments made by this paragraph have effect on and after 16th
March 2005.
Transactions not at arm’s length: exceptions relating to groups of companies
5
16    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 11 (transactions not
at arm’s length) is amended as follows.
      (2)
For sub-paragraph (3) (exceptions relating to groups of companies)
substitute—
    “(3)
Sub-paragraph (1) above does not apply if the related
10
transaction—
(a)
is a transaction as a result of which paragraph 12 below
(groups)—
(i)
applies by virtue of sub-paragraph (1)(a) of it, or
(ii)
would so apply, apart from sub-paragraph (2A) of
15
it (transferor using fair value accounting), or
(b)
is part of a series of transactions as a result of which that
paragraph—
(i)
applies by virtue of sub-paragraph (1)(b) of it, or
(ii)
would so apply, apart from sub-paragraph (2A) of
20
it.”.
      (3)
In consequence, omit sub-paragraph (5) (construction of references to a
member of a group).
      (4)
The amendments made by this paragraph have effect where the related
transaction is on or after 16th March 2005.
25
Continuity of treatment of groups etc: treatment of transferee company
17    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 12 (continuity of
treatment of groups etc) is amended as follows.
      (2)
For sub-paragraph (2) (the credits and debits to be brought into account)
substitute—
30
    “(2)
For the purpose of determining the credits and debits to be
brought into account for the purposes of this Chapter in respect of
the loan relationship—
(a)
for the accounting period in which the transaction or, as
the case may be, the first of the series of transactions takes
35
place, the transferor company shall be treated as having
entered into that transaction for a consideration equal to
the notional carrying value of the asset or liability
representing the relationship; and
(b)
for any accounting period in which it is a party to the
40
relationship, the transferee company shall be treated as if it
had acquired the asset or liability representing the
relationship for a consideration equal to the notional
carrying value of the asset or liability.

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Schedule 7 — Avoidance involving financial arrangements
108


For the purposes of this sub-paragraph, the notional carrying
value is the amount that would have been the carrying value of the
asset or liability in the accounts of the transferor company if a
period of account had ended immediately before the date when
the company ceased to be party to the loan relationship.”.
5
      (3)
In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair
value accounting) for paragraph (aa) (treatment of transferee in respect of
the transaction) substitute—
“(aa)
paragraph (b) of sub-paragraph (2) above shall have effect
in relation to the transferee company.”.
10
      (4)
For sub-paragraph (8) (which applies paragraph 11(5) for construction of
references to a member of a group) substitute—
    “(8)
In this paragraph references to a company which is a member of a
group of companies shall be construed in accordance with section
170 of the Taxation of Chargeable Gains Act 1992.”.
15
      (5)
In sub-paragraph (9) (interpretation) insert the following definition at the
appropriate place—
“ “carrying value” has the same meaning as it has for the
purposes of paragraph 19A below;”.
      (6)
Where the period of account mentioned in the second sentence of the sub-
20
paragraph (2) substituted by sub-paragraph (2) begins before 1st January
2005, “carrying value” shall be construed as if the period had begun on or
after that date.
      (7)
The amendments made by this paragraph have effect in any case where the
relevant transaction is on or after 16th March 2005.
25
      (8)
In this paragraph “the relevant transaction” means—
(a)
the related transaction mentioned in sub-paragraph (1)(a) of
paragraph 12 of Schedule 9 to FA 1996,
(b)
the first of the series of related transactions mentioned in sub-
paragraph (1)(b) of that paragraph, or
30
(c)
the transfer mentioned in sub-paragraph (1)(c) or (1)(d) of that
paragraph,

by virtue of which that paragraph applies or would apply apart from sub-
paragraph (2A) of it.
Transferee leaving group after replacing transferor as party to loan relationship
35
18    (1)
In Schedule 9 to FA 1996 (loan relationships) after paragraph 12 insert—
“Transferee leaving group after replacing transferor as party to loan relationship
12A   (1)
This paragraph applies in any case where—
(a)
paragraph 12 above applies—
(i)
by virtue of sub-paragraph (1)(a) of that paragraph
40
(“case A”), or
(ii)
by virtue of sub-paragraph (1)(b) of that paragraph
(“case B”), but
(b)
before the end of the relevant 6 year period, the transferee
company ceases to be a member of the relevant group.
45

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Schedule 7 — Avoidance involving financial arrangements
109

      (2)
In any such case, this Chapter shall have effect as if the transferee
company had—
(a)
immediately before that cessation, assigned the asset or
liability representing the relevant loan relationship for a
consideration of an amount equal to its fair value at that
5
time, and
(b)
immediately reacquired it for a consideration of the same
amount,

but only if Condition 1 or 2 below is satisfied and sub-paragraph
(5) below does not apply.
10
      (3)
Condition 1 is that if sub-paragraph (2) above has effect, a credit
would in consequence of paragraph (a) of that sub-paragraph fall
to be brought into account for the purposes of this Chapter by the
transferee company.
      (4)
Condition 2 is that—
15
(a)
Condition 1 is not satisfied,
(b)
the loan relationship is a creditor relationship,
(c)
the company has a hedging relationship between a
derivative contract and the creditor relationship,
(d)
in consequence of paragraph 30A(2)(a) of Schedule 26 to
20
the Finance Act 2002, a credit falls to be brought into
account by the transferee company for the purposes of that
Schedule in respect of the derivative contract.
      (5)
Where the transferee company ceases to be a member of the
relevant group by reason only of an exempt distribution (see sub-
25
paragraph (8))—
(a)
sub-paragraph (2) above does not have effect, but
(b)
if there is chargeable payment within 5 years after the
making of the exempt distribution, sub-paragraph (6)
below applies.
30
      (6)
Where this sub-paragraph applies, this Chapter shall have effect
as if—
(a)
the transferee company had, immediately before the
making of the chargeable payment, assigned the asset or
liability representing the relevant loan relationship,
35
(b)
the assignment had been for a consideration of an amount
equal to the fair value of the asset or liability immediately
before the transferee company ceased to be a member of
the relevant group, and
(c)
the transferee company had immediately reacquired the
40
asset or liability for a consideration of the same amount,

but only if Condition 1 or 2 above, as modified by sub-paragraph
(7) below, is satisfied
      (7)
The modifications are that—
(a)
in Condition 1, the references to sub-paragraph (2) above,
45
and paragraph (a) of that sub-paragraph, are to be taken
respectively as references to sub-paragraph (6) above and
paragraphs (a) and (b) of that sub-paragraph, and

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
110

(b)
in Condition 2, the reference to paragraph 30A(2)(a) of
Schedule 26 to the Finance Act 2002 is to be taken as a
reference to paragraph 30A(6)(a) and (b) of that Schedule.
      (8)
In this paragraph—
“assignment”, in relation to Scotland, means an assignation;
5
“chargeable payment” has the meaning given by section
214(2) of the Taxes Act 1988;
“exempt distribution” means a distribution which is exempt
by virtue of section 213(2) of the Taxes Act 1988;
“the relevant 6 year period” means the period of 6 years
10
following—
(a)
in case A, the transaction mentioned in paragraph
12(1)(a) above, or
(b)
in case B, the last of the series of transactions
mentioned in paragraph 12(1)(b) above;
15
“the relevant group” means—
(a)
in case A, the group mentioned in paragraph 12(1)(a)
above, or
(b)
in case B, the group mentioned in paragraph 12(1)(b)
above;
20
“the relevant loan relationship” means the loan relationship
mentioned in paragraph 12(1) above;
“the transferee company” means the company referred to as
such in paragraph 12(1) above.
      (9)
Paragraph 12(14) of Schedule 26 to the Finance Act 2002 (hedging
25
relationships) has effect for the purposes of this paragraph.”.
      (2)
The amendment made by this paragraph has effect where a company ceases
to be a member of a group on or after 16th March 2005.
Avoidance involving repos or stock lending
19    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 15 is amended as
30
follows.
      (2)
At the end of sub-paragraph (2) (disposals and acquisitions to which the
paragraph applies) add “and as is, in the case of those arrangements, the
disposal or acquisition effected by—
(a)
the transfer by A to B mentioned in sub-paragraph (3)(a)
35
below, or
(b)
any transfer to A that gives effect to the entitlement or
requirement described in sub-paragraph (3)(b) below.”.
      (3)
In sub-paragraph (3) (meaning of “repo or stock-lending arrangements”)—
(a)
in paragraph (a), after “one person” insert “(“A”)” and after
40
“another” insert “(“B”)”;
(b)
in paragraph (b), for “the transferor” substitute “A”.
      (4)
In sub-paragraph (4A) (which states certain consequences of sub-paragraph
(1) for each party), omit paragraph (b) (transferee not to be regarded as a
party to the loan relationship) and the word “and” before it, and for the
45