Finance Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance Bill

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
15

(a)
in respect of which the instrument of incorporation provides
arrangements for separate pooling of the contributions of the
shareholders and the profits or income out of which payments
are to be made to them, and
(b)
the shareholders of which are entitled to exchange rights in one
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pool for rights in another,
and a reference to part of an umbrella company is a reference to a
separate pool.”
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Authorised unit trusts and open-ended investment companies
(1)
The following provisions shall cease to have effect—
10
(a)
sections 468H to 468Q of ICTA (authorised unit trusts),
(b)
paragraphs 2A and 2B of Schedule 10 to FA 1996 (authorised unit trusts
and open-ended investment companies: loan relationships),
(c)
paragraphs 32 and 33 of Schedule 26 to FA 2002 (collective investment
schemes: derivative contracts),
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(d)
section 373(4) and (6) of ITTOIA 2005 (open-ended investment
company: interest distributions), and
(e)
section 376(4) and (6) of ITTOIA 2005 (authorised unit trust: interest
distributions).
(2)
In this Chapter “authorised investment funds” means—
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(a)
authorised unit trust schemes, and
(b)
open-ended investment companies.
(3)
The Treasury may, by regulations—
(a)
make provision about the treatment of authorised investment funds for
the purposes of an enactment relating to taxation;
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(b)
provide for the modification of an enactment relating to taxation in its
application in relation to—
(i)
authorised investment funds,
(ii)
shareholders or unit holders in authorised investment funds, or
(iii)
transactions involving authorised investment funds;
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(c)
impose requirements on persons responsible for the management of an
authorised investment fund in relation to the provision of information,
the form of accounts, the keeping of records or other administrative
matters.
(4)
For the purposes of this Chapter—
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(a)
“unit trust scheme” has the meaning given by section 237 of the
Financial Services and Markets Act 2000 (c. 8),
(b)
a unit trust scheme is authorised in relation to an accounting period if
an order under section 243 of the Financial Services and Markets Act
2000 is in force in relation to that scheme during the whole or part of
40
that accounting period,
(c)
“unit holder” means a person entitled to a share of the investments
subject to the trusts of a unit trust scheme,
(d)
a reference to a shareholder or unit holder includes a person
beneficially entitled to shares or units (and a reference to owning units
45
or shares shall be construed accordingly),

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
16

(e)
“open-ended investment company” means a company incorporated in
the United Kingdom to which section 236 of the Financial Services and
Markets Act 2000 applies,
(f)
“associate” has the meaning given by section 417 ICTA,
(g)
“net asset value” means the value of the assets of the authorised
5
investment fund, after the deduction of specified liabilities,
(h)
a reference to a distribution includes investing an amount on behalf of
a unit holder or shareholder in respect of his accumulation units or
accumulation shares,
(i)
“distribution accounts” means accounts showing—
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(i)
the total amount available for distribution to unit holders or
shareholders, and
(ii)
how that amount is computed,
(j)
the “distribution date” for a distribution period in relation to an
authorised investment fund means—
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(i)
the date specified by or in accordance with the terms of the trust
or the instrument of incorporation of the company for any
distribution for that distribution period, or
(ii)
if no date is specified, the last day of that distribution period,
(k)
“distribution period” in relation to an authorised investment fund
20
means a period by reference to which the total amount available for
distribution to unit holders or shareholders is ascertained,
(l)
“umbrella company” has the meaning given by section 468A of ICTA,
(m)
“umbrella scheme” has the meaning given by section 468 of ICTA, and
(n)
section 839 of ICTA (connected persons) applies.
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18
Section 17(3): specific powers
(1)
Regulations under section 17(3)(a) or (b) may make provision about
distributions which may, in particular—
(a)
require an authorised investment fund to comply with prescribed rules
for determining (whether by reference to a formula or otherwise) what
30
proportion of an amount shown in distribution accounts as available
for distribution is to be distributed by way of dividends and what
proportion is to be distributed by way of yearly interest;
(b)
permit persons responsible for the management of an authorised
investment fund to elect to distribute entirely by way of dividends;
35
(c)
require distribution accounts to show the amount available for
distribution—
(i)
by way of dividends;
(ii)
by way of yearly interest;
(d)
allow a distribution of yearly interest for a distribution period to be
40
deducted, in the prescribed manner, in computing the profits of the
authorised investment fund for the accounting period in which the last
day of that distribution period falls;
(e)
make provision for determining the distribution date in relation to a
distribution period of an authorised investment fund;
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(f)
permit distributions to be made, in prescribed circumstances, to or for
the benefit of a person not ordinarily resident in the United Kingdom
without deducting tax;

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
17

(g)
permit distributions to be made without deducting tax, in prescribed
circumstances, to a person ordinarily resident in the United Kingdom
who is unlikely to be liable to pay an amount by way of income tax for
the year of assessment in which the distribution is made;
(h)
include provision, in respect of a unit holder or shareholder who is
5
within the charge to corporation tax, about—
(i)
the liability to corporation tax resulting from receipt of a
distribution, and
(ii)
the method of computing that liability.
(2)
Regulations under section 17(3)(a) or (b) may, in particular—
10
(a)
make special provision for loan relationships held by an authorised
investment fund;
(b)
make special provision for derivative contracts held by an authorised
investment fund;
(c)
modify the meaning of “relevant holding” for the purposes of—
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(i)
paragraph 4 of Schedule 10 to FA 1996 (loan relationships), and
(ii)
paragraph 36 of Schedule 26 to FA 2002 (derivative contracts);
(d)
make special provision in relation to the treatment of umbrella
companies and umbrella schemes (or shareholders or unit holders in
umbrella companies or umbrella schemes);
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(e)
prohibit action which favours a class of unit holders or shareholders.
(3)
Regulations under section 17(3)(a) or (b) may, in particular—
(a)
make special provision in relation to a person who, alone or together
with associates or connected persons, owns (otherwise than as a
nominee) units or shares, in a fund designated by the Financial Services
25
Authority as a Qualified Investor Scheme, which represent 10% or
more (or such other percentage as the regulations may specify) of the
net asset value of the fund;
(b)
include exceptions from provision made by virtue of paragraph (a)
above including, in particular, an exception relating to units or shares
30
held—
(i)
by a charity (within the meaning of section 506(1) of ICTA),
(ii)
by a registered pension scheme (within the meaning of section
150 of FA 2004),
(iii)
by an insurance company (within the meaning of section 431(2)
35
of ICTA) as assets of its long-term insurance fund (within the
meaning of that section), or
(iv)
by such other persons, in such circumstances, as the regulations
may specify.
(4)
Regulations under section 17(3)(c) may, in particular, require persons
40
responsible for the management of an authorised investment fund to supply
information to, and make available books, documents and other records for
inspection by, the Commissioners for Her Majesty’s Revenue and Customs.
(5)
Regulations under section 17(3) may in particular—
(a)
amend a reference in an enactment to a provision repealed by section
45
17(1);
(b)
make different provision for different circumstances;
(c)
make incidental, consequential, supplemental or transitional provision.

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
18

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Section 17: commencement and procedure
(1)
Section 17(1) shall come into force on such day as the Treasury may appoint by
order.
(2)
An order under subsection (1) may—
(a)
commence only a specified repeal;
5
(b)
commence different repeals at different times;
(c)
commence a repeal at different times for different purposes;
(d)
include savings.
(3)
Regulations under section 17(3) shall be subject to annulment by a resolution
of the House of Commons.
10
(4)
But the first set of regulations under section 17(3) may not be made unless a
draft has been laid before and approved by resolution of the House of
Commons.
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Unauthorised unit trusts: chargeable gains
(1)
Section 100 of TCGA 1992 (exemption for authorised unit trusts, &c.) shall be
15
amended as follows.
(2)
After subsection (2) insert—
“(2A)
In determining whether subsection (2) applies no account shall be taken
of units in a scheme which—
(a)
have been disposed of by a unit holder, and
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(b)
are held by the managers of the scheme (in that capacity)
pending disposal.
(2B)
In determining whether subsection (2) applies no account shall be taken
of the possibility of a charge to corporation tax on income in respect of
a gain accruing on a disposal by—
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(a)
an insurance company (within the meaning given by section
431 of the Taxes Act), or
(b)
a friendly society (being an incorporated friendly society or
registered friendly society within the meaning given by section
466(2) of the Taxes Act).”
30
(3)
This section shall have effect for the year 2005-06 and subsequent years of
assessment.
21
Unit trusts: treatment of accumulation units
(1)
In Chapter III of Part III of TCGA 1992 (collective investment schemes, &c.)
after section 99A insert—
35
“99B
Calculation of the disposal cost of accumulation units
(1)
For the purposes of computing the gain accruing on a disposal by a unit
holder of units in a unit trust scheme and for the purposes of all other
provisions of this Act, an amount shall be treated as expenditure falling
within section 38(1)(b) if—
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(a)
it represents income from the investments subject to the unit
trust scheme,

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
19

(b)
it has been reinvested in respect of the units on behalf of the unit
holder (without an issue of new units), and
(c)
it is either—
(i)
charged to income tax as income of the unit holder (or
would be charged to income tax as his income but for a
5
relief which has effect in respect of it) for the purposes of
the Income Tax Acts, or
(ii)
taken into account as a receipt in calculating profits,
gains or losses of the unit holder for the purposes of the
Income Tax Acts.
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(2)
Where an amount is treated as expenditure by virtue of subsection (1),
the expenditure shall be treated for the purposes of this Act as having
been incurred—
(a)
in relation to an authorised unit trust, on the distribution date
for the distribution period in respect of which the amount is
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reinvested, and
(b)
in relation to any other unit trust scheme, on the date on which
the amount is reinvested.
(3)
In subsection (2)(a) “distribution date” and “distribution period” shall
have the meaning given by section 468H of the Taxes Act.”
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(2)
This section shall have effect in relation to a disposal of units on or after 16th
March 2005.
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Section 349B ICTA: exemption for distributions to PEP/ISA managers
(1)
Section 349B(4) of ICTA (requirement for individual to be entitled to income
tax exemption) shall be amended as follows.
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(2)
In paragraph (a) after “of a plan” insert “of a kind to which regulations under
Chapter 3 of Part 6 of ITTOIA 2005 (income from individual investment plans)
apply”.
(3)
Paragraph (b) shall cease to have effect.
(4)
This section shall have effect in relation to payments made on or after 6 April
30
2005.
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Offshore funds
(1)
In section 761 of ICTA 1988 (charge on offshore income gain)—
(a)
in subsection (2)—
(i)
for “sections 2(1) and 10” substitute “sections 2(1), 10 and 10B”,
35
and
(ii)
for “section 11(2)(b)” substitute “section 11(2A)(c)”, and
(b)
in subsection (3)—
(i)
leave out “section 10” and insert “sections 10 and 10B”,
(ii)
for “subsection (1) of that section” substitute “subsection (1) of
40
section 10”, and
(iii)
for the words “and subsection (3) of that section (which makes
similar provision in relation to corporation tax) shall have effect
with the omission of the words “situated in the United
Kingdom”” substitute “and paragraphs (a) and (b) of subsection
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Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
20

(1) of section 10B (which make similar provision in relation to
corporation tax) shall have effect with the omission of the words
“situated in the United Kingdom and””.
(2)
For paragraph 1(1)(d) of Schedule 27 to ICTA 1988 (distributing funds)
substitute—
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“(d)
the form of the distribution is such that—
(i)
if any sum forming part of it were received in the
United Kingdom by an individual resident there and
did not form part of the profits of a trade, profession
or vocation, that sum would fall to be chargeable to
10
tax under a provision specified in section 830(2) of
ITTOIA 2005, or
(ii)
if any sum forming part of it were received in the
United Kingdom by a company resident there and
did not form part of the profits of a trade, profession
15
or vocation, that sum would fall to be chargeable to
tax in accordance with section 18 of ICTA (Schedule
D)—
(a)
under Case III of Schedule D in respect of
income arising from securities out of the
20
United Kingdom or from possessions out of
the United Kingdom, or
(b)
under Case V of Schedule D;”.
(3)
For paragraph 3(1)(a) of that Schedule (distributing funds) substitute—
“(a)
the holders of interests in the fund who are individuals
25
domiciled and resident in the United Kingdom—
(i)
are chargeable to tax under a provision specified in
section 830(2) of ITTOIA 2005 in respect of such of those
sums as are referable to their interests; or
(ii)
if any of that income is derived from assets within the
30
United Kingdom, would be so chargeable had the assets
been outside the United Kingdom;
(aa)
the holders of interests in the fund which are companies
resident in the United Kingdom—
(i)
are chargeable to tax under Case III of Schedule D in
35
respect of income arising from securities out of the
United Kingdom or from possessions out of the United
Kingdom;
(ii)
are chargeable to tax under Case V of Schedule D; or
(iii)
if any of that income is derived from assets within the
40
United Kingdom, would have been chargeable under
sub-paragraph (i) or (ii) had the assets been outside the
United Kingdom; and”.
(4)
In paragraph 3(1)(b) of that Schedule (distributing funds) for “sub-paragraph
(i) or (ii)” substitute “paragraph (a) or (aa)”.
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Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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Chapter 4
Avoidance involving tax arbitrage
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Deduction cases
(1)
If the Commissioners for Her Majesty’s Revenue and Customs consider, on
reasonable grounds, that conditions A to D are or may be satisfied in relation
5
to a transaction to which a company falling within subsection (2) is party, they
may give the company a notice under this section.
(2)
A company falls within this subsection if—
(a)
it is resident in the United Kingdom, or
(b)
it is resident outside the United Kingdom but is within the charge to
10
corporation tax.
(3)
Condition A is that the transaction to which the company is party forms part
of a scheme that is a qualifying scheme.
(4)
Condition B is that the scheme is such that for the purposes of corporation tax
the company is in a position to claim or has claimed an amount by way of
15
deduction in respect of the transaction or is in a position to set off or has set off
against profits in an accounting period an amount relating to the transaction.
(5)
Condition C is that the main purpose, or one of the main purposes, of the
scheme is to achieve a UK tax advantage for the company.
(6)
Condition D is that the amount of the UK tax advantage in question is more
20
than a minimal amount.
(7)
A notice under this section is a notice—
(a)
specifying the transaction in relation to which the Commissioners
consider that conditions A to D are or may be satisfied,
(b)
specifying the accounting period in relation to which the
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Commissioners consider that condition B is or may be satisfied as
regards the transaction, and
(c)
informing the company that as a consequence section 25 (rules relating
to deductions) has effect in relation to the transaction.
(8)
Nothing in this section prevents the Commissioners from giving a company
30
falling within subsection (2) a notice under this section as regards two or more
transactions.
(9)
Schedule 3 makes provision about what constitutes a qualifying scheme.
25
Rules relating to deductions
(1)
The following provisions of this section apply in relation to a transaction if—
35
(a)
a notice specifying the transaction is given to a company under section
24, and
(b)
when the notice is given, conditions A to D of section 24 are satisfied in
relation to the transaction.
(2)
The company must compute (or recompute) for the purposes of corporation
40
tax its income or chargeable gains, or its liability to corporation tax—
(a)
for the accounting period specified in the notice under section 24, and