Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
22

(b)
for any subsequent accounting period,

in accordance with rules A and B.
(3)
Rule A is that, in respect of the specified transaction, no amount is allowable as
a deduction for the purposes of the Corporation Tax Acts to the extent that, in
relation to the same expense, an amount may be deducted or otherwise
5
allowed in computing any income, profits or losses for the purposes of any tax
(including any foreign tax) other than—
(a)
petroleum revenue tax, or
(b)
the tax chargeable under section 501A(1) of ICTA (supplementary
charge in respect of ring fence trades).
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(4)
The reference in subsection (3) to an amount deducted or otherwise allowed in
computing any income, profits or losses for the purposes there mentioned
includes a reference to an amount that would be so deducted or allowed but
for any rule that has the same effect as rule A.
(5)
For the purposes of subsection (4) “rule” means—
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(a)
a provision of the Tax Acts, or
(b)
a rule having effect under the tax law of any territory outside the
United Kingdom.
(6)
Rule B applies if—
(a)
a transaction, or a series of transactions, forming part of the scheme by
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reference to which conditions A to D are satisfied makes or imposes
provision as a result of which one person (“the payer”) makes a
payment and another person (“the payee”) receives, or becomes
entitled to receive, a payment or payments,
(b)
in respect of the payment by the payer, an amount may be deducted or
25
otherwise allowed to the payer, or to another person who is party to, or
concerned in, the scheme, in computing any profits or losses for tax
purposes, and
(c)
in respect of the payment or payments that the payee receives or is
entitled to receive as a result of the transaction or series of transactions,
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or part of such payment or payments, the payee is not liable to tax or, if
liable, his liability to tax is reduced as a result of provision made or
imposed by the scheme.
(7)
For the purposes of subsection (6)(c), the payee’s liability to tax in respect of the
payment or payments that he receives or is entitled to receive as a result of the
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transaction or series of transactions is reduced as a result of provision made or
imposed by the scheme if—
(a)
an amount arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
transactions forming part of the scheme, falls to be deducted or
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otherwise allowed to the payee in computing for tax purposes any
profits or losses arising from the payment or payments or the
entitlement to receive the payment or payments, or
(b)
an amount of relief arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
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transactions forming part of the scheme, may be deducted from the
amount of income or gains arising from the payment or payments or
the entitlement to receive the payment or payments.

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(8)
The requirement in subsection (6)(c) is not satisfied if the payee is not liable to
tax because he is not liable to tax on any income or gains received by him or for
his benefit under the tax law of any territory.
(9)
The requirement in subsection (6)(c) is not satisfied if, or to the extent that, the
payee is not subject to tax because his liability to tax is subject to an exemption
5
falling within subsection (10).
(10)
An exemption falls within this subsection if—
(a)
it exempts a person from being liable to tax in respect of income or
gains, without providing for that income or those gains to be treated as
the income or gains of one or more other persons, and
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(b)
it is conferred by a provision contained in or having the force of an Act
or by a provision of the tax law of any territory outside the United
Kingdom.
(11)
Rule B is that the aggregate of the amounts allowable as a deduction for the
purposes of the Corporation Tax Acts in computing any profits to the company
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arising from—
(a)
the specified transaction, and
(b)
any other transaction that forms part of the scheme and to which the
company is party,

is to be reduced in accordance with subsections (12) and (13).
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(12)
If, in respect of the payment or payments that the payee receives or is entitled
to receive, the payee is not liable to tax for the purposes of the requirement in
subsection (6)(c), the aggregate is to be reduced to nil.
(13)
If, in respect of the payment or payments, the payee is liable to tax as regards
part or his liability to tax is reduced as described in subsection (6)(c), the
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aggregate is to be reduced to such proportion of the aggregate as is equal to the
proportion of the payment or payments on which the payee is liable to tax; and
for this purpose the amount by which the payee’s liability is reduced is to be
treated as an amount on which the payee is not liable to tax.
(14)
The company may choose to incorporate in its company tax return for the
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specified accounting period such relevant adjustments as are necessary for
counteracting those effects of the scheme that are referable to the purpose
referred to in condition C.
(15)
If, as a consequence of incorporating relevant adjustments in that company tax
return, the company counteracts those effects of the scheme that are referable
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to the purpose referred to in condition C, the company is to be treated, so far
as regards the scheme, as having complied with subsection (2).
(16)
The following are relevant adjustments—
(a)
treating all or part of a deduction allowable for corporation tax
purposes as not being allowable;
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(b)
treating all or part of an amount that for corporation tax purposes may
be set off against profits in an accounting period as not falling to be set
off.
(17)
In this section, references to tax purposes include a reference to the purposes
of any foreign tax; and foreign tax has the meaning given by section 403D of
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ICTA.

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(18)
In this section, “company tax return” means the return required to be delivered
pursuant to a notice under paragraph 3 of Schedule 18 to FA 1998, as read with
paragraph 4 of that Schedule.
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Receipts cases
(1)
If the Commissioners for Her Majesty’s Revenue and Customs consider, on
5
reasonable grounds, that conditions A to E are or may be satisfied in relation
to a company resident in the United Kingdom, they may give the company a
notice under this section.
(2)
Condition A is that a scheme makes or imposes provision (“the actual
provision”) as between the company and another person (“the paying party”)
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by means of a transaction or series of transactions.
(3)
Condition B is that the actual provision includes the making by the paying
party, by means of a transaction or series of transactions, of a payment that is
a qualifying payment in relation to the company.
(4)
Condition C is that, as regards the qualifying payment made by the paying
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party, there is an amount that—
(a)
is available as a deduction for the purposes of the Tax Acts, or
(b)
may be deducted or otherwise allowed in respect of the payment under
the tax law of any territory outside the United Kingdom,

and does not fall to be disregarded as described in subsection (5).
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(5)
An amount is to be disregarded if or to the extent that it is, for tax purposes, set
against any income arising to the paying party from the transaction or
transactions forming part of the scheme.
(6)
Condition C is not to be treated as satisfied if—
(a)
the paying party is a dealer,
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(b)
in the ordinary course of his business, he incurs losses in respect of the
transaction or transactions forming part of the scheme to which he is
party, and
(c)
the amount by reference to which condition C would, but for this
subsection, be satisfied is an amount in respect of those losses.
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(7)
In subsection (6), “dealer” means a person who is a dealer in relation to a
distribution within the meaning of section 95(2) of ICTA or who would, if he
were resident in the United Kingdom, be such a dealer.
(8)
Condition D is that at least part of the qualifying payment is not an amount to
which subsection (9) applies.
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(9)
This subsection applies to an amount that is, for the purposes of the
Corporation Tax Acts—
(a)
income or gains arising to the company in the accounting period in
which the qualifying payment was made in relation to the company,
(b)
income arising to any other company resident in the United Kingdom
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in a corresponding accounting period, or
(c)
brought into account by a company as a credit for the purposes of
Chapter 2 of Part 2 of FA 1996 by virtue of section 91A of FA 1996
(avoidance involving shares subject to outstanding third party
obligations).
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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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(10)
Condition E is that the company and the paying party expected on entering
into the scheme that a benefit would arise as a result of condition D being
satisfied (whether by reference to all or part of the qualifying payment).
(11)
A notice under this section is a notice—
(a)
informing the company of the Commissioners’ view under subsection
5
(1),
(b)
specifying the qualifying payment by reference to which the
Commissioners consider conditions B to E are or may be satisfied,
(c)
specifying the accounting period of the company in which the payment
is made, and
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(d)
informing the company that as a consequence section 27 has effect in
relation to the payment.
(12)
For the purposes of this section a payment is a qualifying payment in relation
to a company if it constitutes a contribution to the capital of the company.
(13)
For the purposes of this section the accounting period of a company (“company
15
A”) corresponds to the accounting period of another company (“company B”)
if at least one day of company A’s accounting period falls within company B’s
accounting period.
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Rule as to qualifying payment
(1)
The following provisions of this section apply in relation to a payment that is
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a qualifying payment in relation to a company if—
(a)
a notice specifying that payment is given to the company under section
26, and
(b)
when the notice is given, conditions A to E of section 26 are satisfied in
relation to the company.
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(2)
The company must compute (or recompute) for the purposes of corporation
tax for the accounting period specified in the notice its income or chargeable
gains, or its liability to corporation tax, as if the relevant part of the qualifying
payment were an amount of income chargeable under Case VI of Schedule D
arising to the company in that period.
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(3)
The relevant part of the qualifying payment is the part by reference to which
conditions C and D are satisfied; and, where conditions C and D are satisfied
in relation to the whole of the qualifying payment, the relevant part is the
whole of the qualifying payment.
(4)
In this section “qualifying payment” has the same meaning as in section 26.
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Notices under sections 24 and 26
(1)
Subsection (2) applies if the Commissioners for Her Majesty’s Revenue and
Customs give a notice to a company under section 24 or 26 before the company
has made its company tax return for the accounting period specified in the
notice.
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(2)
If the company makes its return for that period before the end of the period of
90 days beginning with the day on which the notice is given, it may—
(a)
make a return that disregards the notice, and

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(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
provision referred to in the notice.
(3)
If a company has made a company tax return for an accounting period, the
Commissioners may only give the company a notice under section 24 or 26 in
5
relation to that period if a notice of enquiry has been given to the company in
respect of its return for that period.
(4)
After any enquiries into the return for that period have been completed, the
Commissioners may only give the company a notice under section 24 or 26 if
the requirements in subsections (5) and (7) are satisfied.
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(5)
The first requirement is that at the time the enquiries into the return were
completed, the Commissioners could not have been reasonably expected, on
the basis of information made available to them or to an officer of Revenue and
Customs before that time, to have been aware that the circumstances were such
that a notice under section 24 or 26 could have been given to the company in
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relation to that period.
(6)
Paragraph 44(2) and (3) of Schedule 18 to FA 1998 (information made available)
applies for the purposes of subsection (5) as it applies for the purposes of
paragraph 44(1).
(7)
The second requirement is that—
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(a)
the company was requested to produce or provide information during
an enquiry into the return for that period, and
(b)
if the company had duly complied with the request, the Commissioners
could have been reasonably expected to give the company a notice
under section 24 or 26 in relation to that period.
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(8)
If a company is given a notice under section 24 or 26 in relation to an
accounting period after having made a company tax return for that period, the
company may amend the return for the purpose of complying with the
provision referred to in the notice at any time before the end of the period of 90
days beginning with the day on which the notice is given.
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(9)
If the notice under section 24 or 26 is given to the company after it has been
given a notice of enquiry in respect of its return for the period, no closure notice
may be given in relation to the company’s tax return until—
(a)
the end of the period of 90 days beginning with the day on which the
notice under section 24 or 26 is given, or
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(b)
the earlier amendment of the company tax return for the purpose of
complying with the provision referred to in the notice.
(10)
If the notice under section 24 or 26 is given to the company after any enquiries
into the return for the period are completed, no discovery assessment may be
made as regards the income or chargeable gain to which the notice relates
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until—
(a)
the end of the period of 90 days beginning with the day on which the
notice under section 24 or 26 is given, or
(b)
the earlier amendment of the company tax return for the purpose of
complying with the provision referred to in the notice.
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(11)
Subsections (2)(b) and (8) do not prevent a company tax return for a period
becoming incorrect if—

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Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(a)
a notice under section 24 or 26 is given to the company in relation to
that period,
(b)
the return is not amended in accordance with subsection (2)(b) or (8) for
the purpose of complying with the provision referred to in the notice,
and
5
(c)
the return ought to have been so amended.
(12)
In this section—
“closure notice” means a notice under paragraph 32 of Schedule 18 to FA
1998;
“company tax return” means the return required to be delivered pursuant
10
to a notice under paragraph 3 of Schedule 18 to FA 1998, as read with
paragraph 4 of that Schedule;
“discovery assessment” means an assessment under paragraph 41 of
Schedule 18 to FA 1998;
“notice of enquiry” means a notice under paragraph 24 of Schedule 18 to
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FA 1998.
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Amendments relating to company tax returns
(1)
In Schedule 18 to FA 1998 (company tax returns, assessments, etc), in
paragraph 25(1) (scope of enquiry) after “relief)” insert “or a notice under
section 24 or 26 of the Finance (No. 2) Act 2005 (avoidance involving tax
20
arbitrage)”.
(2)
In paragraph 42 of that Schedule (restrictions on power to make discovery
assessment etc), in sub-paragraph (2A), after “1988” insert “or section 24 or 26
of the Finance (No. 2) Act 2005”.
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Interpretation
25
(1)
For the purposes of this Chapter—
(a)
references to a scheme are references to any scheme, arrangements or
understanding of any kind whatever, whether or not legally
enforceable, involving a single transaction or two or more transactions;
(b)
it shall be immaterial in determining whether any transactions have
30
formed or will form part of a series of transactions or scheme that the
parties to any of the transactions are different from the parties to
another of the transactions; and
(c)
the cases in which any two or more transactions are to be taken as
forming part of a series of transactions or scheme shall include any case
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in which it would be reasonable to assume that one or more of them—
(i)
would not have been entered into independently of the other or
others, or
(ii)
if entered into independently of the other or others, would not
have taken the same form or been on the same terms.
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(2)
For the purposes of this Chapter, a scheme achieves a UK tax advantage for a
person if in consequence of the scheme the person is in a position to obtain, or
has obtained—
(a)
a relief or increased relief from income tax or corporation tax,
(b)
a repayment or increased repayment of income tax or corporation tax,
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or

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Chapter 4 — Avoidance involving tax arbitrage
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(c)
the avoidance or reduction of a charge to income tax or corporation tax.
(3)
In subsection (2)(a) the reference to relief includes a reference to a tax credit.
(4)
For the purposes of subsection (2)(c) avoidance or reduction may in particular
be effected by—
(a)
receipts accruing in such a way that the recipient does not pay or bear
5
tax on them, or
(b)
a deduction in computing profits or gains.
31
Commencement
(1)
The deduction cases provisions have effect in relation to accounting periods of
a company beginning on or after 16th March 2005.
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(2)
Where an accounting period of a company begins before, and ends on or after
16th March 2005, it shall be assumed for the purposes of the deduction cases
provisions (and subsection (1) of this section) that that accounting period (“the
straddling period”) consists of two separate accounting periods—
(a)
the first beginning with the straddling period and ending with the 15th
15
March 2005, and
(b)
the second beginning with 16th March 2005 and ending with the
straddling period,

and the company’s profits and losses shall be computed accordingly for tax
purposes.
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(3)
The deduction cases provisions do not have effect so far as regards a
transaction to which a company is party on 16th March 2005 and which on that
date forms part of a scheme, if—
(a)
the company is not on 16th March 2005 connected with a person who is
on that date also party to, or concerned in, the scheme, and
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(b)
the scheme ceases to exist before 31st August 2005.

Section 839 of ICTA applies for the purposes of this subsection.
(4)
The receipts cases provisions have effect in relation to any contribution to the
capital of a company resident in the United Kingdom that is made on or after
16th March 2005.
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(5)
In this section—
“the deduction cases provisions” means—
(a)
sections 24 and 25 and Schedule 3, and
(b)
sections 28 to 30 so far as relating to the provisions in paragraph
(a);
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“the receipts cases provisions” means—
(a)
sections 26 and 27, and
(b)
sections 28 to 30 so far as relating to the provisions in paragraph
(a).