Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Schedule 2 — Employee securities: anti-avoidance
66

giving any consideration for the conversion or incurring any
expenses in connection with it.”
      (4)
This paragraph has effect in relation to acquisitions on or after 2nd
December 2004.
10    (1)
In section 440 (amount of charge under section 438), after subsection (3)
5
insert—
“(3A)
If (because of subsection (2) of section 437) subsection (1) of that
section did not apply in relation to the employment-related
securities, the taxable amount is to be reduced by the amount by
which—
10
(a)
the market value of the employment-related securities for the
purposes specified in that subsection, exceeded
(b)
what it would have been had that subsection applied,

(less the aggregate of any amount by which the taxable amount on
any previous chargeable event relating to the employment-related
15
securities has been reduced under this subsection).”
      (2)
This paragraph has effect on and after 2nd December 2004.
11    (1)
In section 443 (exception from charge under section 438 for certain company
shares), for subsection (1A) substitute—
“(1A)
This subsection is satisfied unless something which affects the
20
employment-related securities has been done (at or before the time
when section 438 would apply) as part of a scheme or arrangement
the main purpose (or one of the main purposes) of which is the
avoidance of tax or national insurance contributions.”
      (2)
This paragraph has effect where something such as is mentioned in section
25
443(1A) of ITEPA 2003 has been done on or after 2nd December 2004.
Securities acquired for less than market value
12
Chapter 3C of Part 7 (securities acquired for less than market value) is
amended as follows.
13    (1)
In section 446R (exception from Chapter for certain company shares), for
30
subsection (1A) substitute—
“(1A)
This subsection is satisfied unless something which affects the
employment-related securities has been done (at or before the time
of the acquisition) as part of a scheme or arrangement the main
purpose (or one of the main purposes) of which is the avoidance of
35
tax or national insurance contributions.”
      (2)
This paragraph has effect where something such as is mentioned in section
446R(1A) of ITEPA 2003 has been done on or after 2nd December 2004.
14    (1)
In section 446U(1) (discharge of notional loan), insert at the end “or
(c)
something which affects the employment-related securities is
40
done as part of a scheme or arrangement the main purpose
(or one of the main purposes) of which is the avoidance of tax
or national insurance contributions.”

Finance Bill
Schedule 2 — Employee securities: anti-avoidance
67

      (2)
This paragraph has effect where something such as is mentioned in section
443U(1)(c) of ITEPA 2003 has been done on or after 2nd December 2004.
15    (1)
After section 446U insert—
“446UA
Pre-acquisition avoidance cases
(1)
Sections 446S to 446U do not apply if the main purpose (or one of the
5
main purposes) of the arrangements under which the right or
opportunity to acquire the employment-related securities is made
available is the avoidance of tax or national insurance contributions.
(2)
But instead an amount equal to what would (apart from this section)
be the amount of the notional loan initially outstanding by virtue of
10
sections 446S and 446T counts as employment income of the
employee for the tax year in which the acquisition takes place.”
      (2)
This paragraph has effect in relation to acquisitions on or after 2nd
December 2004.
16    (1)
Section 698 (PAYE: special charges on employment-related securities) is
15
amended as follows.
      (2)
In subsection (1), after paragraph (e) insert—
“(ea)
section 446UA (securities or interest acquired for less than
market value: charge in avoidance cases),”.
      (3)
In subsection (6), after paragraph (d) insert—
20
“(da)
in relation to an amount counting as employment income
under section 446UA, the date of the acquisition of the
securities or interest in securities in question,”.
      (4)
This paragraph has effect on and after the day on which this Act is passed.
Post-acquisition benefits from securities
25
17
Chapter 4 of Part 7 (post-acquisition benefits from securities) is amended as
follows.
18    (1)
Section 447 (charge on other chargeable benefits from securities) is amended
as follows.
      (2)
In subsection (1), for “by virtue of the ownership of employment-related
30
securities by that person or another associated person” substitute “in
connection with employment-related securities”.
      (3)
For subsection (4) substitute—
“(4)
If the benefit is otherwise chargeable to income tax this section does
not apply unless something has been done which affects the
35
employment-related securities as part of a scheme or arrangement
the main purpose (or one of the main purposes) of which is the
avoidance of tax or national insurance contributions.”
      (4)
Sub-paragraph (2) has effect on and after 2nd December 2004 and sub-
paragraph (3) has effect where something such as is mentioned in section
40
447(4) of ITEPA 2003 has been done on or after that date.
19    (1)
In section 449 (exception from charge under section 447 for certain company

Finance Bill
Schedule 3 — Qualifying scheme
Part 1 — Introductory
68

shares), for subsection (1A) substitute—
“(1A)
This subsection is satisfied unless something which affects the
employment-related securities has been done as part of a scheme or
arrangement the main purpose (or one of the main purposes) of
which is the avoidance of tax or national insurance contributions.”
5
      (2)
This paragraph has effect where something such as is mentioned in section
449(1A) of ITEPA 2003 has been done on or after 2nd December 2004.
Corporation tax relief: minor and consequential amendments
20    (1)
Schedule 23 to FA 2003 (corporation tax relief for employee shares) is
amended as follows.
10
      (2)
In paragraph 7 (award of shares: income tax position of employee), after sub-
paragraph (2) insert—
    “(3)
It must be the case that section 446UA of the Income Tax (Earnings
and Pensions) Act 2003 does not operate in relation to the shares.”
      (3)
In paragraph 21(8) (amount of relief in case of restricted shares: provision to
15
be disregarded in determining amount of relief on a chargeable event under
section 426), for “446E(3)” substitute “446E(6)”.
      (4)
In paragraph 22C (amount of relief in case of convertible shares), after sub-
paragraph (4) insert—
   “(4A)
Subsections (2) and (3) of section 437 of the Income Tax (Earnings
20
and Pensions) Act 2003 are to be disregarded in determining the
amounts mentioned in sub-paragraphs (3) and (4).”
      (5)
In paragraph 25(1) (exclusion of other deductions where relief available
under Schedule 23), after “Schedule is” insert “(or, apart from paragraph
7(3), would be)”.
25
      (6)
Sub-paragraphs (2), (4) and (5) have effect in relation to awards on or after
the day on which this Act is passed.
      (7)
Sub-paragraph (3) is to be treated as having come into force on 7th May 2004.
Schedule 3
Section 24

Qualifying scheme
30
Part 1
Introductory
1
For the purposes of section 24 a scheme is a qualifying scheme if it falls
within any of the following Parts of this Schedule.

Finance Bill
Schedule 3 — Qualifying scheme
Part 3 — Schemes involving hybrid effect
69

Part 2
Schemes involving hybrid entities
2
A scheme falls within this Part if a party to a transaction forming part of the
scheme is a hybrid entity.
3     (1)
An entity is a hybrid entity if—
5
(a)
under the tax law of any territory, the entity is regarded as being a
person, and
(b)
the entity’s profits or gains are, for the purposes of a relevant tax
imposed under the law of any territory, treated as the profits or gains
of a person or persons other than that person.
10
      (2)
The requirement in sub-paragraph (1)(b) is not to be regarded as satisfied in
relation to an entity by reason only of its profits or gains being subject to a
rule similar to that in section 747(3) of ICTA (imputation of chargeable
profits of controlled foreign company) and having effect under the tax law
of any territory outside the United Kingdom.
15
      (3)
For the purposes of this paragraph, the following are relevant taxes—
(a)
income tax;
(b)
corporation tax;
(c)
any tax of a similar character to income tax or corporation tax that is
imposed by the law of a territory other than the United Kingdom.
20
Part 3
Schemes involving hybrid effect
Schemes involving hybrid effect
4
A scheme falls within this Part if it satisfies the requirements of paragraph 5,
6, 7 or 8.
25
Instruments of alterable character
5     (1)
A scheme satisfies the requirements of this paragraph if one of the parties to
the scheme is party to an instrument falling within sub-paragraph (2).
      (2)
An instrument falls within this sub-paragraph if, under the law of a
particular territory, a relevant characteristic of the instrument may be
30
altered on the election of any party to the instrument.
      (3)
For the purposes of this paragraph a characteristic of an instrument is a
relevant characteristic if, under the law of a particular territory, altering it
has the effect of determining whether, for the tax purposes of that territory—
(a)
the instrument is taken into account as giving rise to income,
35
(b)
the instrument is taken into account as giving rise to capital, or
(c)
the instrument does not fall to be taken into account as giving rise
either to income or to capital.
      (4)
An instrument is taken into account as giving rise to capital if any gain on
the disposal of the instrument would, or would if the person making the
40
disposal were resident in the United Kingdom, be a chargeable gain.

Finance Bill
Schedule 3 — Qualifying scheme
Part 3 — Schemes involving hybrid effect
70

Shares subject to conversion
6     (1)
A scheme satisfies the requirements of this paragraph if it includes—
(a)
the issuing by a company of shares subject to conversion, or
(b)
the amendment of rights attaching to shares issued by a company
such that the shares become shares subject to conversion.
5
      (2)
For the purposes of sub-paragraph (1) a company’s shares are shares subject
to conversion if—
(a)
the rights attached to the shares include provision by virtue of which
a holder of such shares is entitled, on the occurrence of an event, to
acquire by conversion or exchange securities in the company or
10
another company, and
(b)
the occurrence of the event is within the reasonable expectation of
the company at the relevant time.
      (3)
For the purposes of sub-paragraph (2) the relevant time is—
(a)
the time when the shares are issued, or
15
(b)
if at the time when the shares are issued the occurrence of the event
is not within the company’s reasonable expectation and the rights
attaching to the shares are later amended as described in sub-
paragraph (1)(b), the time when the rights attaching to the shares are
so amended.
20
      (4)
In this paragraph “security” has the same meaning as in Part 6 of ICTA.
Securities subject to conversion
7     (1)
A scheme satisfies the requirements of this paragraph if it includes—
(a)
the issuing by a company of securities subject to conversion, or
(b)
the amendment of rights attaching to securities issued by a company
25
such that the securities become securities subject to conversion.
      (2)
For the purposes of sub-paragraph (1) a company’s securities are securities
subject to conversion if—
(a)
the rights attached to the securities include provision by virtue of
which a holder of such securities is entitled, on the occurrence of an
30
event, to acquire by conversion or exchange shares in the company
or another company, and
(b)
the occurrence of the event is within the reasonable expectation of
the company at the relevant time.
      (3)
For the purposes of sub-paragraph (2) the relevant time is—
35
(a)
the time when the securities are issued, or
(b)
if at the time when the securities are issued the occurrence of the
event is not within the company’s reasonable expectation and the
rights attaching to the securities are later amended as described in
sub-paragraph (1)(b), the time when the rights attaching to the
40
securities are so amended.
      (4)
In this paragraph “security” has the same meaning as in Part 6 of ICTA.

Finance Bill
Schedule 3 — Qualifying scheme
Part 4 — Schemes involving hybrid effect and connected persons
71

Debt instruments treated as equity
8     (1)
A scheme satisfies the requirements of this paragraph if it includes a debt
instrument issued by a company that is treated as equity in the company
under generally accepted accounting practice.
      (2)
For the purposes of this paragraph, a debt instrument is an instrument
5
issued by a company that represents a loan relationship of the company or,
if the company were a company resident in the United Kingdom, would
represent a loan relationship of the company.
Part 4
Schemes involving hybrid effect and connected persons
10
Schemes involving hybrid effect and connected persons
9
A scheme falls within this Part if it satisfies the requirements of paragraph
10 or 11.
Scheme including issue of shares not conferring a qualifying beneficial entitlement
10    (1)
A scheme satisfies the requirements of this paragraph if it includes the issue
15
by a company to a person connected with the company of shares other than
shares falling within sub-paragraph (2).
      (2)
Shares issued by a company fall within this sub-paragraph if—
(a)
on their issue, they are ordinary shares that are fully paid-up,
(b)
at all times in the accounting period of the company in which the
20
issue takes place, the shares confer a qualifying beneficial
entitlement, and
(c)
when the issue takes place, there is no arrangement or
understanding under which the rights attaching to the shares may be
amended.
25
      (3)
A share in a company confers a qualifying beneficial entitlement if it confers
a beneficial entitlement to the relevant proportion of—
(a)
any profits available for distribution to equity holders of the
company, and
(b)
any assets of the company available for distribution to its equity
30
holders on a winding-up.
      (4)
For the purposes of sub-paragraph (3) the relevant proportion, in relation to
a share, is the same as the proportion of the issued share capital represented
by that share.
      (5)
Schedule 18 to ICTA (equity holders and profits or assets available for
35
distribution) applies for the purposes of sub-paragraph (3) as it applies for
the purposes of section 403C of ICTA.
Scheme including transfer of rights under a security
11    (1)
A scheme satisfies the requirements of this paragraph if it includes a
transaction or a series of transactions under which a person (“the
40
transferor”)—

Finance Bill
Schedule 4 — Chargeable gains: location of assets etc
Part 1 — Location of assets
72

(a)
transfers rights to receive a payment under a relevant security to one
or more other persons, or
(b)
otherwise secures that one or more other persons are similarly
benefited,

and sub-paragraphs (3) and (4) are satisfied.
5
      (2)
A person is similarly benefited for these purposes if he receives a payment
which would, but for the transaction or series of transactions, have arisen to
the transferor.
      (3)
This sub-paragraph is satisfied if—
(a)
the transferor, and
10
(b)
at least one of the persons to whom a transfer of rights is made or a
similar benefit is secured,

are connected with each other.
      (4)
This sub-paragraph is satisfied if following the transfer of rights or the
securing of the similar benefit—
15
(a)
two or more persons either hold rights to receive a payment under
the security or enjoy a similar benefit, and
(b)
the rights held and benefits enjoyed by such of those persons as are
connected have, taken together, a value equal to or greater than the
value of any other rights to receive a payment under the security and
20
of any other similar benefits, taken together.
      (5)
In sub-paragraph (4)(b) references to the value of rights to receive a payment
under a relevant security are references to the market value of those rights;
and references to the value of similar benefits are to be construed
accordingly.
25
      (6)
In this paragraph a relevant security is—
(a)
a security (within the meaning of Part 6 of ICTA), or
(b)
any agreement under which a person receives an annuity or other
annual payment (whether it is payable annually or at shorter or
longer intervals) for a term which is not contingent on the duration
30
of a human life or lives.
Interpretation
12
Section 839 of ICTA has effect for the purposes of this Part.
Schedule 4
Section 34

Chargeable gains: location of assets etc
35
Part 1
Location of assets
Exceptions from sections 713 and 714 of ICTA
1     (1)
Section 715 of ICTA is amended as follows.