Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Schedule 6 — Accounting practice and related matters
83

Schedule 6
Section 37

Accounting practice and related matters
Adjustment on change of accounting basis
1     (1)
In Schedule 22 to FA 2002 (adjustment on change of accounting basis:
corporation tax), in paragraph 4 (adjustment treated as arising on last day of
5
first period for which new basis adopted), for “last day” substitute “first
day”.
      (2)
This amendment has effect for accounting periods ending after 5th April
2005 in relation to periods of account beginning on or after 1st January 2005.
2     (1)
In section 227 of ITTOIA 2005 (adjustment on change of accounting basis:
10
income tax), for subsection (4) (meaning of “relevant change of accounting
approach”) substitute—
“(4)
A “relevant change of accounting approach” means—
(a)
a change of accounting principle or practice that, in
accordance with generally accepted accounting practice,
15
gives rise to a prior period adjustment, or
(b)
a change from using UK generally accepted accounting
practice to using generally accepted accounting practice with
respect to accounts drawn up in accordance with
international accounting standards.”.
20
      (2)
This amendment has effect for the tax year 2005-06 and subsequent tax years
in relation to periods of account beginning on or after 1st January 2005.
Meaning of “statutory insolvency arrangement”
3     (1)
For section 259 of ITTOIA 2005 (trading income: meaning of “statutory
insolvency arrangement”) substitute—
25
“259
Meaning of “statutory insolvency arrangement”
(1)
In this Part “statutory insolvency arrangement” means—
(a)
a voluntary arrangement that has taken effect under or as a
result of the Insolvency Act 1986, Schedule 4 or 5 to the
Bankruptcy (Scotland) Act 1985 or the Insolvency (Northern
30
Ireland) Order 1989,
(b)
a compromise or arrangement that has taken effect under
section 425 of the Companies Act 1985 or Article 418 of the
Companies (Northern Ireland) Order 1986, or
(c)
any arrangement or compromise of a kind corresponding to
35
any of those mentioned in paragraph (a) or (b) that has taken
effect under or by virtue of the law of a country or territory
outside the United Kingdom.”.
      (2)
This amendment has effect for the tax year 2005-06 and subsequent tax years
in relation to periods of account beginning on or after 1st January 2005.
40

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Schedule 6 — Accounting practice and related matters
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Minor corrections
4     (1)
In Schedule 4 to FA 2005, omit paragraph 6 (which amended section 109A of
ICTA 1988 for corporation tax purposes when that section has no such
application).
      (2)
In paragraph 19A of Schedule 9 to FA 1996, in sub-paragraph (4B)(g) after
5
“2,” insert “4A,”.
      (3)
In paragraph 25A of Schedule 26 to FA 2002, for “section 85B(1)” substitute
“paragraph 17B(1)”.
      (4)
In section 103(1) of FA 1996, in the definition of “exchange gain” and
“exchange loss”, after “(1A)” insert “, (1AA)”.
10
      (5)
In paragraph 54(1) of Schedule 26 to FA 2002, in the definition of “exchange
gain” and “exchange loss”, after “(2)” insert “, (2A)”.
      (6)
These amendments shall be deemed always to have had effect.
Deemed release of liability on impaired debt becoming held by connected company
5     (1)
In Schedule 9 to FA 1996 (loan relationships: special computational
15
provisions), for paragraph 4A substitute—
“Deemed release of liability on impaired debt becoming held by connected company
4A    (1)
This paragraph applies—
(a)
in the case specified in sub-paragraph (2), subject to the
exception in sub-paragraph (3), and
20
(b)
in the case specified in sub-paragraph (4).
      (2)
The first case is where—
(a)
a company (“the debtor company”) is party as debtor to a
loan relationship,
(b)
another company (“the creditor company”) becomes party
25
as creditor to the loan relationship,
(c)
the debtor company and the creditor company are
connected immediately after the latter becomes party to
the loan relationship,
(d)
there is no connection between the creditor company and
30
the person from whom it acquires its rights under the loan
relationship in the period of account in which it does so,
and
(e)
the carrying value of the liability under the loan
relationship in the accounts of the debtor company exceeds
35
the amount or value of any consideration given by the
creditor company for its rights under the loan relationship.

The carrying value referred to in paragraph (e) is the amount that
would have been the carrying value of the liability under the loan
relationship in the accounts of the debtor company if a period of
40
account had ended immediately before the creditor company
became party to the loan relationship.
      (3)
The exception to the first case is where—

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Schedule 6 — Accounting practice and related matters
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(a)
the creditor company acquires its rights under the loan
relationship under an arm’s length transaction, and
(b)
there has been no connection between the creditor
company and the debtor company at any time in the
period—
5
(i)
beginning four years before the date on which the
creditor company acquired those rights, and
(ii)
ending twelve months before that date.
      (4)
The second case is where—
(a)
a company (“the debtor company”) is party as debtor to a
10
loan relationship,
(b)
another company (“the creditor company”) that—
(i)
is party to the loan relationship as creditor, and
(ii)
is not connected with the debtor company,

becomes connected with the debtor company, and
15
(c)
the amount that would have been the carrying value of the
asset representing the loan relationship in the accounts of
the creditor company if a period of account had ended
immediately before the companies became connected
would have been adjusted for impairment.
20
      (5)
Where this paragraph applies there is deemed to be a release by
the creditor company of its rights under the loan relationship.
      (6)
In the first case the release is deemed to be of the amount of the
excess referred to in sub-paragraph (2)(e) and to take place when
the creditor company acquires its rights under the loan
25
relationship.
      (7)
In the second case the release is deemed to be of the amount of the
impairment adjustment referred to in sub-paragraph (4)(c) and to
take place when the creditor company becomes connected with
the debtor company.
30
      (8)
For the purposes of this paragraph there is a connection between
a company and another person at any time (subject to sub-
paragraph (9)) if at that time—
(a)
the other person is a company and one of the companies
has control of the other, or
35
(b)
the other person is a company and both companies are
under the control of the same person,

and there is a connection between a company and another person
in a period of account if there is a connection (within paragraph (a)
or (b) above) between the company and the person at any time in
40
that period.

“Control” here has the meaning given for the purposes of section
87 of this Act by section 87A.
      (9)
The provisions of—
(a)
section 87(4) (companies not regarded as connected by
45
virtue of control by government etc), and
(b)
section 88 (connection between companies to be
disregarded in certain circumstances),

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Schedule 6 — Accounting practice and related matters
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apply for the purposes of this paragraph as they apply for the
purposes of section 87.
     (10)
In determining for the purposes of this section the carrying value
of the liability under a loan relationship, or of an asset
representing a loan relationship, no account shall be taken of—
5
(a)
accrued amounts,
(b)
amounts paid or received in advance, or
(c)
impairment losses.”.
      (2)
The amendment in sub-paragraph (1) has effect where the deemed release
occurs on or after 16th March 2005.
10
Adjustment on change to international accounting standards: bad debt debits formerly
disallowed
6     (1)
In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment
on change of accounting policy), after sub-paragraph (4B) insert—
  “(4BA)
In determining the accounting value of an asset of the company at
15
the end of the earlier period, no account shall be taken of a debit
that in a period of account beginning before 1st January 2005 was
disallowed for tax purposes—
(a)
because of the assumption required by paragraph 5(1)
above, or
20
(b)
because the exceptions in section 74(1)(j) of the Taxes Act
1988 did not apply.”.
      (2)
This amendment has effect for periods of account beginning on or after 1st
January 2005.
Loan relationships with embedded derivatives
25
7     (1)
Where—
(a)
a company is subject to old UK GAAP for a period of account
beginning on or after 1st January 2005, and
(b)
it holds assets (“relevant assets”) that—
(i)
it is not permitted, under old UK GAAP, to treat as
30
mentioned in subsection (1) of section 94A of FA 1996 (loan
relationship with embedded derivative treated as two
assets), with the result that that section does not apply, and
(ii)
it would have been permitted to treat as mentioned in that
provision if it had been subject to international accounting
35
standards or new UK GAAP,

the company may elect that Chapter 2 of Part 4 of FA 1996 (loan
relationships) and Schedule 26 to FA 2002 (derivative contracts) shall have
effect as if section 94A did apply.
      (2)
Any such election—
40
(a)
must be made in writing to an officer of Revenue and Customs,
(b)
must be made—
(i)
on or before 31st December 2005, or
(ii)
after that date in accordance with sub-paragraph (3)(a) or (b),

and
45

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Schedule 6 — Accounting practice and related matters
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(c)
is irrevocable.
      (3)
An election may be made after 31st December 2005—
(a)
if the company does not hold any relevant assets at the beginning of
its first period of account beginning on or after 1st January 2005 but
subsequently acquires one (or more) and the election is made no later
5
than 90 days after the acquisition (or, if there is more than one, the
first of them), or
(b)
if the company does not have a period of account beginning in the
calendar year 2005 and holds one or more relevant assets at the
beginning of its first period of account beginning after the end of that
10
year and the election is made no later than 90 days after the
beginning of that period of account.
      (4)
An election under this paragraph has effect effect in relation to all relevant
assets held by the company (including those subsequently acquired).
      (5)
An election under this paragraph—
15
(a)
if made on or before 31st December 2005, has effect from the
beginning of the company’s first period of account beginning on or
after 1st January 2005;
(b)
if made after 31st December 2005 in accordance with sub-paragraph
(3)(a), has effect from the beginning of the period of account in which
20
the first relevant asset is acquired;
(c)
if made after 31st December 2005 in accordance with sub-paragraph
(3)(b), has effect from the beginning of the company’s first period of
account beginning on or after 1st January 2005.
      (6)
Where an election is made under this paragraph the provisions of paragraph
25
19A of Schedule 9 to FA 1996 and paragraph 50A of Schedule 26 to FA 2002
(adjustments on change of accounting policy) apply as if there were a change
of accounting policy (consisting in the company treating its relevant assets
as mentioned in section 94A(1) as from the date the election has effect).
      (7)
In this paragraph “old UK GAAP” means UK generally accepted accounting
30
practice as it applied for periods of account beginning before 1st January
2005 and “new UK GAAP” means UK generally accepted accounting
practice as it applies for periods of account beginning on or after that date.
      (8)
Any election made under paragraph 28(3) of Schedule 4 to FA 2005 before
the passing of this Act shall have effect as if made under this paragraph.
35
8     (1)
In section 116(8A) of TCGA 1992 (reorganisations, conversions and
reconstructions: application of loan relationships regime in certain cases)—
(a)
after “shall have effect” insert “, subject to subsection (8B) below,”,
and
(b)
for “that subsection” substitute “subsection (6) above”.
40
      (2)
After that subsection insert—
“(8B)
Subsection (8A) above does not apply where the relevant transaction
is a conversion of securities occurring in consequence of the
operation of the terms of any security or of any debenture which is
not a security.
45

Expressions used in this subsection have the same meaning as they
have for the purposes of section 132.”.

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Schedule 7 — Avoidance involving financial arrangements
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      (3)
These amendments have effect in relation to transactions occurring after
26th May 2005.
Exchange gains and losses
9     (1)
The following provisions shall cease to have effect—
(a)
section 84A of FA 1996 (exchange gains and losses from loan
5
relationships);
(b)
paragraph 16 of Schedule 26 to FA 2002 (exchange gains and losses
arising from derivative contracts).
      (2)
These amendments come into force on a day to be appointed by the Treasury
by order made by statutory instrument.
10
      (3)
The order may contain such transitional provision and savings as appear to
the Treasury to be appropriate.
10
In section 103 of FA 1996 (loan relationships: general interpretation), for
subsection (1AA) substitute—
  “(1AA)
The Treasury may make provision by regulations as to the manner
15
in which—
(a)
exchange gains or losses, and
(b)
any other profits or gains or losses,

are to be calculated for the purposes of subsection (1A) in a case
where fair value accounting is used by the company.
20

Any such regulations may be made so as to apply to periods of
account beginning before the regulations are made, but not earlier
than the beginning of the calendar year in which they are made.”.
11
In paragraph 54 of Schedule 26 to FA 2002 (derivative contracts: general
interpretation), for sub-paragraph (2A) substitute—
25
   “(2A)
The Treasury may make provision by regulations as to the manner
in which—
(a)
exchange gains or losses, and
(b)
any other profits or gains or losses,

are to be calculated for the purposes of sub-paragraph (2) in a case
30
where fair value accounting is used by the company.

Any such regulations may be made so as to apply to periods of
account beginning before the regulations are made, but not earlier
than the beginning of the calendar year in which they are made.”.
Schedule 7
35
Section 39

Avoidance involving financial arrangements
Rent factoring
1     (1)
Part 2 of ICTA (which, at sections 43A to 43G, includes provisions about rent
factoring) is amended as follows.
      (2)
Section 43C(1) (section 43B not to apply where term over which financial
40
obligation is to be reduced exceeds 15 years) shall cease to have effect.

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      (3)
In section 43E (interposed lease: exceptions etc) in subsection (1), omit
paragraphs (a) and (b) (which relate to certain periods exceeding 15 years).
      (4)
The amendments made by this paragraph have effect in relation to finance
agreements entered into on or after 16th March 2005.
      (5)
But where—
5
(a)
a finance agreement was entered into on or after 20th March 2000
and before 16th March 2005, and
(b)
section 43D of ICTA (interposed lease) would apply in relation to the
agreement but for section 43E(1)(a) or (b) of that Act,

sub-paragraph (6) has effect.
10
      (6)
In any such case, any amount of principal in rent paid on or after 16th March
2005 which, apart from this sub-paragraph, would—
(a)
be deductible as an expense in computing profits charged under
Case I of Schedule D, or
(b)
be deductible under section 75 of ICTA (expenses of management),
15
or
(c)
fall to be brought into account under section 76 of that Act (expenses
of insurance companies) at Step 1 in subsection (7) of that section,

shall not be so deductible or brought into account for any accounting period
ending on or after 16th March 2005.
20
      (7)
If payment of an amount of principal in rent is made on or after 16th March
2005 in respect of a rental period that falls—
(a)
partly before that date, and
(b)
partly on or after it,

sub-paragraph (6) has effect in relation to only so much of the payment as
25
relates to the part of the period falling on or after 16th March 2005.
      (8)
In this paragraph—
“amount of principal in rent” means so much of any amount of rent
payable under a lease as, in the case of the finance agreement in
question, reduces the amount of the financial obligation mentioned
30
in section 43A(1) of ICTA;
“rental period” means a period in respect of which rent is paid.
Section 730: restriction to income consisting of distributions in respect of company shares etc
2     (1)
Section 730 of ICTA (transfers of income arising from securities) is amended
as follows.
35
      (2)
In each place where it occurs—
(a)
for “interest” substitute “distribution”;
(b)
for “securities” substitute “shares”.
      (3)
In subsection (1) (interest deemed to be income of owner etc)—
(a)
in paragraph (a), for “deemed to be” substitute “treated as”,
40
(b)
in paragraph (b), for “deemed to be” substitute “treated as”, and
(c)
omit paragraph (c).
      (4)
For subsection (2) (sale etc where proceeds chargeable to tax by virtue of