Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
97

(b)
any distribution in respect of the share were not a
distribution falling within section 209(2)(a) or (b) of the Taxes
Act 1988.
(3)
The debits and credits to be brought into account by the investing
company for the purposes of this Chapter as respects the share must
5
be determined on the basis of fair value accounting.
(4)
In any case where Condition 1 in section 91C below is satisfied, no
debits are to be brought into account in respect of any transaction (or
series of transactions) which (apart from the assumption in
subsection (5) of section 91C below) would have the effect of causing
10
the condition in paragraph (a) or (b) of subsection (1) of that section
not to be satisfied.
(5)
In any case where Condition 3 in section 91E below is satisfied—
(a)
debits and credits shall be brought into account for the
purposes of Schedule 26 to the Finance Act 2002 (derivative
15
contracts) by the investing company in respect of any
associated transaction falling within section 91E below as if it
were, or were a transaction in respect of, a derivative contract
(if that is not in fact the case), and
(b)
those debits and credits shall be determined on the basis of
20
fair value accounting.
(6)
A share is a non-qualifying share for the purposes of this section if—
(a)
it is not one where section 95 of the Taxes Act 1988 (dealers
etc) applies in relation to distributions in respect of the share,
and
25
(b)
one or more of the Conditions in sections 91C to 91E below is
satisfied.
(7)
Subsection (10) of section 91A above (company treated as holding a
share) also applies for the purposes of this section.”.
      (4)
After section 91B insert—
30
“91C
Condition 1 for section 91B(6)(b)
(1)
Condition 1 is that the assets of the issuing company are not income
producing but are of such a nature that the fair value of the share—
(a)
is likely to increase at a rate which represents a return on an
investment of money at a commercial rate of interest, and
35
(b)
is unlikely to deviate to a substantial extent from that rate of
increase.

Fluctuations in value resulting from changes in exchange rates are to
be left out of account for the purposes of paragraph (b) above.
(2)
The assets which, for the purposes of this section, are “income
40
producing” are—
(a)
any share as respects which the conditions in section 91A(1)
above are satisfied;
(b)
any share as respects which Condition 2 in section 91D below
is satisfied;
45
(c)
any share as respects which Condition 3 in section 91E below
is satisfied;

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Schedule 7 — Avoidance involving financial arrangements
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(d)
any asset of a description specified in any paragraph of
paragraph 8(2) of Schedule 10 to this Act (qualifying
investments in relation to a unit trust scheme or an offshore
fund).
(3)
The Treasury may by regulations amend this section for the purpose
5
of adding to the assets which are income producing.
(4)
The provision that may be made by regulations under this section
includes provision for the regulations to have effect in relation to
accounting periods (whenever beginning) which end on or after the
day on which the regulations come into force.
10
(5)
For the purposes of subsection (1) above, it shall be assumed that no
transaction (or series of transactions) intended to cause the condition
in paragraph (a) or (b) of that subsection not to be satisfied will be
entered into by the investing company.
(6)
This section shall be construed as one with section 91B above.
15
91D
Condition 2 for section 91B(6)(b)
(1)
Condition 2 is that the share—
(a)
is redeemable (see subsection (2)),
(b)
is designed to produce a return which equates, in substance,
to the return on an investment of money at a commercial rate
20
of interest, and
(c)
is not an excepted share (see subsection (3)).
(2)
For the purposes of this section, a share is to be regarded as
redeemable only if it is redeemable as a result of its terms of issue (or
any collateral agreements, arrangements or understandings)—
25
(a)
requiring redemption,
(b)
entitling the holder to require redemption, or
(c)
entitling the issuer to redeem.
(3)
A share is an “excepted share” for the purposes of this section if—
(a)
it is a qualifying publicly issued share (see subsection (4)),
30
(b)
it is a share that mirrors a public issue (see subsections (5) to
(7)), or
(c)
the investing company’s purpose in acquiring the share is not
an unallowable purpose (see subsection (8)).
(4)
A share is a “qualifying publicly issued share” for the purposes of
35
this section if—
(a)
it was issued by a company as part of an issue of shares to
independent persons, and
(b)
less than 10% of the shares in that issue are held by the
investing company or persons connected with it.
40
(5)
The cases where a share mirrors a public issue are those set out in
subsections (6) and (7) below.
(6)
Case 1 is where—
(a)
a company (company A) issues shares (the public issue) to
independent persons,
45

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Schedule 7 — Avoidance involving financial arrangements
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(b)
within 24 hours of that issue, one or more other companies
(companies BB) issue shares (the mirroring shares) to
company A on the same, or substantially the same, terms as
the public issue,
(c)
company A and companies BB are associated companies of
5
the investing company (see subsection (10)), and
(d)
the total nominal value of the mirroring shares does not
exceed the nominal value of the public issue,

and in any such case the mirroring shares are shares that mirror a
public issue.
10
(7)
Case 2 is where, in the circumstances of Case 1,—
(a)
within 24 hours of the public issue, one or more other
companies (companies CC) issue shares (the second-level
mirroring shares) to one or more of companies BB on the
same, or substantially the same, terms as the public issue,
15
(b)
company A, companies BB and companies CC are associated
companies of the investing company, and
(c)
the total nominal value of the second-level mirroring shares
does not exceed the nominal value of the public issue,

and in any such case the second-level mirroring shares are also
20
shares that mirror a public issue.
(8)
For the purposes of this section, a share is acquired by the investing
company for an unallowable purpose if the purpose, or one of the
main purposes, for which the company holds the share is—
(a)
except where the share is a qualifying publicly issued share,
25
the purpose of circumventing section 95 of the Taxes Act 1988
(see subsection (9)), or
(b)
any other purpose which is a tax avoidance purpose (see
subsection (10)).
(9)
The purpose, or one of the main purposes, for which the investing
30
company holds a share shall, in particular, be taken to be the purpose
of circumventing section 95 of the Taxes Act 1988 (taxation of dealers
in respect of distributions etc) if, at the time when the company
acquired the share,—
(a)
a credit institution (see subsection (10)) was an associated
35
company of the investing company, and
(b)
had the share been acquired by the credit institution, that
institution would have held the share in circumstances such
that section 95 of the Taxes Act 1988 applied.
(10)
In this section—
40
“associated company”, in relation to any other company, means
a company which, within the meaning given by section
413(3)(a) of the Taxes Act 1988, is a member of the same
group of companies as that other company;
“credit institution” means—
45
(a)
a bank, within the meaning of section 840A of the
Taxes Act 1988;
(b)
a building society;
(c)
a person authorised by a licence under Part 3 of the
Consumer Credit Act 1974 to carry on consumer
50

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Schedule 7 — Avoidance involving financial arrangements
100

credit business or consumer hire business within the
meaning of that Act;
“independent person”, in relation to a company, means a
person who is not connected with the company;
“tax advantage” has the meaning given by section 709(1) of the
5
Taxes Act 1988;
“tax avoidance purpose”, in the case of any company, means
any purpose that consists in securing a tax advantage
(whether for the company or any other person).
(11)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
10
purposes of this section.
(12)
This section is to be construed as one with section 91B above.
91E
Condition 3 for section 91B(6)(b)
(1)
Condition 3 is that there is a scheme or arrangement under which the
share and one or more associated transactions are together designed
15
to produce a return which equates, in substance, to the return on an
investment of money at a commercial rate of interest.
(2)
In this section “associated transaction” includes entering into, or
acquiring rights or liabilities under, any of the following—
(a)
a derivative contract;
20
(b)
a contract that would be a derivative contract, apart from
paragraph 4(2B) of Schedule 26 to the Finance Act 2002
(trades etc: hedging relationships with shares);
(c)
a contract having a similar effect to—
(i)
a derivative contract, or
25
(ii)
a contract falling within paragraph (b) above;
(d)
a contract of insurance or indemnity.
(3)
This section is to be construed as one with section 91B above.”.
      (5)
After section 91E insert—
“91F
Power to add, vary or remove Conditions for section 91B(6)(b)
30
(1)
The Treasury may by regulations amend this Chapter so as to add,
vary or remove Conditions for the purposes of section 91B(6)(b)
above.
(2)
Where the Treasury so add, vary or remove a Condition, they may
also by regulations amend any of the following enactments—
35
(a)
this Chapter,
(b)
Chapters 1 to 3 of Part 6 of the Taxes Act 1988 (company
distributions),
(c)
Part 18 of the Taxes Act 1988 (double taxation relief),
(d)
the Taxation of Chargeable Gains Act 1992,
40
(e)
Schedule 26 to the Finance Act 2002 (derivative contracts),

so as to make provision for or in connection with taxation in the case
of any asset or transaction that is or was mentioned in the Condition.
(3)
The power to make regulations under this section includes power—
(a)
to make different provision for different cases, and
45

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Schedule 7 — Avoidance involving financial arrangements
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(b)
to make such consequential, supplementary, incidental or
transitional provisions, or savings, as appear to the Treasury
to be necessary or expedient (including provision amending
any enactment or any instrument made under an
enactment).”.
5
      (6)
After section 91F insert—
“91G
Shares beginning or ceasing to be subject to section 91A or 91B
(1)
Where at any time on or after 16th March 2005 the conditions in
section 91A(1) or 91B(1) above become satisfied in the case of any
share, otherwise than in the circumstances described in subsection
10
(3) below, the investing company shall be deemed for the purposes
of the Taxation of Chargeable Gains Act 1992—
(a)
to have disposed of the share immediately before that time
for a consideration of an amount equal to its fair value at that
time, and
15
(b)
to have immediately reacquired it for a consideration of the
same amount.
(2)
Where at any time the conditions in section 91A(1) or 91B(1) above
cease to be satisfied in the case of any share, the investing company
shall be deemed for the purposes of the Taxation of Chargeable
20
Gains Act 1992 and of this Chapter—
(a)
to have disposed of the share immediately before that time
for a consideration of an amount equal to its fair value at that
time, and
(b)
to have immediately reacquired it for a consideration of the
25
same amount.
(3)
In any case where—
(a)
a share is held by a company both—
(i)
at the end of 15th March 2005, and
(ii)
at the beginning of 16th March 2005, and
30
(b)
the conditions in section 91A(1) or 91B(1) above are satisfied
in relation to that share at the beginning of 16th March 2005,

subsection (4) below applies.
(4)
In any such case, section 116 of the Taxation of Chargeable Gains Act
1992 (reorganisations etc involving qualifying corporate bonds) shall
35
have effect in accordance with—
(a)
the assumptions in subsections (5) and (6) below, and
(b)
the provisions of subsection (7) below.
(5)
The first of the assumptions is that the share became an asset
representing a creditor relationship of the company (and,
40
accordingly, a qualifying corporate bond) in consequence of the
occurrence on 16th March 2005 of a transaction such as is mentioned
in section 116(1) of the Taxation of Chargeable Gains Act 1992.
(6)
The remaining assumptions are that, in relation to the transaction
deemed to have occurred as mentioned in subsection (5) above,—
45
(a)
the share immediately before 16th March 2005 shall be
assumed to be the old asset for the purposes of section 116 of
the Taxation of Chargeable Gains Act 1992, and

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Schedule 7 — Avoidance involving financial arrangements
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(b)
the asset representing a creditor relationship immediately
after the beginning of 16th March 2005 shall be assumed for
those purposes to be the new asset.
(7)
Where—
(a)
subsection (3) above has effect in the case of any share, but
5
(b)
the conditions in section 91A(1) or 91B(1) above cease to be
satisfied in the case of the share at any time on or before 31st
December 2005,

subsection (8) below applies.
(8)
In any such case—
10
(a)
the deemed disposal of the share at that time by virtue of
subsection (2)(a) above shall not be regarded as a disposal for
the purposes of subsection (10)(b) or (c) of section 116 of the
Taxation of Chargeable Gains Act 1992, but
(b)
the share shall continue to be the new asset for the purposes
15
of that section.”.
      (7)
The amendments made by this paragraph have effect in relation to shares
held by a company on or after 16th March 2005.
Related transactions in relation to right to receive manufactured interest
11    (1)
Section 97 of FA 1996 (manufactured interest) is amended as follows.
20
      (2)
In subsection (2) (consequences of company having relationship to which
the section applies)—
(a)
paragraph (b) (which restricts the debits and credits to be brought
into account to those relating to the manufactured interest) shall
cease to have effect, and
25
(b)
in the closing words, for “paragraphs (a)(ii) and (b)” substitute
“paragraph (a)(ii)”.
      (3)
After subsection (2) insert—
“(2A)
Where a company—
(a)
has a relationship to which this section applies, but
30
(b)
enters into a related transaction in respect of the right to
receive manufactured interest,

then, for the purpose of bringing credits into account by virtue of
subsection (2) above in respect of that or any other related
transaction, the company shall continue to be treated as having a
35
relationship to which this section applies even though the
manufactured interest is not payable to the company.”.
      (4)
Omit subsections (3) and (3A) (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 97(2)
40
of that Act).
      (5)
The amendments made by this paragraph have effect in relation to related
transactions on or after 16th March 2005.

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Schedule 7 — Avoidance involving financial arrangements
103

Money debts etc not arising from lending of money: discounts and profits from transactions
12    (1)
Section 100 of FA 1996 (money debts etc not arising from the lending of
money) is amended as follows.
      (2)
In subsection (1)(c) (money debts to which the section applies) after sub-
paragraph (iii) insert “or
5
(iv)
as respects which the conditions in subsection (1A)
below (discount etc) are satisfied;”.
      (3)
After subsection (1) insert—
“(1A)
The conditions mentioned in subsection (1)(c)(iv) above are that—
(a)
the company stands in the position of creditor in relation to
10
the money debt;
(b)
the money debt is one from which a discount (whether of an
income or capital nature) arises to the company;
(c)
the discount does not fall to be brought into account under
section 50 of the Finance Act 2005 by virtue of section 47 of
15
that Act (alternative finance return);
(d)
if the money debt is some or all of the consideration payable
for a disposal of property, the money debt (on the
assumption that it will be paid in full) does not fall to be
brought into account for the purposes of corporation tax as a
20
trading receipt of the company;
(e)
if the money debt is some or all of the consideration payable
for a disposal of property, the property in question is not any
of the following—
(i)
an asset representing a loan relationship;
25
(ii)
a derivative contract.”.
      (4)
In subsection (2), as it has effect for periods of account beginning on or after
1st January 2005, in paragraph (a), for “matters mentioned in subsection
(1)(c) above” substitute “matters mentioned in subsection (1)(c)(i) to (iii)
above or subsection (2ZA) below”.
30
      (5)
After subsection (2) insert—
“(2ZA)
The matters are—
(a)
in the case of a money debt falling within subsection (1)(c)(i)
above, profits (but not losses) arising to the company from
any related transaction in respect of the right to receive
35
interest;
(b)
in the case of a money debt falling within subsection (1)(c)(iv)
above, each of the following—
(i)
the discount arising to the company from the money
debt;
40
(ii)
profits (but not losses) arising to the company from
any related transaction;
(iii)
any impairment arising to the company in respect of
the discount;
(iv)
any reversal of any such impairment.
45
(2ZB)
Where a company—