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Finance Bill


Finance Bill
Schedule 7 — Avoidance involving financial arrangements

104

 

      (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

5

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;

10

(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.

15

(2ZB)   

Where a company—

(a)   

has a relationship to which this section applies by virtue of

subsection (1)(c)(i) above, but

(b)   

enters into a related transaction in respect of the right to

receive interest,

20

   

then, for the purpose of bringing credits into account by virtue of

subsection (2ZA)(a) above in respect of that or any other related

transaction, the company shall continue to be treated as having a

relationship to which this section so applies even though the interest

is not payable to the company.”.

25

      (6)  

After subsection (3) (amounts treated as interest under Schedule 28AA to

ICTA) insert—

“(3A)   

For the purposes of this section, a discount shall, in particular, be

taken to arise from a money debt in any case where—

(a)   

there is a disposal of property for a consideration some or all

30

of which is money that falls to be paid after the sale;

(b)   

the amount or value of the whole consideration exceeds what

the purchaser would have paid for the property if he had

been required to pay in full at the time of the disposal; and

(c)   

some or all of the excess can reasonably be regarded as

35

representing a return on an investment of money at interest

(and, accordingly, as being a discount arising from the

money debt).

(3B)   

The credits to be brought into account for the purposes of this

Chapter in respect of a discount arising from a money debt must be

40

determined using an amortised cost basis of accounting (see section

103).”.

      (7)  

Omit subsections (4) to (6) and (8) (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 100(2)

45

of that Act).

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

105

 

      (8)  

Omit subsection (13) (express subjection to Schedules 9 and 11 to FA 1996,

which is unnecessary in view of the closing words of subsection (2) of the

section).

      (9)  

In consequence of the amendments made by this paragraph, paragraph (c)

of the Case III of Schedule D substituted for the purposes of corporation tax

5

by section 18(3A) of ICTA (tax in respect of discount arising otherwise than

in respect of a loan relationship) shall not have effect in relation to any

discount arising in an accounting period beginning on or after the

commencement date.

     (10)  

Subject to sub-paragraph (9), the amendments made by this paragraph have

10

effect in relation to any money debt to which a company is party as a creditor

on or after the commencement date.

     (11)  

Where, on or after the commencement date but in a period of account

beginning before 1st January 2005, a company is party to a relationship to

which section 100 of FA 1996 applies, then, in the application of that section

15

for that period of account, subsection (2) of it shall have effect as follows—

(a)   

paragraph (a) shall have effect in relation to—

(i)   

any discount arising to the company from the money debt,

and

(ii)   

any profits, impairment of discount, or reversal of

20

impairment of discount, arising to the company as

mentioned in subsection (2ZA) of that section,

   

as it has effect (or would have effect) in relation to interest payable to

the company under the relationship,

(b)   

paragraph (b) shall have effect as if the reference to interest included

25

a reference to the matters mentioned in paragraph (a)(i) and (ii)

above, and

(c)   

the closing words shall have effect accordingly.

     (12)  

None of the following shall be brought into account for the purposes of

Chapter 2 of Part 4 of FA 1996 by virtue of this paragraph—

30

(a)   

credits in respect of discount arising from a money debt, to the extent

that the discount accrued before the commencement date;

(b)   

credits in respect of profits arising as mentioned in section

100(2ZA)(a) or (b)(ii) of that Act where the related transaction took

place before the commencement date;

35

(c)   

debits in respect of any impairment arising in respect of discount

arising from a money debt, to the extent that the discount accrued

before the commencement date;

(d)   

credits in respect of any reversal of any such impairment, to the

extent that the discount accrued before the commencement date.

40

     (13)  

In this paragraph “the commencement date” means 16th March 2005.

Meaning of “commercial rate of interest”

13    (1)  

In section 103 of FA 1996 (interpretation) after subsection (3) insert—

“(3A)   

For the purposes of this Chapter, a commercial rate of interest, in the

case of a company and any asset, is—

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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

106

 

(a)   

a rate (“the simple commercial rate”) that is reasonably

comparable to the rate that the company could obtain by

placing on deposit the money it invested in the asset, or

(b)   

in any case where—

(i)   

the likely rate of increase in the value of the asset is in

5

question, and

(ii)   

that likely rate is a lower rate than the simple

commercial rate, and

(iii)   

the difference is a result of an expectation that the

company would also obtain a tax advantage as a

10

result of investing in the asset,

   

that lower rate.

(3B)   

In subsection (3A) above, “tax advantage” has the meaning given by

section 709(1) of the Taxes Act 1988.”.

      (2)  

The amendment made by this paragraph has effect in relation to assets held

15

on or after 16th March 2005 (whenever acquired).

Capital redemption policies: removal of exclusion from loan relationships computations

14    (1)  

Schedule 9 to FA 1996 (loan relationships: special computational provisions)

is amended as follows.

      (2)  

In paragraph 1A(1) (credits and debits relating to life policies and capital

20

redemption policies not to be brought into account) paragraph (b) (capital

redemption policies) shall cease to have effect.

      (3)  

This paragraph has effect in relation to a capital redemption policy on and

after 10th February 2005 (whenever the capital redemption policy was

effected).

25

      (4)  

Where a capital redemption policy—

(a)   

is held by a company immediately before 10th February 2005, and

(b)   

on or after that date, is, for the purposes of Chapter 2 of Part 4 of FA

1996, a creditor relationship of the company,

           

sub-paragraphs (5) and (6) apply.

30

      (5)  

In any such case, Chapter 2 of Part 13 of ICTA (life policies etc: chargeable

events) shall have effect as if—

(a)   

immediately before 10th February 2005, the company had assigned

the whole of the rights conferred by the policy for money or money’s

worth, and

35

(b)   

the value of the consideration for the assignment had been equal to

what the carrying value of the creditor relationship would have been

had an accounting period of the company ended on that date;

           

and Chapter 2 of Part 4 of FA 1996 shall have effect as if, immediately after

9th February 2005, the company had acquired the creditor relationship at a

40

cost equal to that carrying value.

      (6)  

But if—

(a)   

the accounting period in which the assignment is deemed to have

happened (“the assignment period”), and

(b)   

the accounting period in which the company ceases to be party to the

45

creditor relationship (“the cessation period”),

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

107

 

           

are not the same accounting period, any gain which, by virtue of the deemed

assignment, would have fallen to be brought into account in accordance

with section 547(1)(b) of ICTA for the assignment period shall instead be

brought into account for the cessation period.

      (7)  

In this paragraph—

5

“assignment”, in relation to Scotland, means an assignation;

 “carrying value” has the same meaning as it has for the purposes of

paragraph 19A of Schedule 9 to FA 1996, as it has effect for periods

of account beginning on or after 1st January 2005.

Deemed disposal of assets and liabilities on company ceasing to be resident in UK etc

10

15    (1)  

In Schedule 9 to FA 1996 (loan relationships) paragraph 10A is amended as

follows.

      (2)  

After sub-paragraph (1) (cases where the paragraph applies) insert—

   “(1A)  

But this paragraph does not apply if—

(a)   

paragraph 12A below (transferee company leaving group)

15

applies in relation to the company, and

(b)   

the cessation in sub-paragraph (1)(a) or (b) above occurs at

the same time as the cessation in sub-paragraph (1)(b) of

that paragraph.”.

      (3)  

In sub-paragraph (2) (Schedule to have effect as if there had been an

20

assignment and reacquisition) for “Schedule” substitute “Chapter”.

      (4)  

The amendments made by this paragraph have effect on and after 16th

March 2005.

Transactions not at arm’s length: exceptions relating to groups of companies

16    (1)  

In Schedule 9 to FA 1996 (loan relationships) paragraph 11 (transactions not

25

at arm’s length) is amended as follows.

      (2)  

For sub-paragraph (3) (exceptions relating to groups of companies)

substitute—

    “(3)  

Sub-paragraph (1) above does not apply if the related

transaction—

30

(a)   

is a transaction as a result of which paragraph 12 below

(groups)—

(i)   

applies by virtue of sub-paragraph (1)(a) of it, or

(ii)   

would so apply, apart from sub-paragraph (2A) of

it (transferor using fair value accounting), or

35

(b)   

is part of a series of transactions as a result of which that

paragraph—

(i)   

applies by virtue of sub-paragraph (1)(b) of it, or

(ii)   

would so apply, apart from sub-paragraph (2A) of

it.”.

40

      (3)  

In consequence, omit sub-paragraph (5) (construction of references to a

member of a group).

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

108

 

      (4)  

The amendments made by this paragraph have effect where the related

transaction is on or after 16th March 2005.

Continuity of treatment of groups etc: treatment of transferee company

17    (1)  

In Schedule 9 to FA 1996 (loan relationships) paragraph 12 (continuity of

treatment of groups etc) is amended as follows.

5

      (2)  

For sub-paragraph (2) (the credits and debits to be brought into account)

substitute—

    “(2)  

For the purpose of determining the credits and debits to be

brought into account for the purposes of this Chapter in respect of

the loan relationship—

10

(a)   

for the accounting period in which the transaction or, as

the case may be, the first of the series of transactions takes

place, the transferor company shall be treated as having

entered into that transaction for a consideration equal to

the notional carrying value of the asset or liability

15

representing the relationship; and

(b)   

for any accounting period in which it is a party to the

relationship, the transferee company shall be treated as if it

had acquired the asset or liability representing the

relationship for a consideration equal to the notional

20

carrying value of the asset or liability.

           

For the purposes of this sub-paragraph, the notional carrying

value is the amount that would have been the carrying value of the

asset or liability in the accounts of the transferor company if a

period of account had ended immediately before the date when

25

the company ceased to be party to the loan relationship.”.

      (3)  

In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair

value accounting) for paragraph (aa) (treatment of transferee in respect of

the transaction) substitute—

“(aa)   

paragraph (b) of sub-paragraph (2) above shall have effect

30

in relation to the transferee company.”.

      (4)  

For sub-paragraph (8) (which applies paragraph 11(5) for construction of

references to a member of a group) substitute—

    “(8)  

In this paragraph references to a company which is a member of a

group of companies shall be construed in accordance with section

35

170 of the Taxation of Chargeable Gains Act 1992.”.

      (5)  

In sub-paragraph (9) (interpretation) insert the following definition at the

appropriate place—

“ “carrying value” has the same meaning as it has for the

purposes of paragraph 19A below;”.

40

      (6)  

Where the period of account mentioned in the second sentence of the sub-

paragraph (2) substituted by sub-paragraph (2) begins before 1st January

2005, “carrying value” shall be construed as if the period had begun on or

after that date.

      (7)  

The amendments made by this paragraph have effect in any case where the

45

relevant transaction is on or after 16th March 2005.

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

109

 

      (8)  

In this paragraph “the relevant transaction” means—

(a)   

the related transaction mentioned in sub-paragraph (1)(a) of

paragraph 12 of Schedule 9 to FA 1996,

(b)   

the first of the series of transactions mentioned in sub-paragraph

(1)(b) of that paragraph, or

5

(c)   

the transfer mentioned in sub-paragraph (1)(c) or (1)(d) of that

paragraph,

           

by virtue of which that paragraph applies or would apply apart from sub-

paragraph (2A) of it.

Transferee leaving group after replacing transferor as party to loan relationship

10

18    (1)  

In Schedule 9 to FA 1996 (loan relationships) after paragraph 12 insert—

“Transferee leaving group after replacing transferor as party to loan relationship

12A   (1)  

This paragraph applies in any case where—

(a)   

paragraph 12 above applies—

(i)   

by virtue of sub-paragraph (1)(a) of that paragraph

15

(“case A”), or

(ii)   

by virtue of sub-paragraph (1)(b) of that paragraph

(“case B”), but

(b)   

before the end of the relevant 6 year period, the transferee

company ceases to be a member of the relevant group.

20

      (2)  

In any such case, this Chapter shall have effect as if the transferee

company had—

(a)   

immediately before that cessation, assigned the asset or

liability representing the relevant loan relationship for a

consideration of an amount equal to its fair value at that

25

time, and

(b)   

immediately reacquired it for a consideration of the same

amount,

           

but only if Condition 1 or 2 below is satisfied and sub-paragraph

(5) below does not apply.

30

      (3)  

Condition 1 is that if sub-paragraph (2) above has effect, a credit

would in consequence of paragraph (a) of that sub-paragraph fall

to be brought into account for the purposes of this Chapter by the

transferee company.

      (4)  

Condition 2 is that—

35

(a)   

Condition 1 is not satisfied,

(b)   

the loan relationship is a creditor relationship,

(c)   

the company has a hedging relationship between a

derivative contract and the creditor relationship, and

(d)   

in consequence of paragraph 30A(2)(a) of Schedule 26 to

40

the Finance Act 2002, a credit falls to be brought into

account by the transferee company for the purposes of that

Schedule in respect of the derivative contract.

      (5)  

Where the transferee company ceases to be a member of the

relevant group by reason only of an exempt distribution (see sub-

45

paragraph (8))—

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

110

 

(a)   

sub-paragraph (2) above does not have effect, but

(b)   

if there is chargeable payment within 5 years after the

making of the exempt distribution, sub-paragraph (6)

below applies.

      (6)  

Where this sub-paragraph applies, this Chapter shall have effect

5

as if—

(a)   

the transferee company had, immediately before the

making of the chargeable payment, assigned the asset or

liability representing the relevant loan relationship,

(b)   

the assignment had been for a consideration of an amount

10

equal to the fair value of the asset or liability immediately

before the transferee company ceased to be a member of

the relevant group, and

(c)   

the transferee company had immediately reacquired the

asset or liability for a consideration of the same amount,

15

           

but only if Condition 1 or 2 above, as modified by sub-paragraph

(7) below, is satisfied.

      (7)  

The modifications are that—

(a)   

in Condition 1, the references to sub-paragraph (2) above,

and paragraph (a) of that sub-paragraph, are to be taken

20

respectively as references to sub-paragraph (6) above and

paragraphs (a) and (b) of that sub-paragraph, and

(b)   

in Condition 2, the reference to paragraph 30A(2)(a) of

Schedule 26 to the Finance Act 2002 is to be taken as a

reference to paragraph 30A(6)(a) and (b) of that Schedule.

25

      (8)  

In this paragraph—

“assignment”, in relation to Scotland, means an assignation;

“chargeable payment” has the meaning given by section

214(2) of the Taxes Act 1988;

“exempt distribution” means a distribution which is exempt

30

by virtue of section 213(2) of the Taxes Act 1988;

“the relevant 6 year period” means the period of 6 years

following—

(a)   

in case A, the transaction mentioned in paragraph

12(1)(a) above, or

35

(b)   

in case B, the last of the series of transactions

mentioned in paragraph 12(1)(b) above;

“the relevant group” means—

(a)   

in case A, the group mentioned in paragraph 12(1)(a)

above, or

40

(b)   

in case B, the group mentioned in paragraph 12(1)(b)

above;

“the relevant loan relationship” means the loan relationship

mentioned in paragraph 12(1) above;

“the transferee company” means the company referred to as

45

such in paragraph 12(1) above.

      (9)  

Paragraph 12(14) of Schedule 26 to the Finance Act 2002 (hedging

relationships) has effect for the purposes of this paragraph.”.

 

 

 
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