Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
118

(b)
before the end of the relevant 6 year period, the transferee
company ceases to be a member of the relevant group.
      (2)
In any such case, this Schedule shall have effect as if the transferee
company had—
(a)
immediately before that cessation, assigned its rights and
5
liabilities under the relevant derivative contract for a
consideration of an amount equal to their fair value at that
time, and
(b)
immediately reacquired them for a consideration of the
same amount,
10

but only if Condition 1 or 2 is satisfied and sub-paragraph (5) does
not apply.
      (3)
Condition 1 is that if sub-paragraph (2) 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 Schedule by the
15
transferee company.
      (4)
Condition 2 is that—
(a)
Condition 1 is not satisfied,
(b)
the company has a hedging relationship between the
relevant derivative contract and a creditor relationship,
20
and
(c)
in consequence of paragraph 12A(2)(a) of Schedule 9 to the
Finance Act 1996, a credit falls to be brought into account
by the transferee company for the purposes of Chapter 2 of
Part 4 of the Finance Act 1996 in respect of the creditor
25
relationship.
      (5)
Where the transferee company ceases to be a member of the
relevant group by reason only of an exempt distribution (see
subsection (8))—
(a)
sub-paragraph (2) does not have effect, but
30
(b)
if there is chargeable payment within 5 years after the
making of the exempt distribution, sub-paragraph (6)
applies.
      (6)
Where this sub-paragraph applies, this Chapter shall have effect
as if—
35
(a)
the transferee company had, immediately before the
making of the chargeable payment, assigned its rights and
liabilities under the relevant derivative contract,
(b)
the assignment had been for a consideration of an amount
equal to the fair value of those rights and liabilities
40
immediately before the transferee company ceased to be a
member of the relevant group, and
(c)
the transferee company had immediately reacquired those
rights and liabilities for a consideration of the same
amount,
45

but only if Condition 1 or 2, as modified by sub-paragraph (7), is
satisfied.
      (7)
The modifications are that—

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Schedule 7 — Avoidance involving financial arrangements
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(a)
in Condition 1, the references to sub-paragraph (2), and
paragraph (a) of that sub-paragraph, are to be taken
respectively as references to sub-paragraph (6) and
paragraphs (a) and (b) of that sub-paragraph, and
(b)
in Condition 2, the reference to paragraph 12A(2)(a) of
5
Schedule 9 to the Finance Act 1996 is to be taken as a
reference to paragraph 12A(6)(a) and (b) of that Schedule.
      (8)
In this paragraph—
“assignment”, in relation to Scotland, means an assignation;
“chargeable payment” has the meaning given by section
10
214(2) of the Taxes Act 1988;
“exempt distribution” means a distribution which is exempt
by virtue of section 213(2) of the Taxes Act 1988;
“creditor relationship” has the same meaning as Chapter 2 of
Part 4 of the Finance Act 1996 (see section 103(1) of that
15
Act);
“the relevant 6 year period” means the period of 6 years
following—
(a)
in case A, the transaction mentioned in paragraph
28(2)(a), or
20
(b)
in case B, the last of the series of transactions
mentioned in paragraph 28(2)(b);
“the relevant derivative contract” means the derivative
contract mentioned in paragraph 28(1);
“the relevant group” means—
25
(a)
in case A, the group mentioned in paragraph 28(2)(a),
or
(b)
in case B, the group mentioned in paragraph 28(2)(b);
“the transferee company” means the company referred to as
such in paragraph 28(1).”.
30
      (2)
The amendment made by this paragraph has effect where a company ceases
to be a member of a group on or after 16th March 2005.
Deeply discounted securities: corporate strips
25    (1)
Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted
securities) is amended as follows.
35
      (2)
In section 430 (meaning of “deeply discounted security”) in subsection (6)
(subjections) omit “and” before the entry relating to section 443(1) and at the
end of that entry add “, and
section 452A(1) (corporate strips).”.
      (3)
In section 437 (transactions which are disposals) after subsection (4) insert—
40
“(5)
In the case of interest-bearing corporate securities, further provision
about occasions counting as disposals is made by section 452F(2)(a).
(6)
In the case of corporate strips, further provision about occasions
counting as disposals is made by section 452F(2)(a) and (3)(a).”.
      (4)
In section 438 (timing of transfers and acquisitions) for subsection (4)
45

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Schedule 7 — Avoidance involving financial arrangements
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substitute—
“(4)
This section is subject to—
section 445(7) (exchanges for and consolidations of strips);
section 452F(4) (conversion into and consolidations of corporate
strips).”.
5
      (5)
In section 440 (market value disposals) for subsection (5) substitute—
“(5)
Subsection (4) is subject to—
section 445(8) (exchanges for and consolidations of strips);
section 452F(5) (conversion into and consolidations of corporate
strips).”.
10
      (6)
In section 441 (market value acquisitions) for subsection (3) substitute—
“(3)
Subsection (2) is subject to—
section 445(8) (exchanges for and consolidations of strips);
section 452F(5) (conversion into and consolidations of corporate
strips).”.
15
      (7)
Section 444 (meaning of “strip” in Chapter 8) after subsection (5) insert—
“(6)
Nothing in this section affects the meaning of the expression
“corporate strip” in this Chapter (see section 452E).”.
      (8)
After section 452 insert—
“Special rules for corporate strips
20
452A
Application of this Chapter to corporate strips
(1)
All corporate strips are treated as deeply discounted securities for
the purposes of this Chapter, whether or not they would otherwise
be so.
(2)
This Chapter applies to corporate strips subject to the rules in—
25
(a)
section 452F (corporate strips: acquisitions and disposals),
and
(b)
section 452G (corporate strips: manipulation of acquisition,
transfer or redemption payments).
452B
Meaning of “interest-bearing corporate security” in Chapter 8
30
(1)
In this Chapter “interest-bearing corporate security” means any
interest-bearing security other than—
(a)
a security issued by the government of a territory, or
(b)
a share in a company.
(2)
In this section “interest-bearing security” includes any loan stock or
35
similar security.
(3)
Section 452D(4)(a) gives an extended meaning to references to
converting an interest-bearing corporate security into corporate
strips (and related expressions).

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452C
Conversion of interest-bearing corporate securities into corporate
strips
(1)
For the purposes of this Chapter a person converts an interest-
bearing corporate security into corporate strips of the security if he
has an interest-bearing corporate security (“the converted corporate
5
security”) but—
(a)
as a result of any scheme or arrangements, he acquires two or
more separate assets in place of the converted corporate
security,
(b)
each of those separate assets satisfies condition A,
10
(c)
those separate assets, taken together, satisfy condition B, and
(d)
at least one of those separate assets is not prevented from
being a corporate strip by section 452E(2) or (3),

and related expressions shall be construed accordingly.
(2)
Condition A is that the asset—
15
(a)
represents the right to, or
(b)
secures,

one or more stripped payments.
(3)
For the purposes of this section, a “stripped payment” is—
(a)
the payment of, or
20
(b)
a payment corresponding to,

the whole or a part of one or more payments (whether of interest or
principal) remaining to be made under the converted corporate
security.
(4)
Condition B is that the assets, taken together,—
25
(a)
represent the right to, or
(b)
secure,

every payment (whether of interest or principal) remaining to be
made under the converted corporate security (or payments
corresponding to every such payment).
30
(5)
Where a person—
(a)
has an interest-bearing corporate security, but
(b)
sells or transfers the right to one or more payments remaining
to be made under it (so that, as a result, there are two or more
separate assets which, taken together, satisfy condition B),
35

this Chapter has effect as if, as a result of a scheme or arrangements,
the person had acquired the separate assets in place of the security
immediately before the sale or transfer.
(6)
After a balance has been struck for a dividend on an interest-bearing
corporate security, any payment to be made in respect of that
40
dividend shall, at times falling after that balance has been struck, be
treated for the purposes of this paragraph as not being a payment
remaining to be made under the security.
452D
Conversion into corporate strips: lower level conversions
(1)
For the purposes of this Chapter, section 452C also has effect in
45
relation to each of the separate assets mentioned in subsection (1) of

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Schedule 7 — Avoidance involving financial arrangements
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that section as if that separate asset were itself an interest-bearing
corporate security (if that is not in fact the case).
(2)
In subsection (1), the reference to section 452C includes a reference to
that section as it has effect by virtue of this section.
(3)
In the application of section 452C by virtue of this section, references
5
to payments the right to which a separate asset represents or secures
shall be construed in accordance with subsection (6) of that section.
(4)
Where section 452C has effect by virtue of subsection (1)—
(a)
any reference in this Chapter to converting an interest-
bearing corporate security into corporate strips of the
10
security shall be construed accordingly, and
(b)
section 452E (meaning of “corporate strip”) has effect
accordingly.
452E
Meaning of “corporate strip” in Chapter 8
(1)
In this Chapter “corporate strip” means any asset—
15
(a)
which is, or has at any time been, one of the separate assets
mentioned in section 452C(1), and
(b)
which is not prevented from being a corporate strip by
subsection (2) or (3).
(2)
An asset is not a corporate strip if it—
20
(a)
represents the right to, or
(b)
secures,

payments of, or corresponding to, a part of every payment remaining
to be made under an interest-bearing corporate security or a
corporate strip.
25
(3)
An asset is a corporate strip in the case of any person only if he
acquired it—
(a)
on or after 2nd December 2004, and
(b)
otherwise than in pursuance of an agreement entered into
before that date.
30
452F
Corporate strips: acquisitions and disposals
(1)
A person who converts an interest-bearing corporate security into
corporate strips of the security is treated as having acquired each
corporate strip by the payment of an amount equal to—

where—
35
A is acquisition cost of the converted corporate security;
B is the market value of the corporate strip;
C is the total of the market values of all the separate assets
resulting from the conversion.
(2)
If the converted corporate security is a deeply discounted security—
40
(a)
its conversion into corporate strips is to be treated for the
purposes of this Chapter as a transfer of the security, but

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Schedule 7 — Avoidance involving financial arrangements
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(b)
the amount payable on the transfer is taken to be an amount
equal to the acquisition cost of the converted corporate
security.
(3)
For the purposes of this Chapter—
(a)
the consolidation of a corporate strip with other corporate
5
strips into a single security is a disposal of the corporate strip
by the person consolidating it (whether or not it would be
apart from this subsection), and
(b)
an amount equal to the market value of the corporate strip at
the consolidation is treated as payable on the disposal.
10
(4)
Section 438 (timing of transfers and acquisitions) does not apply to a
conversion within subsection (1) or a consolidation within
subsection (3).
(5)
Subsections (1) to (3) apply instead of sections 440(4) (market value
on general conversions of deeply discounted securities) and 441
15
(market value acquisitions).
(6)
For the purposes of this section, the acquisition cost of the converted
corporate security is the amount paid in respect of his acquisition of
the security by the person who has it immediately before the
conversion (no account being taken of any costs incurred in
20
connection with that acquisition).
(7)
References in this section to the market value of a security given or
received in exchange for, or otherwise converted into, another are
references to its market value at the time of the exchange or
conversion.
25
452G
Corporate strips: manipulation of acquisition, transfer or redemption
payments
(1)
This section applies if—
(a)
as a result of any scheme or arrangement, an amount referred
to in subsection (2)(a), (b) or (c) differs from the market value
30
of the corporate strip in a way specified in that subsection,
and
(b)
the obtaining of a tax advantage by any person is the main
benefit, or one of the main benefits, that might have been
expected to accrue from, or from any provision of, the scheme
35
or arrangement.
(2)
The ways are that—
(a)
the amount paid by a person in respect of the acquisition of
the corporate strip is or was more than the market value of
the corporate strip at the time of that acquisition,
40
(b)
the amount payable to a person on transferring the corporate
strip is less than the market value at the time of the transfer,
or
(c)
on redemption of the corporate strip the amount payable to a
person, as the person holding the corporate strip, is less than
45
the market value on the day before redemption.
(3)
In a case within subsection (2)(a), for the purposes of section 439(1)
on transferring the corporate strip the person is treated as if the

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person had paid to acquire the corporate strip an amount equal to the
market value of the corporate strip at the time of the acquisition.
(4)
In a case falling within subsection (2)(b), for those purposes the
person is treated as if the amount payable to the person on the
transfer were an amount equal to the market value of the corporate
5
strip at the time of the transfer.
(5)
In a case falling within subsection (2)(c), for those purposes the
person is treated as if the amount payable to the person on
redemption were an amount equal to the market value of the
corporate strip on the day before redemption.
10
(6)
The market value of a corporate strip at any time is to be determined
for the purposes of this section without regard to any increase or
diminution in the value of the corporate strip as a result of the
scheme or arrangement mentioned in subsection (1).
(7)
For the purposes of this section, no account is to be taken of any
15
incidental expenses incurred in connection with any disposal or
acquisition of a corporate strip.”.
      (9)
In Schedule 4 (abbreviations and defined expressions) in Part 2 (expressions
defined in the Act or in ICTA) insert each of the following entries at the
appropriate place—
20

“conversion of an interest-bearing
sections 452C

corporate security into corporate
and 452D”;

strips of the security (for the purposes

of Chapter 8 of Part 4)

“corporate strip (for the purposes of
section 452E”;

25

Chapter 8 of Part 4)

“interest-bearing corporate security (for
section 452B”.

the purposes of Chapter 8 of Part 4)

     (10)
ITTOIA 2005 shall have effect as if it had been originally enacted with the
amendments made by this paragraph.
30
Schedule 8
Section 40

Financing of companies etc: transfer pricing and loan relationships
Amendments of Schedule 28AA to ICTA
1     (1)
Schedule 28AA to ICTA (provision not at arm’s length) is amended as
follows.
35
      (2)
In paragraph 4 (participation in the management, control or capital of a
person), in sub-paragraph (2) (meaning of indirect participation) for “and
only if” substitute “and (subject to paragraphs 4A and 6(4C) below) only if”.