Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
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Unit trusts: treatment of accumulation units
(1)
In Chapter III of Part III of TCGA 1992 (collective investment schemes, &c.)
after section 99A insert—
“99B
Calculation of the disposal cost of accumulation units
(1)
For the purposes of computing the gain accruing on a disposal by a unit
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holder of units in a unit trust scheme and for the purposes of all other
provisions of this Act, an amount shall be treated as expenditure falling
within section 38(1)(b) if—
(a)
it represents income from the investments subject to the unit
trust scheme,
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(b)
it has been reinvested in respect of the units on behalf of the unit
holder (without an issue of new units), and
(c)
it is either—
(i)
charged to income tax as income of the unit holder (or
would be charged to income tax as his income but for a
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relief which has effect in respect of it) for the purposes of
the Income Tax Acts, or
(ii)
taken into account as a receipt in calculating profits,
gains or losses of the unit holder for the purposes of the
Income Tax Acts.
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(2)
Where an amount is treated as expenditure by virtue of subsection (1),
the expenditure shall be treated for the purposes of this Act as having
been incurred—
(a)
in relation to an authorised unit trust, on the distribution date
for the distribution period in respect of which the amount is
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reinvested, and
(b)
in relation to any other unit trust scheme, on the date on which
the amount is reinvested.
(3)
In subsection (2)(a) “distribution date” and “distribution period” shall
have the meaning given by section 468H of the Taxes Act.”
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(2)
This section shall have effect in relation to a disposal of units on or after 16th
March 2005.
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Section 349B ICTA: exemption for distributions to PEP/ISA managers
(1)
Section 349B(4) of ICTA (requirement for individual to be entitled to income
tax exemption) shall be amended as follows.
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(2)
In paragraph (a) after “of a plan” insert “of a kind to which regulations under
Chapter 3 of Part 6 of ITTOIA 2005 (income from individual investment plans)
apply”.
(3)
Paragraph (b) shall cease to have effect.
(4)
This section shall have effect in relation to payments made on or after 6 April
40
2005.
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Offshore funds
(1)
In section 761 of ICTA (charge on offshore income gain)—

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Authorised investment funds etc
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(a)
in subsection (2)—
(i)
for “sections 2(1) and 10” substitute “sections 2(1), 10 and 10B”,
and
(ii)
for “section 11(2)(b)” substitute “section 11(2A)(c)”, and
(b)
in subsection (3)—
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(i)
for “section 10” substitute “sections 10 and 10B”,
(ii)
for “subsection (1) of that section” substitute “subsection (1) of
section 10”, and
(iii)
for the words “and subsection (3) of that section (which makes
similar provision in relation to corporation tax) shall have effect
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with the omission of the words “situated in the United
Kingdom”” substitute “and paragraphs (a) and (b) of subsection
(1) of section 10B (which make similar provision in relation to
corporation tax) shall have effect with the omission of the words
“situated in the United Kingdom and””.
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(2)
For paragraph 1(1)(d) of Schedule 27 to ICTA (distributing funds) substitute—
“(d)
the form of the distribution is such that—
(i)
if any sum forming part of it were received in the
United Kingdom by an individual resident there and
did not form part of the profits of a trade, profession
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or vocation, that sum would fall to be chargeable to
tax under a provision specified in section 830(2) of
ITTOIA 2005, or
(ii)
if any sum forming part of it were received in the
United Kingdom by a company resident there and
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did not form part of the profits of a trade, profession
or vocation, that sum would fall to be chargeable to
tax in accordance with section 18 of ICTA (Schedule
D)—
(a)
under Case III of Schedule D in respect of
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income arising from securities out of the
United Kingdom or from possessions out of
the United Kingdom, or
(b)
under Case V of Schedule D;”.
(3)
For paragraph 3(1)(a) of that Schedule (distributing funds) substitute—
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“(a)
the holders of interests in the fund who are individuals
domiciled and resident in the United Kingdom—
(i)
are chargeable to tax under a provision specified in
section 830(2) of ITTOIA 2005 in respect of such of those
sums as are referable to their interests; or
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(ii)
if any of that income is derived from assets within the
United Kingdom, would be so chargeable had the assets
been outside the United Kingdom;
(aa)
the holders of interests in the fund which are companies
resident in the United Kingdom—
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(i)
are chargeable to tax under Case III of Schedule D in
respect of income arising from securities out of the
United Kingdom or from possessions out of the United
Kingdom;
(ii)
are chargeable to tax under Case V of Schedule D; or
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Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(iii)
if any of that income is derived from assets within the
United Kingdom, would have been chargeable under
sub-paragraph (i) or (ii) had the assets been outside the
United Kingdom; and”.
(4)
In paragraph 3(1)(b) of that Schedule (distributing funds) for “sub-paragraph
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(i) or (ii)” substitute “paragraph (a) or (aa)”.
Chapter 4
Avoidance involving tax arbitrage
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Deduction cases
(1)
If the Commissioners for Her Majesty’s Revenue and Customs consider, on
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reasonable grounds, that conditions A to D are or may be satisfied in relation
to a transaction to which a company falling within subsection (2) is party, they
may give the company a notice under this section.
(2)
A company falls within this subsection if—
(a)
it is resident in the United Kingdom, or
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(b)
it is resident outside the United Kingdom but is within the charge to
corporation tax.
(3)
Condition A is that the transaction to which the company is party forms part
of a scheme that is a qualifying scheme.
(4)
Condition B is that the scheme is such that for the purposes of corporation tax
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the company is in a position to claim or has claimed an amount by way of
deduction in respect of the transaction or is in a position to set off or has set off
against profits in an accounting period an amount relating to the transaction.
(5)
Condition C is that the main purpose, or one of the main purposes, of the
scheme is to achieve a UK tax advantage for the company.
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(6)
Condition D is that the amount of the UK tax advantage in question is more
than a minimal amount.
(7)
A notice under this section is a notice—
(a)
specifying the transaction in relation to which the Commissioners
consider that conditions A to D are or may be satisfied,
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(b)
specifying the accounting period in relation to which the
Commissioners consider that condition B is or may be satisfied as
regards the transaction, and
(c)
informing the company that as a consequence section 25 (rules relating
to deductions) has effect in relation to the transaction.
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(8)
Nothing in this section prevents the Commissioners from giving a company
falling within subsection (2) a notice under this section as regards two or more
transactions.
(9)
Schedule 3 makes provision about what constitutes a qualifying scheme.
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Rules relating to deductions
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(1)
The following provisions of this section apply in relation to a transaction if—

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(a)
a notice specifying the transaction is given to a company under section
24, and
(b)
when the notice is given, conditions A to D of section 24 are satisfied in
relation to the transaction.
(2)
The company must compute (or recompute) for the purposes of corporation
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tax its income or chargeable gains, or its liability to corporation tax—
(a)
for the accounting period specified in the notice under section 24, and
(b)
for any subsequent accounting period,

in accordance with rules A and B.
(3)
Rule A is that, in respect of the specified transaction, no amount is allowable as
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a deduction for the purposes of the Corporation Tax Acts to the extent that, in
relation to the expense in question, an amount may be otherwise deducted or
allowed in computing the income, profits or losses of any person for the
purposes of any tax (including any foreign tax) other than—
(a)
petroleum revenue tax, or
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(b)
the tax chargeable under section 501A(1) of ICTA (supplementary
charge in respect of ring fence trades).
(4)
The reference in subsection (3) to an amount otherwise deducted or allowed in
computing the income, profits or losses of any person for the purposes there
mentioned includes a reference to an amount that would be so deducted or
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allowed but for any rule that has the same effect as rule A.
(5)
For the purposes of subsection (4) “rule” means—
(a)
a provision of the Tax Acts, or
(b)
a rule having effect under the tax law of any territory outside the
United Kingdom.
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(6)
Rule B applies if—
(a)
a transaction, or a series of transactions, forming part of the scheme by
reference to which conditions A to D are satisfied makes or imposes
provision as a result of which one person (“the payer”) makes a
payment and another person (“the payee”) receives, or becomes
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entitled to receive, a payment or payments,
(b)
in respect of the payment by the payer, an amount may be deducted or
otherwise allowed to the payer, or to another person who is party to, or
concerned in, the scheme, in computing any profits or losses for tax
purposes, and
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(c)
in respect of the payment or payments that the payee receives or is
entitled to receive as a result of the transaction or series of transactions,
or part of such payment or payments, the payee is not liable to tax or, if
liable, his liability to tax is reduced as a result of provision made or
imposed by the scheme.
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(7)
Without prejudice to the generality of subsection (6)(c), the payee’s liability to
tax in respect of the payment or payments that he receives or is entitled to
receive as a result of the transaction or series of transactions shall be treated for
the purposes of subsection (6)(c) as reduced as a result of provision made or
imposed by the scheme if—
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(a)
an amount arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
transactions forming part of the scheme, falls to be deducted or
otherwise allowed to the payee in computing for tax purposes any

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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profits or losses arising from the payment or payments or the
entitlement to receive the payment or payments, or
(b)
an amount of relief arising from the transaction or series of transactions
forming part of the scheme, or from another transaction or series of
transactions forming part of the scheme, may be deducted from the
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amount of income or gains arising from the payment or payments or
the entitlement to receive the payment or payments.
(8)
The requirement in subsection (6)(c) is not satisfied if the payee is not liable to
tax because he is not liable to tax on any income or gains received by him or for
his benefit under the tax law of any territory.
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(9)
The requirement in subsection (6)(c) is not satisfied if, or to the extent that, the
payee is not subject to tax because his liability to tax is subject to an exemption
falling within subsection (10).
(10)
An exemption falls within this subsection if—
(a)
it exempts a person from being liable to tax in respect of income or
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gains, without providing for that income or those gains to be treated as
the income or gains of one or more other persons, and
(b)
it is conferred by a provision contained in or having the force of an Act
or by a provision of the tax law of any territory outside the United
Kingdom.
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(11)
Rule B is that the aggregate of the amounts allowable as a deduction for the
purposes of the Corporation Tax Acts in computing any profits to the company
arising from—
(a)
the specified transaction, and
(b)
any other transaction that forms part of the scheme and to which the
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company is party,

is to be reduced in accordance with subsections (12) and (13).
(12)
If, in respect of the payment or payments that the payee receives or is entitled
to receive, the payee is not liable to tax for the purposes of the requirement in
subsection (6)(c), the aggregate is to be reduced to nil.
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(13)
If, in respect of the payment or payments, the payee is liable to tax as regards
part or his liability to tax is reduced as described in subsection (6)(c), the
aggregate is to be reduced to such proportion of the aggregate as is equal to the
proportion of the payment or payments on which the payee is liable to tax; and
for this purpose the amount by which the payee’s liability is reduced is to be
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treated as an amount on which the payee is not liable to tax.
(14)
The company may choose to incorporate in its company tax return for the
specified accounting period such relevant adjustments as are necessary for
counteracting those effects of the scheme that are referable to the purpose
referred to in condition C.
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(15)
If, as a consequence of incorporating relevant adjustments in that company tax
return, the company counteracts those effects of the scheme that are referable
to the purpose referred to in condition C, the company is to be treated, so far
as regards the scheme, as having complied with subsection (2).
(16)
The following are relevant adjustments—
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(a)
treating all or part of a deduction allowable for corporation tax
purposes as not being allowable;

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(b)
treating all or part of an amount that for corporation tax purposes may
be set off against profits in an accounting period as not falling to be set
off.
(17)
In this section, references to tax purposes include a reference to the purposes
of any foreign tax; and foreign tax has the meaning given by section 403D of
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ICTA.
(18)
In this section, “company tax return” means the return required to be delivered
pursuant to a notice under paragraph 3 of Schedule 18 to FA 1998, as read with
paragraph 4 of that Schedule.
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Receipts cases
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(1)
If the Commissioners for Her Majesty’s Revenue and Customs consider, on
reasonable grounds, that conditions A to E are or may be satisfied in relation
to a company resident in the United Kingdom, they may give the company a
notice under this section.
(2)
Condition A is that a scheme makes or imposes provision (“the actual
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provision”) as between the company and another person (“the paying party”)
by means of a transaction or series of transactions.
(3)
Condition B is that the actual provision includes the making by the paying
party, by means of a transaction or series of transactions, of a payment that is
a qualifying payment in relation to the company.
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(4)
Condition C is that, as regards the qualifying payment made by the paying
party, there is an amount that—
(a)
is available as a deduction for the purposes of the Tax Acts, or
(b)
may be deducted or otherwise allowed in respect of the payment under
the tax law of any territory outside the United Kingdom,
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and does not fall to be disregarded as described in subsection (5).
(5)
An amount is to be disregarded if or to the extent that it is, for tax purposes, set
against any income arising to the paying party from the transaction or
transactions forming part of the scheme.
(6)
Condition C is not to be treated as satisfied if—
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(a)
the paying party is a dealer,
(b)
in the ordinary course of his business, he incurs losses in respect of the
transaction or transactions forming part of the scheme to which he is
party, and
(c)
the amount by reference to which condition C would, but for this
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subsection, be satisfied is an amount in respect of those losses.
(7)
In subsection (6), “dealer” means a person who is a dealer in relation to a
distribution within the meaning of section 95(2) of ICTA or who would, if he
were resident in the United Kingdom, be such a dealer.
(8)
Condition D is that at least part of the qualifying payment is not an amount to
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which subsection (9) or (10) applies.
(9)
This subsection applies to an amount that is, for the purposes of the
Corporation Tax Acts—
(a)
income or gains arising to the company in the accounting period in
which the qualifying payment was made in relation to the company, or
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Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
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(b)
income arising to any other company resident in the United Kingdom
in a corresponding accounting period.
(10)
This subsection applies to an amount that is taken into account in determining
the debits and credits to be brought into account by a company for the
purposes of Chapter 2 of Part 4 of FA 1996 as respects a share in another
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company by virtue of section 91A or 91B of FA 1996 (shares treated as loan
relationships).
(11)
Condition E is that the company and the paying party expected on entering
into the scheme that a benefit would arise as a result of condition D being
satisfied (whether by reference to all or part of the qualifying payment).
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(12)
A notice under this section is a notice—
(a)
informing the company of the Commissioners’ view under subsection
(1),
(b)
specifying the qualifying payment by reference to which the
Commissioners consider conditions B to E are or may be satisfied,
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(c)
specifying the accounting period of the company in which the payment
is made, and
(d)
informing the company that as a consequence section 27 has effect in
relation to the payment.
(13)
For the purposes of this section a payment is a qualifying payment in relation
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to a company if it constitutes a contribution to the capital of the company.
(14)
For the purposes of this section the accounting period of a company (“company
A”) corresponds to the accounting period of another company (“company B”)
if at least one day of company A’s accounting period falls within company B’s
accounting period.
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27
Rule as to qualifying payment
(1)
The following provisions of this section apply in relation to a payment that is
a qualifying payment in relation to a company if—
(a)
a notice specifying that payment is given to the company under section
26, and
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(b)
when the notice is given, conditions A to E of section 26 are satisfied in
relation to the company.
(2)
The company must compute (or recompute) for the purposes of corporation
tax for the accounting period specified in the notice its income or chargeable
gains, or its liability to corporation tax, as if the relevant part of the qualifying
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payment were an amount of income chargeable under Case VI of Schedule D
arising to the company in that period.
(3)
The relevant part of the qualifying payment is the part by reference to which
conditions C and D are satisfied; and, where conditions C and D are satisfied
in relation to the whole of the qualifying payment, the relevant part is the
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whole of the qualifying payment.
(4)
In this section “qualifying payment” has the same meaning as in section 26.