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 4 — Avoidance involving tax arbitrage
26

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Notices under sections 24 and 26
(1)
Subsection (2) applies if the Commissioners for Her Majesty’s Revenue and
Customs give a notice to a company under section 24 or 26 before the company
has made its company tax return for the accounting period specified in the
notice.
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(2)
If the company makes its return for that period before the end of the period of
90 days beginning with the day on which the notice is given, it may—
(a)
make a return that disregards the notice, and
(b)
at any time after making the return and before the end of the period of
90 days, amend the return for the purpose of complying with the
10
provision referred to in the notice.
(3)
If a company has made a company tax return for an accounting period, the
Commissioners may only give the company a notice under section 24 or 26 in
relation to that period if a notice of enquiry has been given to the company in
respect of its return for that period.
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(4)
After any enquiries into the return for that period have been completed, the
Commissioners may only give the company a notice under section 24 or 26 if
the requirements in subsections (5) and (7) are satisfied.
(5)
The first requirement is that at the time the enquiries into the return were
completed, the Commissioners could not have been reasonably expected, on
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the basis of information made available to them or to an officer of Revenue and
Customs before that time, to have been aware that the circumstances were such
that a notice under section 24 or 26 could have been given to the company in
relation to that period.
(6)
Paragraph 44(2) and (3) of Schedule 18 to FA 1998 (information made available)
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applies for the purposes of subsection (5) as it applies for the purposes of
paragraph 44(1).
(7)
The second requirement is that—
(a)
the company was requested to produce or provide information during
an enquiry into the return for that period, and
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(b)
if the company had duly complied with the request, the Commissioners
could reasonably have been expected to give the company a notice
under section 24 or 26 in relation to that period.
(8)
If a company is given a notice under section 24 or 26 in relation to an
accounting period after having made a company tax return for that period, the
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company may amend the return for the purpose of complying with the
provision referred to in the notice at any time before the end of the period of 90
days beginning with the day on which the notice is given.
(9)
If the notice under section 24 or 26 is given to the company after it has been
given a notice of enquiry in respect of its return for the period, no closure notice
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may be given in relation to the company’s tax return until—
(a)
the end of the period of 90 days beginning with the day on which the
notice under section 24 or 26 is given, or
(b)
the earlier amendment of the company tax return for the purpose of
complying with the provision referred to in the notice.
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(10)
If the notice under section 24 or 26 is given to the company after any enquiries
into the return for the period are completed, no discovery assessment may be

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
27

made as regards the income or chargeable gain to which the notice relates
until—
(a)
the end of the period of 90 days beginning with the day on which the
notice under section 24 or 26 is given, or
(b)
the earlier amendment of the company tax return for the purpose of
5
complying with the provision referred to in the notice.
(11)
Subsections (2)(b) and (8) do not prevent a company tax return for a period
becoming incorrect if—
(a)
a notice under section 24 or 26 is given to the company in relation to
that period,
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(b)
the return is not amended in accordance with subsection (2)(b) or (8) for
the purpose of complying with the provision referred to in the notice,
and
(c)
the return ought to have been so amended.
(12)
In this section—
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“closure notice” means a notice under paragraph 32 of Schedule 18 to FA
1998;
“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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“discovery assessment” means an assessment under paragraph 41 of
Schedule 18 to FA 1998;
“notice of enquiry” means a notice under paragraph 24 of Schedule 18 to
FA 1998.
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Amendments relating to company tax returns
25
(1)
In Schedule 18 to FA 1998 (company tax returns, assessments, etc), in
paragraph 25(1) (scope of enquiry) after “relief)” insert “or a notice under
section 24 or 26 of the Finance (No. 2) Act 2005 (avoidance involving tax
arbitrage)”.
(2)
In paragraph 42 of that Schedule (restrictions on power to make discovery
30
assessment etc), in sub-paragraph (2A), after “1988” insert “or section 24 or 26
of the Finance (No. 2) Act 2005”.
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Interpretation
(1)
For the purposes of this Chapter—
(a)
references to a scheme are references to any scheme, arrangements or
35
understanding of any kind whatever, whether or not legally
enforceable, involving a single transaction or two or more transactions;
(b)
it shall be immaterial in determining whether any transactions have
formed or will form part of a series of transactions or scheme that the
parties to any of the transactions are different from the parties to
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another of the transactions; and
(c)
the cases in which any two or more transactions are to be taken as
forming part of a series of transactions or scheme shall include any case
in which it would be reasonable to assume that one or more of them—
(i)
would not have been entered into independently of the other or
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others, or

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Avoidance involving tax arbitrage
28

(ii)
if entered into independently of the other or others, would not
have taken the same form or been on the same terms.
(2)
For the purposes of this Chapter, a scheme achieves a UK tax advantage for a
person if in consequence of the scheme the person is in a position to obtain, or
has obtained—
5
(a)
a relief or increased relief from income tax or corporation tax,
(b)
a repayment or increased repayment of income tax or corporation tax,
or
(c)
the avoidance or reduction of a charge to income tax or corporation tax.
(3)
In subsection (2)(a) the reference to relief includes a reference to a tax credit.
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(4)
For the purposes of subsection (2)(c) avoidance or reduction may in particular
be effected by—
(a)
receipts accruing in such a way that the recipient does not pay or bear
tax on them, or
(b)
a deduction in computing profits or gains.
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Commencement
(1)
The deduction cases provisions have effect in relation to accounting periods of
a company beginning on or after 16th March 2005.
(2)
Where an accounting period of a company begins before, and ends on or after
16th March 2005, it shall be assumed for the purposes of the deduction cases
20
provisions (and subsection (1) of this section) that that accounting period (“the
straddling period”) consists of two separate accounting periods—
(a)
the first beginning with the straddling period and ending with the 15th
March 2005, and
(b)
the second beginning with 16th March 2005 and ending with the
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straddling period,

and the company’s profits and losses shall be computed accordingly for tax
purposes.
(3)
The deduction cases provisions do not have effect so far as regards a
transaction to which a company is party on 16th March 2005 and which on that
30
date forms part of a scheme, if—
(a)
the company is not on 16th March 2005 connected with a person who is
on that date also party to, or concerned in, the scheme, and
(b)
the scheme ceases to exist before 31st August 2005.

Section 839 of ICTA applies for the purposes of this subsection.
35
(4)
The receipts cases provisions have effect in relation to any contribution to the
capital of a company resident in the United Kingdom that is made on or after
16th March 2005.
(5)
In this section—
“the deduction cases provisions” means—
40
(a)
sections 24 and 25 and Schedule 3, and
(b)
sections 28 to 30 so far as relating to the provisions in paragraph
(a);
“the receipts cases provisions” means—
(a)
sections 26 and 27, and
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Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Chargeable gains
29

(b)
sections 28 to 30 so far as relating to the provisions in paragraph
(a).
Chapter 5
Chargeable gains
Residence, location of assets etc
5
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Temporary non-residents
(1)
Section 10A of TCGA 1992 is amended as follows.
(2)
In subsection (3) (certain gains or losses to be excluded from being treated by
virtue of subsection (2) as accruing to the taxpayer in year of return)—
(a)
in paragraph (a), for “he was neither resident nor ordinarily resident in
10
the United Kingdom” substitute—
“(i)
he was neither resident nor ordinarily resident in
the United Kingdom, or
(ii)
he was resident or ordinarily resident in the
United Kingdom but was Treaty non-resident;”;
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(b)
in paragraph (d), after “152(1)(b)” insert “, 153(1)(b)”.
(3)
In subsection (8) (definitions) in the definition of “relevant disposal”, after
“United Kingdom” insert “and was not Treaty non-resident”.
(4)
For subsection (9) substitute—
“(9)
For the purposes of this section an individual satisfies the residence
20
requirements for a year of assessment—
(a)
if, during any part of that year of assessment, he is resident in
the United Kingdom and not Treaty non-resident, or
(b)
if he is ordinarily resident in the United Kingdom during that
year of assessment, unless he is Treaty non-resident during that
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year of assessment.
(9A)
For the purposes of this section an individual is Treaty non-resident at
any time if, at that time, he falls to be regarded as resident in a territory
outside the United Kingdom for the purposes of double taxation relief
arrangements having effect at that time.
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(9B)
Where this section applies in the case of any individual in
circumstances in which one or more intervening years would, but for
his being Treaty non-resident during some or all of that year or those
years, not be an intervening year, this section shall have effect in the
taxpayer’s case—
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(a)
as if subsection (2)(a) above did not apply in the case of any
amount treated by virtue of section 87 or 89(2) as an amount of
chargeable gains accruing to the taxpayer in any such
intervening year, and
(b)
as if any such intervening year were not an intervening year for
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the purposes of subsections (2)(b) and (c) and (6) above.”.

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Chargeable gains
30

(5)
After subsection (9B) (as inserted by subsection (4) above) insert—
“(9C)
Nothing in any double taxation relief arrangements shall be read as
preventing the taxpayer from being chargeable to capital gains tax in
respect of any of the chargeable gains treated by virtue of subsection
(2)(a) above as accruing to the taxpayer in the year of return (or as
5
preventing a charge to that tax from arising as a result).”.
(6)
Omit subsection (10) (section to be without prejudice to right to claim relief
under double taxation relief arrangements).
(7)
The amendments in subsections (2)(a), (4), (5) and (6) have effect—
(a)
in any case in which the year of departure is, or (on the assumption that
10
the amendment in subsection (4) had always had effect) would be, the
year 2005-06 or a subsequent year of assessment; and
(b)
in any case in which—
(i)
the year of departure is, or (on that assumption) would be, the
year 2004-05, and
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(ii)
at a time in that year on or after 16th March 2005, the taxpayer
was resident or ordinarily resident in the United Kingdom and
was not Treaty non-resident (within the meaning given by
section 10A(9A) of TCGA 1992, as inserted by subsection (4)).
(8)
The amendment in subsection (2)(b) has effect in relation to relevant disposals
20
made on or after 16th March 2005.
(9)
The amendment in subsection (3) has effect for determining whether a disposal
of an asset is a relevant disposal for the purposes of section 10A of TCGA 1992
in any case in which the person making the disposal acquired the asset on or
after 16th March 2005.
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Trustees both resident and non-resident in a year of assessment
(1)
After section 83 of TCGA 1992 insert—
“83A
Trustees both resident and non-resident in a year of assessment
(1)
This section applies if a chargeable gain accrues to the trustees of a
settlement on the disposal by them of an asset in a year of assessment
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and the trustees—
(a)
are within the charge to capital gains tax in that year of
assessment, but
(b)
are non-UK resident at the time of the disposal.
(2)
Where this section applies, nothing in any double taxation relief
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arrangements shall be read as preventing the trustees from being
chargeable to capital gains tax (or as preventing a charge to tax arising,
whether or not on the trustees) by virtue of the accrual of that gain.
(3)
For the purposes of this section the trustees of a settlement are within
the charge to capital gains tax in a year of assessment—
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(a)
if, during any part of that year of assessment, they are resident
in the United Kingdom and not Treaty non-resident, or
(b)
if they are ordinarily resident in the United Kingdom during
that year of assessment, unless they are Treaty non-resident
during that year of assessment.
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Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 5 — Chargeable gains
31

(4)
For the purposes of this section the trustees of a settlement are non-UK
resident at a particular time if, at that time,—
(a)
they are neither resident nor ordinarily resident in the United
Kingdom, or
(b)
they are resident or ordinarily resident in the United Kingdom
5
but are Treaty non-resident.
(5)
For the purposes of this section the trustees of a settlement are Treaty
non-resident at any time if, at that time, they fall to be regarded as
resident in a territory outside the United Kingdom for the purposes of
double taxation relief arrangements having effect at that time.”.
10
(2)
The amendment made by this section has effect in relation to disposals made
on or after 16th March 2005.
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Location of assets etc
Schedule 4 (which makes provision in relation to the situation of assets for the
purposes of TCGA 1992 and which makes minor amendments in that Act in
15
relation to non-resident companies with United Kingdom permanent
establishments) has effect.
Miscellaneous
35
Exercise of options etc
Schedule 5 (which makes provision, for the purposes of the taxation of
20
chargeable gains, in relation to options) has effect.
36
Notional transfers within a group
(1)
Section 171A of TCGA 1992 (notional transfers within a group) is amended as
follows.
(2)
After subsection (3) insert—
25
“(3ZA)
In a case where B—
(a)
is not resident in the United Kingdom, but
(b)
is carrying on a trade in the United Kingdom through a
permanent establishment there,

the asset or part deemed to be transferred to B by A is to be treated for
30
the purposes of subsections (2)(c) and (3) above as having been
acquired by B for use by or for the purposes of the permanent
establishment; but that shall not be taken to affect the question whether
or not the asset or part is situated in the United Kingdom at any time.”.
(3)
The amendment made by this section has effect in relation to disposals made
35
on or after 16th March 2005.

Finance Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 6 — Miscellaneous
32

Chapter 6
Miscellaneous
Accounting practice and related matters
37
Accounting practice and related matters

Schedule 6 (accounting practice and related matters) has effect.
5
Financial avoidance etc
38
Charges on income for the purposes of corporation tax
(1)
Section 338A of ICTA (meaning of “charges on income” for the purposes of
corporation tax) is amended as follows.
(2)
In subsection (2) (what are charges on income) paragraph (a) (annuities or
10
other annual payments that meet the conditions in section 338B) shall cease to
have effect.
(3)
In section 125(1) of ICTA (annual payments for non-taxable consideration) for
“income tax,” substitute “income tax and”.
(4)
In section 434A(2)(a) of ICTA (loss resulting to insurance company from
15
computation in accordance with Case I of Schedule D: reduction by specified
amounts) omit sub-paragraph (i) (which relates to charges on income).
(5)
The side-note to section 494 of ICTA (charges on income) becomes “Loan
relationships etc.”.
(6)
The amendment made by subsection (4) has effect for accounting periods
20
beginning on or after 1st April 2004.
(7)
The other amendments made by this section have effect in relation to payments
made on or after the commencement date in respect of annuities or other
annual payments.
(8)
Where—
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(a)
an accounting period of a company begins before, and ends on or after,
the commencement date,
(b)
a payment in respect of an annuity or other annual payment is made by
the company in that period but before the commencement date, and
(c)
the payment is deductible as a charge on income for the purposes of
30
corporation tax,

subsection (9) applies.
(9)
In any such case, so much of any amount as represents that payment—
(a)
is not deductible under section 75 of ICTA (expenses of management),
and
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(b)
is not to be brought into account under section 76 of that Act (expenses
of insurance companies) as expenses payable,

for that or any subsequent accounting period.
(10)
Subsection (12) applies in any case where—