Finance Bill

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Session 2005 - 06
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60
Finance Bill
Schedule 1 — Disclosure of value added tax avoidance schemes

Schedules
Schedule 1
Section 6

Disclosure of value added tax avoidance schemes
Introduction
1
Schedule 11A to VATA 1994 (disclosure of avoidance schemes) is amended
5
in accordance with this Schedule.
Interpretative provisions
2
In paragraph 1 (interpretation), after the definition of “designated scheme”
insert—
“ “non-deductible tax”, in relation to a taxable person, has the
10
meaning given by paragraph 2A;”.
3
For paragraph 2 substitute—
“2    (1)
For the purposes of this Schedule, a taxable person obtains a tax
advantage if—
(a)
in any prescribed accounting period, the amount by which
15
the output tax accounted for by him exceeds the input tax
deducted by him is less than it would otherwise be,
(b)
he obtains a VAT credit when he would not otherwise do
so, or obtains a larger VAT credit or obtains a VAT credit
earlier than would otherwise be the case,
20
(c)
in a case where he recovers input tax as a recipient of a
supply before the supplier accounts for the output tax, the
period between the time when the input tax is recovered
and the time when the output tax is accounted for is
greater than would otherwise be the case, or
25
(d)
in any prescribed accounting period, the amount of his
non-deductible tax is less than it would otherwise be.
      (2)
For the purposes of this Schedule, a person who is not a taxable
person obtains a tax advantage if his non-refundable tax is less
than it would otherwise be.
30
      (3)
In sub-paragraph (2), “non-refundable tax”, in relation to a person
who is not a taxable person, means—
(a)
VAT on the supply to him of any goods or services,
(b)
VAT on the acquisition by him from another member State
of any goods, and
35
(c)
VAT paid or payable by him on the importation of any
goods from a place outside the member States,

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Schedule 1 — Disclosure of value added tax avoidance schemes
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but excluding (in each case) any VAT in respect of which he is
entitled to a refund from the Commissioners by virtue of any
provision of this Act.”
4
After paragraph 2 insert—
“Meaning of “non-deductible tax”
5
2A    (1)
In this Schedule “non-deductible tax”, in relation to a taxable
person, means—
(a)
input tax for which he is not entitled to credit under section
25, and
(b)
any VAT incurred by him which is not input tax and in
10
respect of which he is not entitled to a refund from the
Commissioners by virtue of any provision of this Act.
      (2)
For the purposes of sub-paragraph (1)(b), the VAT “incurred” by a
taxable person is—
(a)
VAT on the supply to him of any goods or services,
15
(b)
VAT on the acquisition by him from another member State
of any goods, and
(c)
VAT paid or payable by him on the importation of any
goods from a place outside the member States.”
Duty to notify Commissioners
20
5     (1)
Paragraph 6 (duty to notify Commissioners) is amended as follows.
      (2)
In sub-paragraph (1)—
(a)
omit the word “or” at the end of paragraph (a), and
(b)
after paragraph (b) insert “, or
(c)
the amount of his non-deductible tax in respect of any
25
prescribed accounting period is less than it would be but
for such a scheme.”
      (3)
After sub-paragraph (2) insert—
   “(2A)
Sub-paragraph (2) does not apply to a taxable person in relation to
any scheme if he has on a previous occasion—
30
(a)
notified the Commissioners under that sub-paragraph in
relation to the scheme, or
(b)
provided the Commissioners with prescribed information
under sub-paragraph (3) (as it applied before the scheme
became a designated scheme) in relation to the scheme.”
35
      (4)
For sub-paragraph (5) substitute—
    “(5)
Sub-paragraph (3) also does not apply where the scheme is one in
respect of which the taxable person has on a previous occasion
provided the Commissioners with prescribed information under
that sub-paragraph.”
40
6
In paragraph 7 (exemptions from duty to notify) in the definition of
“relevant period” in sub-paragraph (9) for “6(1)(a) or (b)” substitute “6(1)(a),
(b) or (c)”.

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Schedule 2 — Employee securities: anti-avoidance
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Amount of penalty
7     (1)
Paragraph 11 (amount of penalty) is amended as follows.
      (2)
In sub-paragraph (3)—
(a)
omit the word “and” at the end of paragraph (a), and
(b)
after paragraph (b) insert “, and
5
(c)
to the extent that—
(i)
the case falls within paragraph 6(1)(c), and
(ii)
the excess of the notional non-deductible
tax of the taxable person for the relevant
periods over his non-deductible tax for
10
those periods is not represented by a
corresponding amount which by virtue of
paragraph (a) or (b) is part of the VAT
saving,

the amount of the excess.”
15
      (3)
In sub-paragraph (4), after “(3)(a)” insert “and (c)”.
      (4)
After sub-paragraph (4) insert—
    “(5)
In sub-paragraph (3)(c), “notional non-deductible tax”, in relation
to a taxable person, means the amount that would, but for the
scheme, have been the amount of his non-deductible tax.”
20
Penalty assessments
8
In paragraph 12 (penalty assessments) for sub-paragraph (3) substitute—
    “(3)
In a case where—
(a)
the penalty falls to be calculated by reference to the VAT
saving as determined under paragraph 11(3), and
25
(b)
the notional tax cannot readily be attributed to any one or
more prescribed accounting periods,

the notional tax shall be treated for the purposes of this Schedule
as attributable to such period or periods as the Commissioners
may determine to the best of their judgment and notify to the
30
person liable for the penalty.
     (3A)
In sub-paragraph (3) “the notional tax” means—
(a)
the VAT that would, but for the scheme, have been shown
in returns as payable by or to the taxable person, or
(b)
any amount that would, but for the scheme, have been the
35
amount of the non-deductible tax of the taxable person.”
Schedule 2
Section 12

Employee securities: anti-avoidance
Introductory
1
ITEPA 2003 is amended as follows.
40

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Schedule 2 — Employee securities: anti-avoidance
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Rights under certain insurance contracts to be securities
2     (1)
Section 420 (income and exemptions relating to securities: meaning of
“securities” etc.) is amended as follows.
      (2)
In subsection (1), after paragraph (a) insert—
“(aa)
rights under contracts of insurance other than excluded
5
contracts of insurance,”.
      (3)
In paragraph (b) of that subsection, insert at the end “(other than contracts
of insurance)”.
      (4)
In paragraph (g) of that subsection, insert at the end “(other than contracts
of insurance)”.
10
      (5)
After that subsection insert—
“(1A)
For the purposes of subsection (1)(aa) a contract of insurance is an
excluded contract of insurance if it is—
(a)
a contract for an annuity which is (or will be) pension income
(see Part 9),
15
(b)
a contract of long-term insurance, other than an annuity
contract, which does not have a surrender value and is not
capable of acquiring one (whether on conversion or in any
other circumstances), or
(c)
a contract of general insurance other than one which falls, in
20
accordance with generally accepted accounting practice, to
be accounted for as a financial asset or liability.
(1B)
In this section—
“contract of insurance”,
“contract of long-term insurance”, and
25
“contract of general insurance”,

have the same meaning as in the Financial Services and Markets Act
2000 (Regulated Activities) Order 2001.”
      (6)
In subsection (5)—
(a)
at the end of paragraph (c) insert “and”, and
30
(b)
omit paragraph (d) (exclusion of insurance contracts).
      (7)
In Part 2 of Schedule 1 (index of defined expressions), insert at the
appropriate place—

“generally accepted accounting
Section 832(1) of ICTA”

practice

35
      (8)
This paragraph has effect on and after 2nd December 2004 and applies in
relation to rights under contracts of insurance acquired before that date, as
well as those acquired on or after that date; and—
(a)
for the purposes of the application of Chapter 3B of Part 7 of ITEPA
2003 (securities with artificially enhanced market value) by reason of
40
this paragraph in relation to rights under contracts of insurance
acquired before that date, section 446O of that Act (meaning of
“relevant period”) has effect as if they were acquired on that date,
and

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Schedule 2 — Employee securities: anti-avoidance
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(b)
for the purposes of section 420(1A)(c) of ITEPA 2003, section 50 of FA
2004 (meaning of “generally accepted accounting practice”) has
effect on and after that date, in spite of subsection (6) of that section.
Restricted securities
3
Chapter 2 of Part 7 (restricted securities) is amended as follows.
5
4     (1)
Section 424 (employment-related securities which are not restricted
securities or restricted interest in securities) is renumbered as subsection (1)
of that section.
      (2)
In that subsection—
(a)
at the end of paragraph (a) insert “or”, and
10
(b)
omit paragraph (c) (employment-related securities which are, or are
an interest in, redeemable securities) and the word “or” before it.
      (3)
After that subsection insert—
“(2)
Subsection (1) does not apply if the main purpose (or one of the main
purposes) of the arrangements under which the right or opportunity
15
to acquire the employment-related securities is made available is the
avoidance of tax or national insurance contributions.”
      (4)
This paragraph has effect on and after 2nd December 2004 and applies in
relation to employment-related securities acquired before that date, as well
as those acquired on or after that date; and section 422 of ITEPA 2003
20
(application of Chapter 2 of Part 7) applies to employment-related securities
in relation to which this paragraph has effect and which were acquired
before that date with the omission of the words “at the time of the
acquisition”.
5     (1)
In section 428 (amount of charge under section 426), after subsection (9)
25
insert—
“(10)
But subsection (9) does not apply if something which affects the
employment-related securities has been done (at or before the time
of the chargeable event) as part of a scheme or arrangement the main
purpose (or one of the main purposes) of which is the avoidance of
30
tax or national insurance contributions.”
      (2)
This paragraph has effect where something such as is mentioned in section
428(10) of ITEPA 2003 has been done on or after 2nd December 2004.
6     (1)
In section 429 (exception from charge under section 426 for certain company
shares), for subsection (1A) substitute—
35
“(1A)
This subsection is satisfied unless something which affects the
employment-related securities has been done (at or before the time
when section 426 would apply) as part of a scheme or arrangement
the main purpose (or one of the main purposes) of which is the
avoidance of tax or national insurance contributions.”
40
      (2)
This paragraph has effect where something such as is mentioned in section
429(1A) of ITEPA 2003 has been done on or after 2nd December 2004.

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7     (1)
After section 431A insert—
“431B
Securities acquired for purpose of avoidance
Where employment-related securities are restricted securities or a
restricted interest in securities, the employer and the employee are to
be treated as making an election under section 431(1) in relation to
5
the employment-related securities if the main purpose (or one of the
main purposes) of the arrangements under which the right or
opportunity to acquire the employment-related securities is made
available is the avoidance of tax or national insurance contributions.”
      (2)
This paragraph has effect in relation to employment-related securities
10
acquired on or after 2nd December 2004.
Convertible securities
8
Chapter 3 of Part 7 (convertible securities) is amended as follows.
9     (1)
In section 436(a) (meaning of “convertible securities”), for “immediate or
conditional entitlement” substitute “entitlement (whether immediate or
15
deferred and whether conditional or unconditional)”.
      (2)
Section 437 (adjustment of acquisition charge) is renumbered as subsection
(1) of that section.
      (3)
After that subsection insert—
“(2)
Subsection (1) does not apply if the main purpose (or one of the main
20
purposes) of the arrangements under which the right or opportunity
to acquire the employment-related securities is made available is the
avoidance of tax or national insurance contributions unless the
market value of the employment-related securities determined
under subsection (1) would be greater than that determined under
25
subsection (3).
(3)
Where subsection (1) does not apply by virtue of subsection (2) the
market value of the employment-related securities is to be
determined—
(a)
where the securities which are (or an interest in which is) the
30
employment-related securities fall within paragraph (a) of
section 436 and the entitlement to convert is not both
immediate and unconditional, as if it were,
(b)
where they fall within paragraph (b) of that section, as if the
circumstances are such that an entitlement to convert to
35
arises immediately, and
(c)
where they fall within paragraph (c) of that section, as if
provision were made for their immediate conversion;

and in each case is to be determined as if they were immediately and
fully convertible.
40
(4)
In subsection (3) “immediately and fully convertible” means
convertible immediately after the acquisition of the employment-
related securities so as to obtain the maximum gain that would be
possible on a conversion at that time (assuming, where the securities
into which the securities may be converted were not in existence at
45
that time and it is appropriate to do so, that they were) without

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giving any consideration for the conversion or incurring any
expenses in connection with it.”
      (4)
This paragraph has effect in relation to acquisitions on or after 2nd
December 2004.
10    (1)
In section 440 (amount of charge under section 438), after subsection (3)
5
insert—
“(3A)
If (because of subsection (2) of section 437) subsection (1) of that
section did not apply in relation to the employment-related
securities, the taxable amount is to be reduced by the amount by
which—
10
(a)
the market value of the employment-related securities for the
purposes specified in that subsection, exceeded
(b)
what it would have been had that subsection applied,

(less the aggregate of any amount by which the taxable amount on
any previous chargeable event relating to the employment-related
15
securities has been reduced under this subsection).”
      (2)
This paragraph has effect on and after 2nd December 2004.
11    (1)
In section 443 (exception from charge under section 438 for certain company
shares), for subsection (1A) substitute—
“(1A)
This subsection is satisfied unless something which affects the
20
employment-related securities has been done (at or before the time
when section 438 would apply) as part of a scheme or arrangement
the main purpose (or one of the main purposes) of which is the
avoidance of tax or national insurance contributions.”
      (2)
This paragraph has effect where something such as is mentioned in section
25
443(1A) of ITEPA 2003 has been done on or after 2nd December 2004.
Securities acquired for less than market value
12
Chapter 3C of Part 7 (securities acquired for less than market value) is
amended as follows.
13    (1)
In section 446R (exception from Chapter for certain company shares), for
30
subsection (1A) substitute—
“(1A)
This subsection is satisfied unless something which affects the
employment-related securities has been done (at or before the time
of the acquisition) as part of a scheme or arrangement the main
purpose (or one of the main purposes) of which is the avoidance of
35
tax or national insurance contributions.”
      (2)
This paragraph has effect where something such as is mentioned in section
446R(1A) of ITEPA 2003 has been done on or after 2nd December 2004.
14    (1)
In section 446U(1) (discharge of notional loan), insert at the end “or
(c)
something which affects the employment-related securities is
40
done as part of a scheme or arrangement the main purpose
(or one of the main purposes) of which is the avoidance of tax
or national insurance contributions.”