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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

97

 

(b)   

any distribution in respect of the share were not a

distribution falling within section 209(2)(a) or (b) of the Taxes

Act 1988.

(3)   

The debits and credits to be brought into account by the investing

company for the purposes of this Chapter as respects the share must

5

be determined on the basis of fair value accounting.

(4)   

In any case where Condition 1 in section 91C below is satisfied, no

debits are to be brought into account in respect of any transaction (or

series of transactions) which (apart from the assumption in

subsection (6) of section 91C below) would have the effect of causing

10

the condition in paragraph (a) or (b) of subsection (1) of that section

not to be satisfied.

(5)   

In any case where Condition 3 in section 91E below is satisfied—

(a)   

debits and credits shall be brought into account for the

purposes of Schedule 26 to the Finance Act 2002 (derivative

15

contracts) by the investing company in respect of any

associated transaction falling within section 91E below as if it

were, or were a transaction in respect of, a derivative contract

(if that is not in fact the case), and

(b)   

those debits and credits shall be determined on the basis of

20

fair value accounting.

(6)   

A share is a non-qualifying share for the purposes of this section if—

(a)   

it is not one where section 95 of the Taxes Act 1988 (dealers

etc) applies in relation to distributions in respect of the share,

and

25

(b)   

one or more of the Conditions in sections 91C to 91E below is

satisfied.

(7)   

Subsection (10) of section 91A above (company treated as holding a

share) also applies for the purposes of this section.”.

      (4)  

After section 91B insert—

30

“91C    

Condition 1 for section 91B(6)(b)

(1)   

Condition 1 is that the assets of the issuing company are of such a

nature that the fair value of the share—

(a)   

is likely to increase at a rate which represents a return on an

investment of money at a commercial rate of interest, and

35

(b)   

is unlikely to deviate to a substantial extent from that rate of

increase.

   

Fluctuations in value resulting from changes in exchange rates are to

be left out of account for the purposes of paragraph (b) above.

(2)   

But Condition 1 is not satisfied if the whole or substantially the

40

whole by fair value of the assets of the issuing company are income

producing.

(3)   

The assets which, for the purposes of this section, are “income

producing” are—

(a)   

any share as respects which the conditions in section 91A(1)

45

above are satisfied;

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

98

 

(b)   

any share as respects which Condition 1 above is satisfied or

would, apart from subsection (2) above, be satisfied;

(c)   

any share as respects which Condition 2 in section 91D below

is satisfied or would, apart from subsection (1)(c) of that

section (excepted shares), be satisfied;

5

(d)   

any share as respects which Condition 3 in section 91E below

is satisfied;

(e)   

any asset of a description specified in any paragraph of

paragraph 8(2) of Schedule 10 to this Act (qualifying

investments in relation to a unit trust scheme or an offshore

10

fund);

(f)   

rights under a repo in relation to which section 730A of the

Taxes Act 1988 applies;

(g)   

any share in a company the whole or substantially the whole

by fair value of whose assets are assets within paragraphs (a)

15

to (f) above.

(4)   

The Treasury may by regulations amend this section for the purpose

of adding to the assets which are income producing.

(5)   

The provision that may be made by regulations under this section

includes provision for the regulations to have effect in relation to

20

accounting periods (whenever beginning) which end on or after the

day on which the regulations come into force.

(6)   

For the purposes of subsection (1) above, it shall be assumed that no

transaction (or series of transactions) intended to cause the condition

in paragraph (a) or (b) of that subsection not to be satisfied will be

25

entered into by the investing company.

(7)   

This section shall be construed as one with section 91B above.

91D     

Condition 2 for section 91B(6)(b)

(1)   

Condition 2 is that the share—

(a)   

is redeemable (see subsection (2)),

30

(b)   

is designed to produce a return which equates, in substance,

to the return on an investment of money at a commercial rate

of interest, and

(c)   

is not an excepted share (see subsection (3)).

(2)   

For the purposes of this section, a share is to be regarded as

35

redeemable only if it is redeemable as a result of its terms of issue (or

any collateral agreements, arrangements or understandings)—

(a)   

requiring redemption,

(b)   

entitling the holder to require redemption, or

(c)   

entitling the issuer to redeem.

40

(3)   

A share is an “excepted share” for the purposes of this section if—

(a)   

it is a qualifying publicly issued share (see subsections (4)

and (5)),

(b)   

it is a share that mirrors a public issue (see subsections (6) to

(8)), or

45

(c)   

the investing company’s purpose in acquiring the share is not

an unallowable purpose (see subsection (9)).

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

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(4)   

A share is a “qualifying publicly issued share” for the purposes of

this section if—

(a)   

it was issued by a company as part of an issue of shares to

independent persons, and

(b)   

less than 10% of the shares in that issue are held by the

5

investing company or persons connected with it.

(5)   

But a share is not a qualifying publicly issued share for those

purposes if the investing company’s purpose in acquiring the share

is an unallowable purpose by virtue of subsection (9)(a) below.

(6)   

The cases where a share mirrors a public issue are those set out in

10

subsections (7) and (8) below.

(7)   

Case 1 is where—

(a)   

a company (company A) issues shares (the public issue) to

independent persons,

(b)   

within 24 hours of that issue, one or more other companies

15

(companies BB) issue shares (the mirroring shares) to

company A on the same, or substantially the same, terms as

the public issue,

(c)   

company A and companies BB are associated companies (see

subsection (11)), and

20

(d)   

the total nominal value of the mirroring shares does not

exceed the nominal value of the public issue,

   

and in any such case the mirroring shares are shares that mirror a

public issue.

(8)   

Case 2 is where, in the circumstances of Case 1,—

25

(a)   

within 24 hours of the public issue, one or more other

companies (companies CC) issue shares (the second-level

mirroring shares) to one or more of companies BB on the

same, or substantially the same, terms as the public issue,

(b)   

company A, companies BB and companies CC are associated

30

companies, and

(c)   

the total nominal value of the second-level mirroring shares

does not exceed the nominal value of the public issue,

   

and in any such case the second-level mirroring shares are also

shares that mirror a public issue.

35

(9)   

For the purposes of this section, a share is acquired by the investing

company for an unallowable purpose if the purpose, or one of the

main purposes, for which the company holds the share is—

(a)   

the purpose of circumventing section 95 of the Taxes Act 1988

(see subsection (10)), or

40

(b)   

any other purpose which is a tax avoidance purpose (see

subsection (11)).

(10)   

The purpose, or one of the main purposes, for which the investing

company holds a share shall, in particular, be taken to be the purpose

of circumventing section 95 of the Taxes Act 1988 (taxation of dealers

45

in respect of distributions etc) if the investing company was an

associated company of a bank (see subsection (11)) at the time when

the investing company acquired the share, unless the investing

company shows that—

 

 

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Schedule 7 — Avoidance involving financial arrangements

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(a)   

immediately before that time, some or all of its business

consisted in making and holding investments, and

(b)   

it acquired the share in the ordinary course of that business.

(11)   

In this section—

“associated company”, in relation to any other company, means

5

a company which, within the meaning given by section

413(3)(a) of the Taxes Act 1988, is a member of the same

group of companies as that other company;

“bank” has the meaning given by section 840A of the Taxes Act

1988;

10

“independent person”, in relation to a company, means a

person who is not connected with the company;

“tax advantage” has the meaning given by section 709(1) of the

Taxes Act 1988;

“tax avoidance purpose”, in the case of any company, means

15

any purpose that consists in securing a tax advantage

(whether for the company or any other person).

(12)   

Section 839 of the Taxes Act 1988 (connected persons) applies for the

purposes of this section.

(13)   

This section is to be construed as one with section 91B above.

20

91E     

Condition 3 for section 91B(6)(b)

(1)   

Condition 3 is that there is a scheme or arrangement under which the

share and one or more associated transactions are together designed

to produce a return which equates, in substance, to the return on an

investment of money at a commercial rate of interest.

25

(2)   

But Condition 3 is not satisfied if—

(a)   

Condition 1 in section 91C above is satisfied as respects the

share or would, apart from subsection (2) of that section

(income producing assets), be so satisfied, or

(b)   

Condition 2 in section 91D above is satisfied as respects the

30

share or would, apart from subsection (1)(c) of that section

(excepted shares), be so satisfied.

(3)   

In this section “associated transaction” includes entering into, or

acquiring rights or liabilities under, any of the following—

(a)   

a derivative contract;

35

(b)   

a contract that would be a derivative contract, apart from

paragraph 4(2B) of Schedule 26 to the Finance Act 2002

(trades etc: hedging relationships with shares);

(c)   

a contract having a similar effect to—

(i)   

a derivative contract, or

40

(ii)   

a contract falling within paragraph (b) above;

(d)   

a contract of insurance or indemnity.

(4)   

This section is to be construed as one with section 91B above.”.

 

 

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Schedule 7 — Avoidance involving financial arrangements

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      (5)  

After section 91E insert—

“91F    

Power to add, vary or remove Conditions for section 91B(6)(b)

(1)   

The Treasury may by regulations amend this Chapter so as to add,

vary or remove Conditions for the purposes of section 91B(6)(b)

above.

5

(2)   

Where the Treasury so add, vary or remove a Condition, they may

also by regulations amend any of the following enactments—

(a)   

this Chapter,

(b)   

Chapters 1 to 3 of Part 6 of the Taxes Act 1988 (company

distributions),

10

(c)   

Part 18 of the Taxes Act 1988 (double taxation relief),

(d)   

the Taxation of Chargeable Gains Act 1992,

(e)   

Schedule 26 to the Finance Act 2002 (derivative contracts),

   

so as to make provision for or in connection with taxation in the case

of any asset or transaction that is or was mentioned in the Condition.

15

(3)   

The power to make regulations under this section includes power—

(a)   

to make different provision for different cases, and

(b)   

to make such consequential, supplementary, incidental or

transitional provisions, or savings, as appear to the Treasury

to be necessary or expedient (including provision amending

20

any enactment or any instrument made under an

enactment).”.

      (6)  

After section 91F insert—

“91G    

Shares beginning or ceasing to be subject to section 91A or 91B

(1)   

Where at any time on or after 16th March 2005 the conditions in

25

section 91A(1) or 91B(1) above become satisfied in the case of any

share, otherwise than in the circumstances described in subsection

(3) below, the investing company shall be deemed for the purposes

of the Taxation of Chargeable Gains Act 1992—

(a)   

to have disposed of the share immediately before that time

30

for a consideration of an amount equal to its fair value at that

time, and

(b)   

to have immediately reacquired it for a consideration of the

same amount.

(2)   

Where at any time the conditions in section 91A(1) or 91B(1) above

35

cease to be satisfied in the case of any share, the investing company

shall be deemed for the purposes of the Taxation of Chargeable

Gains Act 1992 and of this Chapter—

(a)   

to have disposed of the share immediately before that time

for a consideration of an amount equal to its fair value at that

40

time, and

(b)   

to have immediately reacquired it for a consideration of the

same amount.

(3)   

In any case where—

(a)   

a share is held by a company both—

45

(i)   

at the end of 15th March 2005, and

(ii)   

at the beginning of 16th March 2005, and

 

 

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Schedule 7 — Avoidance involving financial arrangements

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(b)   

the conditions in section 91A(1) or 91B(1) above are satisfied

in relation to that share at the beginning of 16th March 2005,

   

subsection (4) below applies.

(4)   

In any such case, section 116 of the Taxation of Chargeable Gains Act

1992 (reorganisations etc involving qualifying corporate bonds) shall

5

have effect in accordance with—

(a)   

the assumptions in subsections (5) and (6) below, and

(b)   

the provisions of subsections (7) and (8) below.

(5)   

The first of the assumptions is that the share became an asset

representing a creditor relationship of the company (and,

10

accordingly, a qualifying corporate bond) in consequence of the

occurrence on 16th March 2005 of a transaction such as is mentioned

in section 116(1) of the Taxation of Chargeable Gains Act 1992.

(6)   

The remaining assumptions are that, in relation to the transaction

deemed to have occurred as mentioned in subsection (5) above,—

15

(a)   

the share immediately before 16th March 2005 shall be

assumed to be the old asset for the purposes of section 116 of

the Taxation of Chargeable Gains Act 1992, and

(b)   

the asset representing a creditor relationship immediately

after the beginning of 16th March 2005 shall be assumed for

20

those purposes to be the new asset.

(7)   

Where—

(a)   

subsection (3) above has effect in the case of any share, but

(b)   

the conditions in section 91A(1) or 91B(1) above cease to be

satisfied in the case of the share at any time on or before 31st

25

December 2005,

   

subsection (8) below applies.

(8)   

In any such case—

(a)   

the deemed disposal of the share at that time by virtue of

subsection (2)(a) above shall not be regarded as a disposal for

30

the purposes of subsection (10)(b) or (c) of section 116 of the

Taxation of Chargeable Gains Act 1992, but

(b)   

the share shall continue to be the new asset for the purposes

of that section.”.

      (7)  

The amendments made by this paragraph have effect in relation to shares

35

held by a company on or after 16th March 2005.

Related transactions in relation to right to receive manufactured interest

11    (1)  

Section 97 of FA 1996 (manufactured interest) is amended as follows.

      (2)  

In subsection (2) (consequences of company having relationship to which

the section applies)—

40

(a)   

paragraph (b) (which restricts the debits and credits to be brought

into account to those relating to the manufactured interest) shall

cease to have effect, and

(b)   

in the closing words, for “paragraphs (a)(ii) and (b)” substitute

“paragraph (a)(ii)”.

45

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

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      (3)  

After subsection (2) insert—

“(2A)   

Where a company—

(a)   

has a relationship to which this section applies, but

(b)   

enters into a related transaction in respect of the right to

receive manufactured interest,

5

   

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

subsection (2) 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 applies even though the

manufactured interest is not payable to the company.”.

10

      (4)  

Omit subsections (3) and (3A) (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 97(2)

of that Act).

      (5)  

The amendments made by this paragraph have effect in relation to related

15

transactions on or after 16th March 2005.

Money debts etc not arising from lending of money: discounts and profits from transactions

12    (1)  

Section 100 of FA 1996 (money debts etc not arising from the lending of

money) is amended as follows.

      (2)  

In subsection (1)(c) (money debts to which the section applies) after sub-

20

paragraph (iii) insert “or

(iv)   

as respects which the conditions in subsection (1A)

below (discount etc) are satisfied;”.

      (3)  

After subsection (1) insert—

“(1A)   

The conditions mentioned in subsection (1)(c)(iv) above are that—

25

(a)   

the company stands in the position of creditor in relation to

the money debt;

(b)   

the money debt is one from which a discount (whether of an

income or capital nature) arises to the company;

(c)   

the discount does not fall to be brought into account under

30

section 50 of the Finance Act 2005 by virtue of section 47 of

that Act (alternative finance return);

(d)   

if the money debt is some or all of the consideration payable

for a disposal of property, the money debt (on the

assumption that it will be paid in full) does not fall to be

35

brought into account for the purposes of corporation tax as a

trading receipt of the company;

(e)   

if the money debt is some or all of the consideration payable

for a disposal of property, the property in question is not any

of the following—

40

(i)   

an asset representing a loan relationship;

(ii)   

a derivative contract.”.

      (4)  

In subsection (2), as it has effect for periods of account beginning on or after

1st January 2005, in paragraph (a), for “matters mentioned in subsection

(1)(c) above” substitute “matters mentioned in subsection (1)(c)(i) to (iii)

45

above or subsection (2ZA) below”.

 

 

 
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