Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Schedule 6 — Avoidance involving financial arrangements
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“money” includes money expressed in a currency other than
sterling,
“property” means property in any form,
“stock lending arrangement” and “securities” have the same
meanings as in section 263B of the 1992 Act,
5
“transfer” means a transfer otherwise than by way of sale.”.
      (4)
The amendments made by this paragraph have effect in relation to any
arrangement made on or after 22nd March 2006.
Loan relationships: mandatory convertibles
4     (1)
Section 81 of FA 1996 (meaning of “loan relationship” etc) is amended as
10
follows.
      (2)
In subsection (2) (meaning of “money debt”)—
(a)
omit the “or” immediately before paragraph (b) (transfer of right to
settlement under a money debt), and
(b)
at the end of that paragraph insert “, or
15
(c)
by the issue or transfer of any shares in any
company,”.
      (3)
The amendments made by this paragraph have effect in relation to
relationships to which a company is a party on or after 22nd March 2006.
      (4)
The following provisions of this paragraph apply for the purposes of TCGA
20
1992 if—
(a)
a company is a party to a relationship on 22nd March 2006,
(b)
the relationship becomes a loan relationship on that date for the
purposes of Chapter 2 of Part 4 of FA 1996 as a result of the
amendments made by this paragraph,
25
(c)
the relationship is a creditor relationship of the company, and
(d)
immediately before that date the asset representing the relationship
was a chargeable asset in relation to the company.
      (5)
The company is treated as if—
(a)
it had made a disposal of the asset representing the relationship
30
immediately before 22nd March 2006, and
(b)
the disposal had been for a consideration equal to the fair value of the
asset at that time (within the meaning given by section 103(1) of FA
1996).
      (6)
Any chargeable gain or loss accruing to the company on the disposal is
35
treated as accruing to the company when it ceases to be a party to the
relationship.
      (7)
For the purposes of this paragraph an asset is a chargeable asset in relation
to the company at any time if any gain accruing to it on the disposal of the
asset at that time would be a chargeable gain for the purposes of TCGA 1992.
40
Loan relationships: computation in accordance with generally accepted accounting practice
5     (1)
Section 85A of FA 1996 (computation in accordance with generally accepted
accounting practice) is amended as follows.

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Schedule 6 — Avoidance involving financial arrangements
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      (2)
In subsection (1) (amounts to be brought into account are those recognised
in determining company’s profit or loss) after “Subject to the provisions of
this Chapter” insert “(including, in particular, section 84(1))”.
Loan relationships: amounts not fully recognised for accounting purposes
6     (1)
After section 85B of FA 1996 (amounts recognised in determining
5
company’s profit or loss) insert—
“85C
Amounts not fully recognised for accounting purposes
(1)
This section applies if—
(a)
a company is, or is treated as being, a party to a loan
relationship in any period, and
10
(b)
the credits and debits to be brought into account by the
company in respect of the relationship for the period for the
purposes of this Chapter are less than those that, on the
applicable assumptions, would be so brought into account.

In determining whether the condition in paragraph (b) is met, the
15
effect of this section is to be disregarded.
(2)
The credits and debits to be brought into account by the company in
respect of the relationship for the period for the purposes of this
Chapter are to be those that, on the applicable assumptions, would
be so brought into account.
20
(3)
For the purposes of this section, if the relationship is a creditor
relationship of the company, the applicable assumptions are the
assumptions that—
(a)
the asset representing the relationship is the only asset of any
kind of the company for the period, and
25
(b)
the company has no liabilities of any kind for the period.
(4)
For the purposes of this section, if the relationship is a debtor
relationship of the company, the applicable assumptions are the
assumptions that—
(a)
the liability representing the relationship is the only liability
30
of any kind of the company for the period, and
(b)
the company has no assets of any kind for the period.
(5)
In determining under this section the amount of the credits and
debits to be brought into account by the company in respect of the
relationship for the period, the applicable assumptions are not to
35
affect the operation of any other provision of this Chapter.
(6)
This section does not apply to an amount of credits or debits for any
period in so far as it is not brought into account by the company for
the period for the purposes of this Chapter as a result of regulations
under—
40
(a)
section 84A(3A) (exchange gains and losses), or
(b)
section 85B(3) (amounts recognised in determining
company’s profit or loss).
(7)
This section does not apply if the company has any qualifying rights
under any repo or stock lending arrangements in relation to the
45
relationship.

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(8)
For this purpose a company has qualifying rights under any repo or
stock lending arrangements if—
(a)
the arrangements are an agreement falling within subsection
(1)(a) of section 730A of the Taxes Act 1988 (sale and
repurchase of securities) which are not excluded by
5
subsection (8) of that section and the company is the interim
holder under the agreement, or
(b)
the arrangements are a stock lending arrangement (within
the meaning of section 263B of the Taxation of Chargeable
Gains Act 1992) and the company is the borrower under the
10
stock lending arrangement.
(9)
For the purposes of this section a company is to be treated as
continuing to be a party to a loan relationship notwithstanding that
the rights under the relationship have been transferred to another
person—
15
(a)
under a repo or stock lending arrangement, or
(b)
under a transaction which is treated by section 26 of the
Taxation of Chargeable Gains Act 1992 as not involving any
disposal.
(10)
In this section “liabilities” includes any share capital issued by the
20
company which falls to be treated for accounting purposes as a
liability.”.
      (2)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 22nd March 2006.
      (3)
But, in relation to a period of account beginning before 22nd March 2006,
25
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of that amendment only if the amounts relate to any
time on or after that date.
Shares treated as loan relationships: shares subject to outstanding third party obligations
7     (1)
Section 91A of FA 1996 (shares subject to outstanding third party
30
obligations) is amended as follows.
      (2)
In subsection (1) (conditions for section to apply), in the opening words, for
“a company if at any time in an accounting period” substitute “the times in
a company’s accounting period during which”.
      (3)
In subsection (2) (how Chapter has effect for the accounting period) after “as
35
if” insert “during those times”.
      (4)
In subsection (5) (cases where a share is subject to outstanding third party
obligations)—
(a)
in paragraph (a) (share is subject to obligations of description in
subsection (6)) after “the share is subject to” insert “, or will or might
40
under any relevant arrangements be subject to,”, and
(b)
in paragraph (b) (obligations of a person other than the investing
company) after “the investing company” insert “or are obligations of
the investing company which, under any relevant arrangements,
will or might be discharged directly or indirectly by any other
45
person”.

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      (5)
After that subsection insert—
“(5A)
For the purposes of subsection (5) above—
(a)
“arrangements” includes any agreement or understanding
(whether or not legally enforceable),
(b)
arrangements are “relevant” if they were entered into at any
5
time on or before the share was issued.”.
      (6)
The amendments made by sub-paragraphs (2) and (3) have effect in relation
to accounting periods ending on or after 22nd March 2006.
      (7)
The other amendments made by this paragraph have effect in relation to
shares held by a company on or after 22nd March 2006.
10
      (8)
But, in relation to an accounting period beginning before 22nd March 2006,
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those other amendments only if the amounts relate
to any time on or after that date.
Shares treated as loan relationships: application of rules to non-qualifying shares
15
8     (1)
Section 91B of FA 1996 (non-qualifying shares) is amended as follows.
      (2)
In subsection (1) (conditions for section to apply)—
(a)
in the opening words, for “a company if at any time in an accounting
period” substitute “the times in a company’s accounting period
during which”, and
20
(b)
in the words after paragraph (c), for “at no time in the accounting
period does section 91A above apply” substitute “, during those
times, section 91A above does not apply”.
      (3)
In subsection (2) (how Chapter has effect for the accounting period) after “as
if” insert “during those times”.
25
      (4)
The amendments made by this paragraph have effect in relation to
accounting periods ending on or after 22nd March 2006.
      (5)
But, in relation to an accounting period beginning before 22nd March 2006,
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those amendments only if the amounts relate to
30
any time on or after that date.
Shares treated as loan relationships: redeemable shares
9     (1)
Section 91D of FA 1996 (condition 2 for section 91B(6)(b)) is amended as
follows.
      (2)
For subsection (2) (cases in which share regarded as redeemable)
35
substitute—
“(2)
For the purposes of this section, a share is to be regarded as
redeemable if (and only if)—
(a)
it is redeemable as a result of its terms of issue (or any
collateral arrangements) requiring redemption, entitling the
40
holder to require redemption or entitling the issuer to
redeem, or

Finance (No.2) Bill
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(b)
there are relevant arrangements which will or might entitle
the investing company to qualifying redemption amounts.”.
      (3)
After that subsection insert—
“(2A)
For the purposes of subsection (2) above—
(a)
“arrangements” includes any agreement or understanding
5
(whether or not legally enforceable and whether or not
forming part of the terms of issue of the share),
(b)
arrangements are “relevant” if they were entered into at any
time on or before the investing company acquired the share,
and
10
(c)
“qualifying redemption amounts” means amounts which,
when taken together, are the same, or are substantially the
same, as an amount that might be payable on the redemption
of the share.”.
      (4)
In subsection (7) (shares mirroring a public issue: Case 1), in paragraph (b)
15
(associated companies issuing mirroring shares to company within 24 hours
of its issuing shares), for “24 hours” substitute “7 days”.
      (5)
In subsection (8) (shares mirroring a public issue: Case 2), in paragraph (a)
(second-level mirroring shares issued within 24 hours of the public issue),
for “24 hours” substitute “7 days”.
20
      (6)
The amendments made by sub-paragraphs (2) and (3) have effect in relation
to shares held by a company on or after 22nd March 2006.
      (7)
But, in relation to an accounting period beginning before 22nd March 2006,
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those amendments only if the amounts relate to
25
any time on or after that date.
      (8)
The amendments made by sub-paragraphs (4) and (5) have effect in relation
to any case where the public issue (within the meaning of section 91D(7) and
(8) of FA 1996) is on or after 22nd March 2006.
Creditor relationships and benefit derived by connected persons
30
10    (1)
After section 93B of FA 1996 (despite its repeal) insert—
“93C
Creditor relationships and benefit derived by connected persons
(1)
This section applies in the case of any loan relationship which is a
creditor relationship of a company (“company C”) if—
(a)
the return to company C from the relationship is less than a
35
return (a “commercial return”) on an investment of money at
a commercial rate of interest,
(b)
another company (“company P”) that is connected with
company C directly or indirectly derives any benefit as a
result of any arrangements made in consequence of, or
40
otherwise in connection with, the relationship, and
(c)
that benefit is designed to represent some or all of the amount
by which the return to company C from the relationship is
less than a commercial return.

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(2)
The credits to be brought into account by company C in respect of the
relationship for the purposes of this Chapter must be determined on
the basis of fair value accounting.
(3)
The fair value of company C’s rights under the relationship must
include the fair value of the benefit which is derived by company P
5
as a result of the arrangements.
(4)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of this section.
(5)
In this section—
“arrangements” includes any agreement or understanding
10
(whether or not legally enforceable);
“benefit” includes value in any form.
(6)
In determining for the purposes of subsection (1)(a) the return to
company C from the relationship, any benefit which company C
derives directly or indirectly from the benefit derived by company P
15
as mentioned in subsection (1)(b) is to be disregarded.”.
      (2)
The amendment made by this paragraph has effect in relation to loan
relationships to which a company is a party on or after 22nd March 2006.
      (3)
But amounts are to be brought into account for the purposes of Chapter 2 of
Part 4 of FA 1996 as a result of that amendment only if the amounts relate to
20
any time on or after that date.
Loan relationships: money debts etc not arising from the lending of money
11    (1)
Section 100 of FA 1996 (money debts etc not arising from the lending of
money) is amended as follows.
      (2)
In subsection (1A) (conditions mentioned in subsection (1)(c)(iv)) for
25
paragraph (e) (property not an asset representing a loan relationship or
derivative contract) substitute—
“(e)
if the money debt is some or all of the consideration payable
for a disposal of property, the property in question is not an
asset representing a loan relationship or a derivative contract
30
the disposal of which is a relevant disposal.”.
      (3)
After that subsection insert—
“(1B)
For the purposes of subsection (1A)(e) above “relevant disposal”
means—
(a)
a disposal to which paragraph 12 of Schedule 9 applies or
35
would apply but for sub-paragraph (2A) of that paragraph,
(b)
a disposal to which paragraph 28 of Schedule 26 to the
Finance Act 2002 applies or would apply but for paragraph
30 of that Schedule,
(c)
a disposal not falling within paragraph (a) or (b) above as
40
respects which the whole of the consideration is brought into
account for the purposes of this Chapter or Schedule 26 to the
Finance Act 2002.”.
      (4)
The amendments made by this paragraph have effect in relation to disposals
made on or after 22nd March 2006.
45

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Loan relationships: meaning of “fair value” in Chapter 2 of Part 4 of FA 1996
12    (1)
Section 103 of FA 1996 (interpretation of Chapter 2 of Part 4 of FA 1996) is
amended as follows.
      (2)
In subsection (1), in the definition of “fair value”, in paragraphs (a) and (b),
omit “in respect of amounts which at that time are not yet due and payable”.
5
      (3)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 22nd March 2006.
      (4)
But, in relation to a period of account beginning before 22nd March 2006, the
amendment made by this paragraph has effect only in relation to—
(a)
disposals or acquisitions (in whole or in part) of rights or liabilities
10
under a loan relationship, or
(b)
anything treated for the purposes of Chapter 2 of Part 4 of FA 1996
as such a disposal or acquisition,

which were made (or treated as made) on or after that date.
Loan relationships: continuity of treatment of groups etc
15
13    (1)
In Schedule 9 to FA 1996 (loan relationships: special computational
provisions) paragraph 12 (continuity of treatment: groups etc) is amended as
follows.
      (2)
In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair
value accounting)—
20
(a)
in the opening words, for “uses” substitute “is regarded for the
purposes of this sub-paragraph as using”, and
(b)
for paragraph (aa) (treatment of transferee in respect of the
transaction) substitute—
“(aa)
for any accounting period in which it is a party to
25
the relationship, the transferee company shall be
treated for the purpose of determining the credits
and debits to be brought into account for the
purposes of this Chapter in respect of the
relationship as if it had acquired the asset or
30
liability representing the relationship for a
consideration equal to the amount mentioned in
paragraph (a) above (but on the assumption that
sub-paragraph (2C)(b) below is omitted).”.
      (3)
After that sub-paragraph insert—
35
   “(2B)
The transferor company shall be regarded for the purposes of sub-
paragraph (2A) above as using fair value accounting as respects
the loan relationship only if—
(a)
it uses fair value accounting as respects the relationship
and the debits and credits to be brought into account for
40
the purposes of this Chapter as respects the relationship
are also determined on that basis, or
(b)
it does not use fair value accounting as respects the
relationship but the debits and credits to be brought into
account for the purposes of this Chapter as respects the
45
relationship are determined on that basis.”.