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
191

      (4)
After sub-paragraph (2B) (as inserted by sub-paragraph (3) above) insert—
   “(2C)
In any case where a discount (within the meaning given by section
100(3A)) arises in respect of the transaction, the series of
transactions or the transfer—
(a)
the consideration for the purposes of sub-paragraph (2)(a)
5
above is to be increased by the amount of the discount;
(b)
the amount to be brought into account by virtue of sub-
paragraph (2A)(a)(i) above is to be increased by the
amount of the discount.”.
      (5)
The amendments made by this paragraph have effect in any case where the
10
relevant transaction is on or after 22nd March 2006.
      (6)
For this purpose “the relevant transaction” means—
(a)
the related transaction mentioned in paragraph 12(1)(a) of Schedule
9 to FA 1996,
(b)
the first of the series of transactions mentioned in paragraph 12(1)(b)
15
of that Schedule, or
(c)
the transfer mentioned in paragraph 12(1)(c) or (d) of that Schedule,

as a result of which paragraph 12 of that Schedule applies or, but for sub-
paragraph (2A) of that paragraph, would apply.
Derivative contracts: computation in accordance with generally accepted accounting practice
20
14    (1)
Paragraph 17A of Schedule 26 to FA 2002 (computation in accordance with
generally accepted accounting practice) is amended as follows.
      (2)
In sub-paragraph (1) (amounts to be brought into account are those
recognised in determining company’s profit or loss) after “Subject to the
provisions of this Schedule” insert “(including, in particular, paragraph
25
15(1))”.
Derivative contracts: transactions within groups
15    (1)
In Schedule 26 to FA 2002 (derivative contracts), paragraph 28 (transactions
within groups) is amended as follows.
      (2)
After sub-paragraph (3) (rule for determining the credits and debits to be
30
brought into account) insert—
  “(3ZA)
In any case where a discount (within the meaning given by section
100(3A) of the Finance Act 1996) arises in respect of the transaction
or the series of transactions, the consideration for the purposes of
sub-paragraph (3)(a) is to be increased by the amount of the
35
discount.”.
      (3)
The amendment made by this paragraph has effect in any case where the
relevant transaction is on or after 22nd March 2006.
      (4)
For this purpose “the relevant transaction” means—
(a)
the related transaction mentioned in paragraph 28(2)(a) of Schedule
40
26 to FA 2002,
(b)
the first of the series of transactions mentioned in paragraph 28(2)(b)
of that Schedule, or
(c)
the transfer mentioned in paragraph 28(2)(c) or (d) of that Schedule,

Finance (No.2) Bill
Schedule 6 — Avoidance involving financial arrangements
192


as a result of which paragraph 28 of that Schedule applies or, but for
paragraph 30 of that Schedule, would apply.
Derivative contracts: transactions within groups (fair value accounting)
16    (1)
In Schedule 26 to FA 2002 (derivative contracts), paragraph 30 (transactions
within groups: fair value accounting) is amended as follows.
5
      (2)
In sub-paragraph (1) (paragraph 28 not to apply where transferor uses fair
value accounting) for paragraph (b) (treatment of transferee in respect of the
transaction) substitute—
“(b)
for any accounting period in which it is a party to the
contract, the transferee company shall be treated for the
10
purpose of determining the credits and debits to be
brought into account for the purposes of this Schedule in
respect of the contract as if it had acquired the contract for
a consideration equal to the amount mentioned in
paragraph (a) (but on the assumption that sub-paragraph
15
(1A) is omitted).”.
      (3)
After that sub-paragraph insert—
   “(1A)
In any case where a discount (within the meaning given by section
100(3A) of the Finance Act 1996) arises in respect of the transaction
or the series of transactions, the amount to be brought into account
20
by virtue of sub-paragraph (1)(a) is to be increased by the amount
of the discount.”.
      (4)
The amendments made by this paragraph have effect in any case where the
relevant transaction is on or after 22nd March 2006.
      (5)
For this purpose “the relevant transaction” has the same meaning given by
25
paragraph 15.
Derivative contracts: meaning of “fair value” in Schedule 26 to FA 2002
17    (1)
Paragraph 54 of Schedule 26 to FA 2002 (interpretation of Schedule) is
amended as follows.
      (2)
In sub-paragraph (1), in the definition of “fair value”, in paragraphs (a) and
30
(b), omit “in respect of amounts which at that time are not yet due and
payable”.
      (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
35
amendment made by this paragraph has effect only in relation to—
(a)
disposals or acquisitions (in whole or in part) of rights or liabilities
under a derivative contract, or
(b)
anything treated for the purposes of Schedule 26 to FA 2002 as such
a disposal or acquisition,
40

which were made (or treated as made) on or after that date.

Finance (No.2) Bill
Schedule 7 — Transfer of assets abroad
193

Schedule 7
Section 79

Transfer of assets abroad
Income and Corporation Taxes Act 1988
Amendments of ICTA: introductory
1
ICTA is amended as follows.
5
Section 741: application subject to sections 741B and 741C
2     (1)
Section 741 (exemption from sections 739 and 740) is amended as follows.
      (2)
At the beginning of the section insert “(1)”.
      (3)
At the end of the section insert—
“(2)
This section is subject to sections 741B and 741C (application of this
10
section and section 741A etc).”.
      (4)
In consequence of amendments made by this Schedule, the heading of the
section becomes “Exemption from sections 739 and 740 (transactions before
5th December 2005)”.
      (5)
The amendments made by this paragraph shall be taken to have come into
15
force on 5th December 2005.
Exemption from sections 739 and 740: new provision
3     (1)
After section 741 insert—
“741A
  Exemption from sections 739 and 740 (transactions on or after 5th
December 2005)
20
(1)
The individual is not liable to income tax by virtue of section 739 or
740 for the year of assessment by reference to the relevant
transactions if he satisfies an officer of the Board—
(a)
that Condition A is met, or
(b)
in a case where Condition A is not met, that Condition B is
25
met.
(2)
Condition A is that it would not be reasonable to draw the
conclusion, from all the circumstances of the case, that the purpose
of avoiding liability to taxation was the purpose, or one of the
purposes, for which the relevant transactions or any of them were
30
effected.
(3)
Condition B is that—
(a)
all the relevant transactions were genuine commercial
transactions, and
(b)
it would not be reasonable to draw the conclusion, from all
35
the circumstances of the case, that any one or more of those
transactions was more than incidentally designed for the
purpose of avoiding liability to taxation.
(4)
The intentions and purposes of any person who, whether or not for
consideration,—
40

Finance (No.2) Bill
Schedule 7 — Transfer of assets abroad
194

(a)
designs or effects the relevant transactions or any of them, or
(b)
provides advice in relation to the relevant transactions or any
of them,

are to be taken into account in determining the purposes for which
those transactions or any of them were effected.
5
(5)
A relevant transaction is a commercial transaction only if it is
effected—
(a)
in the course of a trade or business, or
(b)
with a view to setting up and commencing a trade or
business,
10

and, in either case, for the purposes of that trade or business.
(6)
For that purpose, the making and managing of investments, or the
making or managing of investments, is not a trade or business except
to the extent that—
(a)
the person by whom it is done, and
15
(b)
the person for whom it is done,

are independent persons dealing at arm’s length.
(7)
In this section—
“commercial transaction” does not include—
(a)
a transaction on terms other than those that would
20
have been made between independent persons
dealing at arm’s length, or
(b)
a transaction that would not have been entered into
between independent persons dealing at arm’s
length;
25
“independent persons” means persons who are not connected
with each other (within the meaning given by section 839);
“relevant transactions” means—
(a)
the transfer, and
(b)
any associated operations;
30
“revenue” includes taxes, duties and national insurance
contributions;
“taxation” includes any revenue for whose collection and
management the Commissioners for Her Majesty’s Revenue
and Customs are responsible.
35
(8)
Any associated operation that would not (apart from this subsection)
fall to be taken into account for the purposes of this section must be
taken into account for those purposes if, were it to be so taken into
account, the conditions in subsection (1) above would be failed by
reference to—
40
(a)
that associated operation, or
(b)
that associated operation taken together with the transfer or
any one or more other associated operations.
(9)
The jurisdiction of the Special Commissioners on any appeal
includes jurisdiction to review any decision taken by an officer of the
45
Board in exercise of the officer’s functions under this section.
(10)
This section is subject to sections 741B and 741C (application of
section 741 and this section etc).”.

Finance (No.2) Bill
Schedule 7 — Transfer of assets abroad
195

      (2)
The amendment made by this paragraph shall be taken to have come into
force on 5th December 2005.
Application of sections 741 and 741A
4     (1)
After section 741A insert—
“741B
  Application of sections 741 and 741A
5
(1)
This section makes provision with respect to the application for the
year of assessment of—
(a)
section 741,
(b)
section 741A, or
(c)
section 741C,
10

in the case of the individual and the relevant transactions.
(2)
In this section—
“new transaction” means a relevant transaction effected on or
after the relevant date;
“old transaction” means a relevant transaction effected before
15
the relevant date;
“the relevant date” means 5th December 2005;
“relevant transactions” means—
(a)
the transfer, and
(b)
any associated operations.
20
(3)
If all the relevant transactions are old transactions, section 741 is the
provision to be applied.
(4)
If all the relevant transactions are new transactions, section 741A is
the provision to be applied.
(5)
If—
25
(a)
any one or more of the relevant transactions are old
transactions, and
(b)
any one or more of the relevant transactions are new
transactions,

section 741C is the provision to be applied.
30
741C
Cases where there are both old transactions and new transactions
(1)
This section applies by virtue of section 741B if the case falls within
subsection (5) of that section.
(2)
Sections 739 and 740 do not apply, unless subsection (3) below
applies.
35
(3)
This subsection applies if—
(a)
the conditions in section 741(1) are failed by reference to the
old transactions or any of them, or
(b)
the conditions in section 741A(1) are failed by reference to the
new transactions or any of them.
40
(4)
Where subsection (3) above applies, the general rule is that sections
739 and 740 apply as they would have applied apart from any
exemption by virtue of sections 741 to 741C.

Finance (No.2) Bill
Schedule 7 — Transfer of assets abroad
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(5)
In any case where subsection (3) above applies by virtue only of
paragraph (b) of that subsection, the general rule has effect subject to,
and in accordance with, the Rules in subsections (6) to (8) below.
(6)
Rule 1 is that, for the purposes of section 739(2) or (3), any income
arising before the relevant date must not be brought into account as
5
income of the person resident or domiciled outside the United
Kingdom.
(7)
Rule 2 is that for the purposes of section 740, where—
(a)
a benefit is received by the individual in a year of assessment
ending after the relevant date, and
10
(b)
relevant income of years of assessment up to and including
that year falls to be determined,

the general rule requires years ending before the relevant date to be
brought into account as well as years ending after that date.
(8)
Rule 3 is that, for the purposes of section 740, a benefit received by
15
the individual in the year 2005-06 is to be left out of account to the
extent that, on a time apportionment basis, it fell to be enjoyed in any
part of the year that falls before the relevant date.
(9)
This section is to be read as one with section 741B.”.
      (2)
The amendment made by this paragraph shall be taken to have come into
20
force on 5th December 2005.
Just and reasonable apportionment in certain cases
5     (1)
After section 741C insert—
“741D
  Section 739: just and reasonable apportionment in certain cases
(1)
This section applies where—
25
(a)
an individual is liable to tax by virtue of section 739 for a year
of assessment (the “taxable year”), but
(b)
the conditions in subsections (2) to (4) below are met.
(2)
Condition 1 is that since the making of the transfer there have been
one or more years of assessment when the circumstances were such
30
that, so far as relating to the transfer and any associated operations
effected before the end of the year, the individual—
(a)
was not liable to tax by virtue of section 739, or
(b)
would not have been liable to tax by virtue of section 739 if
there had been any deemed income of his under that section,
35

because an appropriate exemption applied or, in a case falling within
paragraph (b) above, would have applied.
(3)
Condition 2 is that the individual is liable to tax under section 739 in
the taxable year in consequence of Condition B not being met.
(4)
Condition 3 is that the income by reference to which the individual
40
is liable to tax for the taxable year is attributable—
(a)
partly to associated operations by reference to which, taken
together with the transfer, the appropriate exemption
applied for the last exempt year of assessment, and

Finance (No.2) Bill
Schedule 7 — Transfer of assets abroad
197

(b)
partly to other associated operations (“chargeable
operations”).
(5)
For the purposes of this section, a year of assessment is “exempt” if it
is one of the years of assessment mentioned in subsection (2) and
there is no earlier year of assessment for which—
5
(a)
the individual was liable to tax by virtue of section 739, or
(b)
the individual would have been liable to tax by virtue of
section 739, if there had been any deemed income of his
under that section.
(6)
Where this section applies, the liability of the individual is to be
10
reduced as if it fell to be determined by reference to only so much of
the income as appears to an officer of the Board to be justly and
reasonably attributable to chargeable operations in all the
circumstances of the case.
(7)
The facts and matters that may be taken into account in determining
15
for the purposes of subsection (6) above whether income may be
regarded as justly and reasonably attributable to chargeable
operations include whether, and to what extent, the chargeable
operations or any of them directly or indirectly affect any of the
following—
20
(a)
the character, description or amount of any income of any
person,
(b)
any person’s power to enjoy any income,
(c)
the character, description or amount of any income which a
person has power to enjoy.
25
(8)
The jurisdiction of the Special Commissioners on any appeal
includes jurisdiction to review any decision taken by an officer of the
Board in exercise of the officer’s functions under this section.
(9)
In this section “appropriate exemption” means exemption by virtue
of—
30
(a)
paragraph (b) of section 741(1), or
(b)
Condition B in section 741A(3).”.
      (2)
The amendment made by this paragraph shall be taken to have come into
force on 5th December 2005.
Section 742: interpretation of the Chapter
35
6     (1)
Section 742 (interpretation of sections 739 to 741) is amended as follows.
      (2)
In subsection (1) (meaning of “associated operations”) for “sections 739 to
741” substitute “this Chapter”.
      (3)
At the end of subsection (1), insert—

“It is immaterial whether the operation is effected before, after, or at
40
the same time as the transfer.”.
      (4)
After subsection (1) insert—
“(1A)
The income that becomes payable to, or has become income of, a
person resident or domiciled outside the United Kingdom that is
referred to in section 739(1) or (3) or section 740(1) includes any
45