Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
36

49
Sound recordings: allocation of expenditure
(1)
This section applies in calculating for the purposes of corporation tax the
profits or losses of a company from a trade where—
(a)
the trade consists of or includes the exploitation of original master
versions of sound recordings, and
5
(b)
the original master versions do not constitute trading stock of the trade
as defined by section 100(2) of ICTA.
(2)
Expenditure that is—
(a)
incurred on the production or acquisition of the original master version
of a sound recording, and
10
(b)
expenditure of a revenue nature (whether as a result of section 48 or
otherwise),

must be allocated to relevant periods in accordance with this section.
(3)
The company must allocate to a relevant period so much of the expenditure as
is just and reasonable having regard to—
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(a)
the amount of the expenditure that remains unallocated at the
beginning of the period,
(b)
the proportion that the estimated value of the original master version
of the sound recording that is realised in that period (whether by way
of income or otherwise) bears to the aggregate of the value so realised
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and the estimated remaining value of the original master version at the
end of the period, and
(c)
the need to bring the whole of the expenditure into account over the
time during which the value of the original master version is expected
to be realised.
25
(4)
The company may also allocate to a relevant period a further amount, so long
as the total amount allocated does not exceed the value of the original master
version of the sound recording realised in that period (whether by way of
income or otherwise).
50
Sound recordings: interpretation
30
For the purposes of sections 48 and 49 (corporation tax treatment of sound
recordings)—
(a)
“sound recording” does not include a film soundtrack;
(b)
“original master version” means the master tape or master audio disc
of the recording;
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(c)
references to the original master version of a sound recording include
any rights in the original master version that are held or acquired with
it; and
(d)
“relevant period” means—
(i)
a period for which accounts of the trade are made up, or
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(ii)
if no accounts of the trade are made up for a period, an
accounting period of the company.

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
37

Supplementary provisions
51
Corporation tax: films and sound recordings as intangible fixed assets
(1)
In Schedule 29 to FA 2002 (corporation tax: gains and losses from intangible
fixed assets), for paragraph 80 (exclusion of films and sound recordings)
substitute—
5
“Assets excluded: certain films
80A   (5)
This Schedule does not apply to an intangible fixed asset held by a
film production company to the extent that it represents production
expenditure on a film to which Schedule 4 of the Finance Act 2006
applies.
10

Expressions used in this sub-paragraph have the same meaning as in
Chapter 3 of Part 3 of the Finance Act 2006.
      (2)
Except as regards royalties, this Schedule does not apply to an
intangible fixed asset held by a company to the extent that it
represents expenditure by the company—
15
(a)
on the production of the original master version of a film that
commenced principal photography before 1st April 2006;
(b)
on the acquisition before 1st October 2007 of the original
master version of a film that commenced principal
photography before 1st April 2006.
20
      (3)
In sub-paragraph (2)—
(a)
“film” has the same meaning as in Chapter 3 Part 3 of the
Finance Act 2006;
(b)
“original master version” means the original negative, tape or
disc;
25
(c)
references to the original master version of a film include the
original master version of the film soundtrack (if any);
(d)
references to the original master version include any rights in
the original master version that are held or acquired with it.
Assets excluded except as regards royalties: sound recordings
30
80B   (1)
Except as regards royalties, this Schedule does not apply to an
intangible fixed asset held by a company to the extent that it
represents expenditure by the company on the production or
acquisition of the master version of a sound recording.
      (2)
For this purpose—
35
(a)
“sound recording” does not include a film soundtrack;
(b)
“master version” means master tape or master audio disc of
the recording;
(c)
references to the master version include any rights in the
master version that are held or acquired with it.”.
40
(2)
In determining for the purposes of that Schedule whether an asset representing
production expenditure on a film was created before or after 1st April 2002, the
asset shall be treated as created when the film was completed.

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Charities
38

52
Films: application of provisions to certain films already in production
(1)
The Treasury may make provision by regulations for the application of the
provisions of this Chapter, and of any enactment amended by this Chapter, in
relation to films that commenced principal photography before 1st April 2006
but are not completed before 1st January 2007.
5
(2)
The regulations may provide for such adaptations and modifications of the
provisions of this Chapter, of any enactment amended by this Chapter and of
any other provision of the Corporation Tax Acts, as appear to the Treasury
appropriate for that purpose.
(3)
The regulations may—
10
(a)
provide that the provisions of this Chapter (or any specified provisions
of this Chapter) shall have effect as if they had been in force at all
material times;
(b)
require or authorise the making or amendment of returns, or the
making of assessments, in relation to past accounting periods or tax
15
years (whether before or after the commencement of this Chapter);
(c)
authorise the making of any such return, amendment or assessment
notwithstanding any limitation on the time within which a return,
amendment or assessment may normally be made.
(4)
No regulations shall be made under this section unless a draft of them has been
20
laid before and approved by a resolution of the House of Commons.
53
Films and sound recordings: commencement and power to alter dates
(1)
The provisions of this Chapter come into force on such day as the Treasury
may appoint by order.
(2)
The Treasury may by order amend any provision of this Chapter that refers to
25
1st April 2006, the date on which this Act is passed or 1st October 2007 so as to
substitute a reference to a later date.
Chapter 4
Charities
54
Transactions with substantial donors
30
(1)
After section 506 of ICTA insert—
“506A
     Transactions with substantial donors
(1)
This section applies to the following transactions—
(a)
the sale or letting of property by a charity to a substantial donor,
(b)
the sale or letting of property to a charity by a substantial donor,
35
(c)
the provision of services by a charity to a substantial donor,
(d)
the provision of services to a charity by a substantial donor,
(e)
an exchange of property between a charity and a substantial
donor,
(f)
the provision of financial assistance by a charity to a substantial
40
donor,

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Charities
39

(g)
the provision of financial assistance to a charity by a substantial
donor, and
(h)
investment by a charity in the business of a substantial donor.
(2)
For the purposes of this section a person is a substantial donor to a
charity in respect of a chargeable period if—
5
(a)
the charity receives relievable gifts of at least £25,000 from him
in a period of 12 months in which the chargeable period wholly
or partly falls, or
(b)
the charity receives relievable gifts of at least £100,000 from him
in a period of six years in which the chargeable period wholly
10
or partly falls;

and if a person is a substantial donor to a charity in respect of a
chargeable period by virtue of paragraph (a) or (b), he is a substantial
donor to the charity in respect of the following five chargeable periods.
(3)
A payment made by a charity to a substantial donor in the course of or
15
for the purposes of a transaction to which this section applies shall be
treated for the purposes of section 505 as non-charitable expenditure.
(4)
If the terms of a transaction to which this section applies are less
beneficial to the charity than terms which might be expected in a
transaction at arm’s length, the charity shall be treated for the purposes
20
of section 505 as incurring non-charitable expenditure equal to that
amount which the Commissioners for Her Majesty’s Revenue and
Customs determine as the cost to the charity of the difference in terms.
(5)
A payment by a charity of remuneration to a substantial donor shall be
treated for the purposes of section 505 as non-charitable expenditure
25
unless it is remuneration, for services as a trustee, which is approved
by—
(a)
the Charity Commission,
(b)
another body with responsibility for regulating charities by
virtue of legislation having effect in respect of any Part of the
30
United Kingdom, or
(c)
a court.
506B
Section 506A: exceptions
(1)
Section 506A shall not apply to a transaction within section 506A(1)(b)
or (d) if the Commissioners for Her Majesty’s Revenue and Customs
35
determine that the transaction—
(a)
takes place in the course of a business carried on by the
substantial donor,
(b)
is on terms which are no less beneficial to the charity than those
which might be expected in a transaction at arm’s length, and
40
(c)
is not part of an arrangement for the avoidance of any tax.
(2)
Section 506A shall not apply to the provision of services to a substantial
donor if the Commissioners determine that the services are provided—
(a)
in the course of the actual carrying out of a primary purpose of
the charity, and
45
(b)
on terms which are no more beneficial to the substantial donor
than those on which services are provided to others.

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Charities
40

(3)
Section 506A shall not apply to the provision of financial assistance to
a charity by a substantial donor if the Commissioners determine that
the assistance—
(a)
is on terms which are no less beneficial to the charity than those
which might be expected in a transaction at arm’s length, and
5
(b)
is not part of an arrangement for the avoidance of any tax.
(4)
Section 506A shall not apply to investment by a charity in the business
of a substantial donor where the investment takes the form of the
purchase of shares or securities listed on a recognised stock exchange.
(5)
A disposal at an undervalue to which section 587B applies shall not be
10
a transaction to which section 506A applies (but may be taken into
account in the application of section 506A(2)).
(6)
A disposal at an undervalue to which section 257(2) of the 1992 Act
(gifts of chargeable assets) applies shall not be a transaction to which
section 506A applies (but may be taken into account in the application
15
of section 506A(2)).
(7)
In the application of section 506A payments by a charity, or benefits
arising to a substantial donor from a transaction, shall be disregarded
in so far as they—
(a)
relate to a donation by the donor, and
20
(b)
do not exceed the relevant value in relation to the donation for
the purposes of section 339 or section 25 of FA 1990.
(8)
A company which is wholly owned by a charity within the meaning of
section 339(7AB) shall not be treated as a substantial donor in relation
to the charity which owns it (or any of the charities which own it).
25
506C
Sections 506A and 506B: supplemental
(1)
A gift is “relievable” for the purposes of section 506A(2) if relief is
available in respect of it under—
(a)
section 83A,
(b)
section 339,
30
(c)
sections 587B and 587C,
(d)
section 25 of the Finance Act 1990 (individual gift aid),
(e)
section 257 of the 1992 Act (gifts of chargeable assets),
(f)
section 63 of the Capital Allowances Act 2001 (gifts of plant and
machinery),
35
(g)
sections 713 to 715 of ITEPA 2003 (payroll giving),
(h)
section 108 of ITTOIA 2005 (gifts of trading stock), or
(i)
sections 628 and 630 of ITTOIA 2005 (gifts from settlor-
interested trusts).
(2)
A charity is treated as incurring expenditure in accordance with section
40
506A(4) at such time (or times) as the Commissioners determine.
(3)
Section 506A applies to a transaction entered into in a chargeable
period with a person who is a substantial donor in respect of that
period, even if it was not until after the transaction was entered into
that he first satisfied the definition of “substantial donor” in respect of
45
that period.

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Charities
41

(4)
Either or both of subsections (3) and (4) of section 506A may be applied
to a single transaction; but any amount of non-charitable expenditure
which a charity is treated as incurring under section 506A(3) in respect
of a transaction shall be deducted from any amount which it would
otherwise be treated as incurring under section 506A(4) in respect of the
5
transaction.
(5)
Two or more connected charities shall be treated as a single charity for
the purposes of section 506A and 506B and this section; and for this
purpose “connected” means connected in a matter relating to the
structure, administration or control of a charity.
10
(6)
Where remuneration is paid otherwise than in money, section 506A(5)
shall apply as to a payment in money of the amount that would, under
Part 3 of ITEPA, be the cash equivalent of the remuneration as a benefit.
(7)
In sections 506A and 506B and this section—
(a)
a reference to a substantial donor or other person includes a
15
reference to a person connected with him within the meaning of
section 839,
(b)
“financial assistance” includes, in particular—
(i)
the provision of a loan, guarantee or indemnity, and
(ii)
entering into alternative finance arrangements within
20
the meaning of section 46 of the Finance Act 2005, and
(c)
a reference to a gift of a specified amount includes a reference to
a non-monetary gift of that value.
(8)
On an appeal against an assessment the Special Commissioners may
review a decision of the Commissioners in connection with section
25
506A.
(9)
The Treasury may by regulations vary a sum, or a period of time,
specified in section 506A(2).”
(2)
This section shall have effect in relation to transactions occurring on or after
22nd March 2006; and for that purpose a person may satisfy the definition of
30
“substantial donor” by reference to gifts made at any time.
(3)
But this section shall not have effect in relation to a transaction entered into in
pursuance of a contract made before 22nd March 2006 (otherwise than in
pursuance of a variation on or after that date).
55
Non-charitable expenditure
35
(1)
For section 505(3) to (8) of ICTA (charities: exemption: non-qualifying
expenditure) substitute—
“(3)
In subsections (4) to (7)—
(a)
“charitable expenditure” has the meaning given by section 506,
(b)
“relief” means relief or exemption under—
40
(i)
subsection (1) above,
(ii)
section 56(3)(c) above,
(iii)
section 761(6) below,
(iv)
section 256 of the 1992 Act (charities), or
(v)
section 46 of FA 2000 (small trades),
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Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Charities
42

(c)
“relievable income and gains” means income and gains which
would be eligible for relief or exemption under any of those
provisions (disregarding subsections (4) to (6)), and
(d)
“total income and gains” means the aggregate of—
(i)
relievable income and gains,
5
(ii)
income and gains, other than relievable income and
gains, chargeable to tax, and
(iii)
donations, legacies and other similar receipts that are
not chargeable to tax.
(4)
If a charity incurs (or is treated as incurring) non-charitable
10
expenditure in a chargeable period, relief shall be disallowed in respect
of such amount of relievable income and gains as equals the amount of
the non-charitable expenditure.
(5)
If in a chargeable period a charity’s non-charitable expenditure exceeds
its total income and gains the excess shall be treated as non-charitable
15
expenditure of the previous period for the purposes of subsection (4);
and any necessary adjustments shall be made, whether by making
assessments or otherwise.
(6)
Subsection (5) may apply to a chargeable period wholly or partly as a
result of the application of that subsection in respect of a later period;
20
but no excess of non-charitable expenditure shall be treated as non-
charitable expenditure of a chargeable period which ended more than
six years before the end of the period in which the expenditure was
actually incurred.
(7)
Where an amount of a charity’s relievable income and gains is
25
disallowed for relief by subsection (4) (whether or not as a result of the
application of subsection (5))—
(a)
the charity may by notice to the Board specify which items of
income or gains are to be disallowed, but
(b)
if the Board requires the charity to give a notice under
30
paragraph (a) and the charity fails to comply within the period
of 30 days beginning with the date on which the requirement is
imposed, the Board shall determine which items to disallow.”
(2)
In section 506 of ICTA (section 505: supplemental)—
(a)
in subsection (1) for the definitions of “qualifying expenditure” and
35
“non-qualifying expenditure” substitute—
“charitable expenditure” means (subject to subsections (3) to (5)
below) expenditure which is exclusively for charitable
purposes.”,
(b)
in subsection (2) omit “and subsection (1) above,”
40
(c)
in subsection (3) for “qualifying expenditure” substitute “charitable
expenditure”,
(d)
in subsection (4) for “non-qualifying expenditure” substitute “non-
charitable expenditure”,
(e)
in subsection (5) for “non-qualifying expenditure” substitute “non-
45
charitable expenditure”,
(f)
omit subsection (6), and
(g)
for the heading, substitute “Charitable and non-charitable
expenditure”.