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
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Miscellaneous provisions
86

PAYE
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PAYE: retrospective notional payments
(1)
ITEPA 2003 is amended as follows.
(2)
In section 222 (payments by employer on account of tax where deduction not
possible)—
5
(a)
in subsection (1)(c), for “date on which the employer is treated as
making the notional payment” substitute “relevant date”,
(b)
in subsection (2), for “date mentioned in subsection (1)(c)” substitute
“relevant date”, and
(c)
after subsection (3) insert—
10
“(4)
In this section “the relevant date” means—
(a)
if the employer is treated by virtue of any Act as making
the notional payment before the date on which the Act
is passed, that date, and
(b)
in any other case, the date on which the employer is
15
treated as making the notional payment.”
(3)
In section 684(2) (PAYE regulations), in item 1—
(a)
for “time of the payment” substitute “relevant time”, and
(b)
after paragraph (b) insert—
““The relevant time” is—
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(a)
if the payment is a notional payment for the
purposes of section 710 and the person is treated
by virtue of any Act as making it at a time before
the date on which the Act is passed, that date,
and
25
(b)
in any other case, the time when the payment is
made.”
(4)
In section 710 (notional payments: accounting for tax)—
(a)
in subsection (7), after “means” insert “(subject to subsection (7A))”,
and
30
(b)
after that subsection insert—
“(7A)
In a case where the notional payment is treated by virtue of any
Act as made before the date on which the Act is passed—
(a)
the reference in sub-paragraph (i) of paragraph (a) of
subsection (7) to the time when the notional payment is
35
made is to the date on which the Act is passed,
(b)
the reference in sub-paragraph (ii) of that paragraph to
any occasion falling within the same income tax period
were to any occasion falling before the end of the income
tax period next after that in which that date falls, and
40
(c)
the reference in paragraph (b) of that subsection to the
income tax period in which the notional payment was
made is to the income tax period next after that in which
that date falls.”
(5)
The provisions of ITEPA 2003 amended by this section have effect in relation
45
to notional payments treated by virtue of this Act as made before the date on

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Miscellaneous provisions
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which this Act is passed as if for the references to the date on which the Act is
passed in—
(a)
section 222(4)(a),
(b)
paragraph (a) of the definition of “the relevant time” in section 684(2),
and
5
(c)
section 710(7A)(a), (b) and (c),

there were substituted references to such date as the Commissioners for Her
Majesty’s Revenue and Customs may by order made by statutory instrument
appoint.
Alternative finance arrangements
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95
Profit share agency
(1)
In section 46(1) of FA 2005 (alternative finance arrangements: definition) for “or
49.” substitute “, 49 or 49A.”
(2)
In section 49 of FA 2005 (profit share return)—
(a)
for subsection (2) substitute—
15
“(2)
Amounts paid or credited as mentioned in subsection (1)(c) by
a financial institution under arrangements falling within this
section are profit share return for the purposes of this Chapter.”,
and
(b)
in the heading for “profit share return” substitute “deposit”.
20
(3)
After section 49 of FA 2005 insert—
“49A
Alternative finance arrangements: profit share agency
(1)
Subject to section 52, arrangements fall within this section if they are
arrangements under which—
(a)
a person (“the principal”) appoints a financial institution as his
25
agent,
(b)
the agent uses money provided by the principal with a view to
producing a profit,
(c)
the principal is entitled, to a specified extent, to profits resulting
from the use of the money,
30
(d)
the agent is entitled to any additional profits resulting from the
use of the money (and may also be entitled to a fee to be paid by
the principal), and
(e)
payments in pursuance of the entitlement specified in
paragraph (c) equate, in substance, to the return on an
35
investment of the money at interest.
(2)
Amounts paid or credited by a financial institution in accordance with
an entitlement of the kind specified in subsection (1)(c) are profit share
return for the purposes of this Chapter.
(3)
The principal shall not be treated for the purposes of the Tax Acts as
40
entitled to profits to which the agent is entitled in accordance with
subsection (1)(d).”
(4)
After section 50(2) of FA 2005 (treatment of alternative finance arrangements:

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Miscellaneous provisions
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companies) insert—
“(2A)
Where a company is a party to arrangements falling within section 49A,
Chapter 2 of Part 4 of FA 1996 (loan relationships) has effect in relation
to the arrangements as if—
(a)
the arrangements were a loan relationship to which the
5
company is a party,
(b)
the amount provided under the arrangements were—
(i)
in relation to a company which is the principal under the
arrangements, the amount of a loan made by the
company to the agent, and
10
(ii)
in relation to a company which is the agent under the
arrangements, the amount of a loan made to it by the
principal, and
(c)
profit share return payable to or by the company under the
arrangements were interest payable under that loan
15
relationship.”
(5)
In section 52 of FA 2005 (provision not at arm’s length)—
(a)
in subsection (1)(a) for “or section 49,” substitute “, 49 or 49A,”
(b)
in subsection (3) for “or section 49.” substitute “, 49 or 49A.”, and
(c)
in subsection (5) for “49,” substitute “49 or 49A,”.
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(6)
In the heading to section 54 of FA 2005 “Section 49” becomes “Sections 49 and
49A”.
(7)
In the definition of “profit share return” in section 57 of FA 2005 for “section
49(2)” substitute “sections 49(2) and 49A(2)”.
(8)
In paragraph 1(b) of Schedule 2 to FA 2005 after “49” insert “or 49A”.
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(9)
In section 148 of FA 2003 (meaning of “permanent establishment”) after
subsection (5A) insert—
“(5B)
Where profit share return is paid, in accordance with arrangements to
which section 49A of FA 2005 applies (alternative finance
arrangements: profit share agency), to a company that is not resident in
30
the United Kingdom, the company is not regarded as having a
permanent establishment in the United Kingdom merely by virtue of
anything done for the purposes of the arrangements by the other party
to the arrangements or by any other person acting for the company in
relation to the arrangements.”
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(10)
In section 127(1) of FA 1995 (persons not treated as UK representatives)
renumber paragraph (cc) as paragraph (ca) and insert after it—
“(cb)
where the income consists of profit share return in accordance with
arrangements to which section 49A of FA 2005 applies (alternative
finance arrangements: profit share agency), the other party to the
40
arrangements or any other person acting for the non-resident in
relation to the arrangements;”.
(11)
Section 56 of FA 2005 (commencement and transitional) shall have effect in
relation to the commencement of this section—
(a)
as if references to Chapter 5 of Part 2 of that Act were references to this
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section,
(b)
as if references to 6th April 2005 were references to—

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(i)
1st April 2006 in relation to corporation tax, and
(ii)
6th April 2006 in relation to income tax, and
(c)
as if references to section 49 were references to section 49A.
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Diminishing shared ownership
(1)
In section 46(1) of FA 2005 (alternative finance arrangements: definition) after
5
“47” insert “, 47A,”.
(2)
In section 47 of FA 2005 (alternative finance return)—
(a)
omit subsection (5),
(b)
in subsections (6) and (7) after “is to be taken” insert “for the purposes
of this Chapter”, and
10
(c)
in the heading for “alternative finance return” substitute “purchase and
re-sale”.
(3)
After section 47 of FA 2005 insert—
“47A
Alternative finance arrangements: diminishing shared ownership
(1)
Subject to section 52, arrangements fall within this section if under
15
them—
(a)
a financial institution acquires a beneficial interest in an asset,
and
(b)
another person (“the eventual owner”)—
(i)
also acquires a beneficial interest in the asset,
20
(ii)
is to make payments to the financial institution
amounting in aggregate to the consideration paid for the
acquisition of its beneficial interest,
(iii)
is to acquire the financial institution’s beneficial interest
(whether or not in stages) as a result of those payments,
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(iv)
is to make other payments to the financial institution
(whether in pursuance of a lease forming part of the
arrangements, or otherwise),
(v)
has the exclusive right to occupy or otherwise use the
asset,
30
(vi)
is exclusively entitled to any income, profit or gain
arising from or attributable to the asset (including, in
particular, any increase in the asset’s value).
(2)
For the purposes of subsection (1)(a) it is immaterial—
(a)
whether or not the financial institution acquires its beneficial
35
interest from the eventual owner,
(b)
whether the eventual owner or another person other than the
financial institution also has a beneficial interest in the asset,
and
(c)
whether or not the financial institution also has a legal interest
40
in the asset.
(3)
Subsection (1)(b)(v) does not prevent the eventual owner from granting
an interest or right in relation to the asset to someone other than—
(a)
the financial institution,
(b)
a person controlled by the financial institution within the
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meaning of section 840 of ICTA, and

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Miscellaneous provisions
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(c)
a person controlled by a person who also controls the financial
institution, in each case within the meaning of section 840 of
ICTA;

provided that the grant is not required by the financial institution or by
arrangements to which the financial institution is party.
5
(4)
Subsection (1)(b)(vi) does not prevent the financial institution from
having responsibility for, or a share in any loss arising out of, any
reduction in the asset’s value (and subsection (1)(b)(ii) is subject to this
subsection).
(5)
Payments by the eventual owner under arrangements to which this
10
section applies are alternative finance return for the purposes of this
Chapter except in so far as they amount to—
(a)
payments of the kind described in subsection (1)(b)(ii), or
(b)
payments in respect of any arrangement fee or legal or other
costs or expenses which the eventual owner is required under
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the arrangements to pay.
(6)
Arrangements to which this section applies shall not be treated as a
partnership for the purposes of the Taxes Acts (within the meaning of
the Taxes Management Act 1970 (c. 9).”
(4)
In section 50 of FA 2005 (treatment of alternative finance arrangements:
20
companies)—
(a)
in subsection (1) after “section 47” insert “or 47A”,
(b)
at the beginning of subsection (1)(b) add “in the case of arrangements
within section 47,”, and
(c)
after subsection (1)(b) insert—
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“(ba)
in the case of arrangements within section 47A, the
consideration paid by the financial institution for the
acquisition of its beneficial interest were the amount of
a loan made (as the case requires) to the company by, or
by the company to, the other party to the
30
arrangements,”.
(5)
In section 52 of FA 2005 (provision not at arm’s length)—
(a)
in subsection (1)(a) after “47” insert “, 47A”,
(b)
in subsection (3) after “47” insert “, 47A”, and
(c)
in subsection (4) for “47,” substitute “47 or 47A,”.
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(6)
In section 53 of FA 2005 (sale and purchase of asset)—
(a)
in subsection (1) after “47” insert “or 47A”,
(b)
after subsection (2) add—
“(3)
In the application of this section to section 47A a reference to the
effective return is a reference to the alternative finance return.”,
40
and
(c)
in the heading after “47” insert “or 47A”.
(7)
In the definition of “alternative finance return” in section 57 of FA 2005 for
“section 47(5)” substitute “sections 47(6) and (7) and 47A(5)”.
(8)
This section shall have effect in relation to alternative finance arrangements
45
entered into on or after—
(a)
1st April 2006 in relation to corporation tax, and

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(b)
6th April 2006 in relation to income tax.
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Beneficial loans to employees
(1)
For the purposes of Chapter 7 of Part 3 of ITEPA 2003 (taxable benefits: loans)
a reference to a loan includes a reference to an arrangement which—
(a)
is an alternative finance arrangement to which section 47 or 47A FA
5
2005 applies, or
(b)
would be an alternative finance arrangement to which one of those
sections applied if one of the parties were a financial institution.
(2)
In the application of that Chapter by virtue of subsection (1)—
(a)
a reference to interest shall be treated as including a reference to
10
alternative finance return, and
(b)
a reference to the amount outstanding shall be taken to be—
(i)
in the case of arrangements to which section 47 applies, a
reference to the purchase price minus such part of the aggregate
payments made as does not represent alternative finance
15
return, and
(ii)
in the case of arrangements to which section 47A applies, a
reference to the amount of the financial institution’s original
beneficial interest minus such part of the aggregate payments
made as does not represent alternative finance return.
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(3)
This section shall have effect in relation to arrangements entered into on or
after 22nd March 2006.
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Regulations
(1)
The Treasury may by order amend Chapter 5 of Part 2 to FA 2005 (alternative
finance arrangements) so as to introduce provision relating to arrangements
25
which in the Treasury’s opinion—
(a)
equate in substance to a loan, deposit or other transaction of a kind that
generally involves the payment of interest, but
(b)
achieve a similar effect without including provision for the payment of
interest.
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(2)
An order under subsection (1) may, in particular—
(a)
include provision of a kind similar to provision already made by
Chapter 5 of Part 2;
(b)
make other provision about the treatment for the purposes of the Tax
Acts of arrangements to which the order applies;
35
(c)
make provision generally or only in relation to specified cases or
circumstances;
(d)
make different provision for different cases or circumstances;
(e)
include consequential provision (which may include provision
amending a provision of the Tax Acts);
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(f)
include incidental or transitional provision.
(3)
An order under subsection (1)—
(a)
shall be made by statutory instrument, and
(b)
shall not be made unless a draft has been laid before and approved by
resolution of the House of Commons.
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