Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

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who has, disposes of or acquires shares of that company also to have,
to dispose of or to acquire a holding of shares of the other company.
(8)
Condition 4 is that at least 90% of the profits of the property rental business
arising in the accounting period are distributed—
(a)
by way of dividend, and
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(b)
on or before the filing date for the company’s tax return for the
accounting period (see paragraph 14 of Schedule 18 to FA 1998).
(9)
But—
(a)
Condition 4 shall be disregarded if and in so far as compliance with it
would be unlawful by virtue of—
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(i)
an enactment (including Northern Ireland legislation and an
Act of the Scottish Parliament), or
(ii)
an enactment of a jurisdiction outside the United Kingdom
where the enactment is prescribed, or is of a kind prescribed, for
the purposes of this paragraph in regulations made by the
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Commissioners for Her Majesty’s Revenue and Customs, and
(b)
a distribution that is withheld in order to prevent or reduce a charge to
tax arising under regulations under section 114 shall be treated for the
purposes of Condition 4 as having been made.
108
Conditions for balance of business
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(1)
In order to be a company to which this Part applies in respect of an accounting
period Conditions 1 and 2 below must be satisfied in respect of the company.
(2)
Condition 1 is that in the accounting period the profits arising from tax-exempt
business are at least 75% of the company’s total profits; and for that purpose—
(a)
“total profits” means profits arising from tax-exempt business plus
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profits arising from non-tax-exempt business, and
(b)
“profits” means profits before deduction of tax and excluding realised
and unrealised gains and losses on the disposal of property, calculated
in accordance with international accounting standards.
(3)
Condition 2 is that at the beginning of the accounting period the value of the
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assets involved in tax-exempt business is at least 75% of the total value of assets
held by the company; and for that purpose—
(a)
an asset is involved in tax-exempt business if it is property involved in
the relevant property rental business within the meaning given by
section 107(6)(a),
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(b)
assets must be valued in accordance with international accounting
standards,
(c)
where international accounting standards offer a choice of valuation
between cost basis and fair value, fair value must be used, and
(d)
no account shall be taken of liabilities secured against or otherwise
40
relating to assets (whether generally or specifically).
Entering Real Estate Investment Trust Regime
109
Notice
(1)
If a company (which satisfies the requirement in section 106(1)) gives a notice
under this section specifying an accounting period from the beginning of
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which this Part is to apply to the company, this Part shall apply to the company
from the beginning of that accounting period.
(2)
A notice—
(a)
must be given in writing to the Commissioners for Her Majesty’s
Revenue and Customs,
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(b)
must be given before the beginning of the specified accounting period,
(c)
must be accompanied by a statement by the company that Conditions
1 to 6 in section 106 are reasonably expected to be satisfied in respect of
the company throughout the specified accounting period, and
(d)
must contain such other information, and be accompanied by such
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other documents, as may be prescribed by regulations made by the
Commissioners for Her Majesty’s Revenue and Customs.
110
Duration
Once this Part has begun to apply to a company, it shall continue to apply
unless and until it ceases to apply in accordance with any of sections 128 to 130.
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111
Effects of entry
(1)
Property rental business of C (pre-entry) shall be treated for the purposes of
corporation tax as ceasing at entry.
(2)
Assets which immediately before entry are involved in property rental
business of C (pre-entry) shall be treated for the purposes of corporation tax as
20
being sold by C (pre-entry) immediately before entry and re-acquired by C
(tax-exempt) immediately after entry.
(3)
The sale and re-acquisition deemed under subsection (2) shall be treated as
being for a consideration equal to the market value of the assets.
(4)
For the purposes of CAA 2001—
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(a)
the sale and re-acquisition deemed under subsection (2)—
(i)
shall not give rise to allowances or charges, and
(ii)
shall not make it possible to make an election under section 198
or 199 of that Act (apportionment),
(b)
subsection (3) above shall not apply, and
30
(c)
anything done by or to C (pre-entry) before entry in relation to an asset
which is deemed under subsection (2) to be sold and re-acquired shall
be treated after entry as having been done by or to C (tax-exempt).
(5)
For the purposes of corporation tax, on entry one accounting period of the
company shall end and another shall begin.
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(6)
For the purposes of subsection (2) an asset is involved in property rental
business if it is property involved in the business within the meaning given by
section 107(6)(a).
(7)
A gain accruing by reason of this section shall not be a chargeable gain.

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112
Entry charge
(1)
A company to which this Part applies shall be chargeable to corporation tax
under Case VI of Schedule D on an amount of notional income calculated in
accordance with subsection (3).
(2)
The notional income shall be treated as arising to C (residual) on entry.
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(3)
The notional income is—
where—
(a)
Market Value means the aggregate market value of assets treated as
sold and re-acquired under section 111(2) (ignoring any asset of
negative market value), and
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(b)
Tax Rate means the percentage rate at which C (residual) is
chargeable to tax on profits.
(4)
No loss, deficit, expense or allowance may be set off against notional income or
tax arising under this section.
(5)
The company may elect to have the notional income treated as arising in four
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instalments, the first on the date of entry and the other three on the first three
anniversaries of that date; and for this purpose subsection (3) shall apply as if
the percentage referred to were—
(a)
0.50% for the first instalment,
(b)
0.53% for the second instalment,
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(c)
0.56% for the third instalment, and
(d)
0.60% for the fourth instalment.
(6)
If a company makes an election under subsection (5)—
(a)
notice of the election must be given to the Commissioners for Her
Majesty’s Revenue and Customs with the notice under section 109,
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(b)
the election is irrevocable, and
(c)
if this Part ceases to apply to a company before the third anniversary of
entry, any remaining instalments shall become chargeable
immediately.
(7)
The Treasury may by regulations amend a percentage specified in subsection
30
(5) in order to reflect a change in interest rates; but regulations under this
subsection shall not have effect in relation to elections made before the
regulations come into force.
Assets, &c.
113
Ring-fencing of tax-exempt business
35
(1)
For the purposes of corporation tax, the business of C (tax-exempt) shall be
treated as a separate business (distinct from—
(a)
any business carried on by C (pre-entry),
(b)
any business carried on by C (residual), and

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(c)
any business carried on by C (post-cessation)).
(2)
For the purposes of corporation tax C (tax-exempt) shall be treated as a
separate company (distinct from—
(a)
C (pre-entry),
(b)
C (residual), and
5
(c)
C (post-cessation)).
(3)
In particular—
(a)
a loss incurred by C (tax-exempt) may not be set off against profits of C
(residual),
(b)
a loss incurred in respect of C (residual) may not be set off against
10
profits of C (tax-exempt),
(c)
a loss incurred in respect of C (pre-entry) may not be set off against
profits of C (tax-exempt) (but this section does not prevent a loss of that
kind from being set off against profits of C (residual)),
(d)
a loss incurred by C (tax-exempt) may not be set off against profits
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arising to C (post-cessation) (in respect of business of any kind), and
(e)
receipts accruing after entry but relating to business of C (pre-entry)
shall not be treated as receipts of C (tax-exempt).
(4)
In subsection (3) a reference to a loss includes a reference to a deficit, expense,
charge or allowance.
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(5)
Section 392B of ICTA (ring-fencing of losses from overseas property business)
shall not apply to business of C (tax-exempt).
(6)
Paragraphs 5B and 5C of Schedule 28AA to ICTA (transfer pricing: exemption
for small and medium enterprises) shall not apply to a company to which this
Part applies (whether to C (tax-exempt) or to C (residual)).
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114
Maximum shareholding
(1)
The Treasury may make regulations that apply to a company to which this Part
applies if it makes a distribution to or in respect of a person who—
(a)
is beneficially entitled (directly or indirectly) to 10% or more of the
dividends paid by the company,
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(b)
is beneficially entitled (directly or indirectly) to 10% or more of the
company’s share capital, or
(c)
controls (directly or indirectly) 10% or more of the voting rights in the
company.
(2)
The regulations may, in particular—
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(a)
cause a sum to be charged to tax, in accordance with the regulations,
(whether by reference to a person’s interest, to a rate of tax or
otherwise);
(b)
provide that a charge does not arise, or is reduced, if the company takes
or does not take action of a specified kind.
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115
Profit: financing-cost ratio
(1)
The Treasury may make regulations that apply to a company to which this Part
applies where the result of the sum specified in subsection (2) is less than 1.25
in respect of an accounting period.

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(2)
That sum is—

where—
(a)
Profits means the amount of the profits of C (tax-exempt) arising in the
accounting period (before the offset of capital allowances), and
(b)
Financing Costs means the amount of the financing costs incurred in
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that period in respect of the business of C (tax-exempt).
(3)
The regulations may cause a sum to be charged to tax, in accordance with the
regulations, by reference to that part of the financing costs as a result of which
the result of the sum specified in subsection (2) is less than 1.25.
(4)
In subsections (2)(b) and (3) “financing costs” means the cost of debt finance;
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and in calculating the costs of debt finance in respect of an accounting period
the matters to be taken into account include—
(a)
costs giving rise to debits in respect of debtor relationships of the
company under Chapter 2 of Part 4 of FA 1996 (loan relationships),
other than debits in respect of exchange losses from such relationships
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(within the meaning of section 103(1A) and (1B) of that Act),
(b)
any exchange gain or loss from a debtor relationship within the
meaning of that Chapter in relation to debt finance,
(c)
any credit or debit falling to be brought into account under Schedule 26
to FA 2002 (derivative contracts) in relation to debt finance,
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(d)
the financing cost implicit in a payment under a finance lease, and
(e)
any other costs arising from what would be considered, in accordance
with generally accepted accounting practice, to be a financing
transaction.
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Minor or inadvertent breach
25
(1)
The Treasury may make regulations about the application of this Part to a
company if a requirement in section 107 or 108 is not satisfied (whether
generally or in respect of an accounting period).
(2)
A company which gave a notice under section 109 shall notify the
Commissioners for Her Majesty’s Revenue and Customs as soon as reasonably
30
practicable if a requirement in section 107 or 108 ceases to be satisfied in
relation to the company.
(3)
The regulations may, in particular—
(a)
provide for sums to be charged to tax, or otherwise treated, in
accordance with the regulations;
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(b)
make provision by reference to the extent of a failure to satisfy a
requirement;
(c)
make provision by reference to the number of requirements not
satisfied;
(d)
limit the number of occasions on which a provision of the regulations
40
may be relied upon by a company in respect of a specified period;
(e)
include other provision for preventing tax avoidance;

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(f)
confer a discretion on the Commissioners.
(4)
This section is subject to section 129.
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Cancellation of tax advantage
(1)
This section applies if the Commissioners for Her Majesty’s Revenue and
Customs think that a company to which this Part applies has tried to obtain a
5
tax advantage for itself or another person.
(2)
The Commissioners may give a notice to the company specifying the tax
advantage.
(3)
If the Commissioners give a notice to the company under subsection (2)—
(a)
a tax advantage obtained by the company shall be counteracted, in
10
accordance with the notice, by an adjustment by way of—
(i)
an assessment;
(ii)
the cancellation of a right of repayment;
(iii)
a requirement to return a repayment already made;
(iv)
the computation or recomputation of profits or gains, or
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liability to tax, on a basis specified by the Commissioners in the
notice, and
(b)
the Commissioners may (in addition to the adjustment under
paragraph (a)) assess the company to such additional amount of
corporation tax under Case VI of Schedule D as they think is equivalent
20
to the value of the tax advantage.
(4)
For the purposes of this section “tax advantage” has the meaning given by
section 709 of ICTA (and includes, in particular, entering into arrangements the
sole or main purpose of which is to avoid or reduce a charge to tax under
section 112).
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(5)
But a company does not obtain a tax advantage by reason only of this Part
applying to it, unless it does anything (whether before or during the
application of this Part) which in the Commissioners’ opinion is wholly or
principally designed—
(a)
to create or inflate or apply a loss, deduction or expense (whether or not
30
suffered or incurred by the company), or
(b)
to have another effect of a kind specified for the purposes of this
subsection by regulations made by the Treasury.
(6)
Where a notice is given to a company under subsection (2), the company may
appeal to the Special Commissioners.
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(7)
An appeal must be instituted by notice given in writing to the Commissioners
for Her Majesty’s Revenue and Customs during the period of 30 days
beginning with the date on which the notice under subsection (2) is given to the
company.
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Funds awaiting re-investment
40
(1)
This section applies where a company to which this Part applies—
(a)
disposes of an asset used wholly and exclusively for the purposes of
tax-exempt business, and
(b)
holds the proceeds in cash.

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(2)
Profits or losses arising from a loan relationship entered into in connection
with the proceeds—
(a)
shall be disregarded for the purposes of section 120, and
(b)
shall be treated for all tax purposes as arising from a loan relationship
entered into in connection with business of C (residual).
5
(3)
For the purposes of section 108—
(a)
the proceeds shall, during the period of 24 months beginning with the
date of the disposal, be treated for the purposes of Condition 2 as assets
held in connection with the tax-exempt business, but
(b)
any income derived from the proceeds is income from non-tax-exempt
10
business.
(4)
For the purposes of this section proceeds are held in cash if—
(a)
held on deposit (whether or not in sterling),
(b)
invested in stocks or bonds of any of the descriptions included in Part
1 of Schedule 11 to FA 1942 (gilts), or
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(c)
held or invested in such other form as the Commissioners for Her
Majesty’s Revenue and Customs may specify for the purposes of this
section in regulations.
(5)
In the case of the disposal of an asset which for one or more periods of at least
a year has been used partly for the purposes of the business of C (tax-exempt)
20
and partly for the purposes of C (residual), this section shall apply to such part
of the proceeds as may reasonably be attributed to the tax-exempt business
(having regard to the extent to which, and the length of the periods during
which, the asset was used for the different purposes).
Profits
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119
Corporation tax
(1)
Profits arising from the business of C (tax-exempt) shall not be charged to
corporation tax.
(2)
Profits arising from the business of C (residual) which are charged to
corporation tax shall be charged at a rate determined without reference to
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section 13 of ICTA (small companies rate).
120
Calculation of profits
(1)
This section provides for the calculation of profits for the purposes of sections
107(8), 115(2), 119(1) and 123(c).
(2)
Section 21A of ICTA (calculation of profits of Schedule A business) shall apply
35
(to profits of any kind).
(3)
Paragraph 2(3) of section 15(1) ICTA (Schedule A: disregard of credits and
debits from loan relationships and derivative contracts) shall not apply in
respect of—
(a)
a loan relationship if or in so far as it relates to tax-exempt business,
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(b)
a hedging derivative contract if or in so far as it relates to tax-exempt
business, or
(c)
embedded derivatives if or in so far as the host contract is entered into
for the purposes of tax-exempt business.