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 4 — Real Estate Investment Trusts
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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.
(2)
That sum is—
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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
that period in respect of the business of C (tax-exempt).
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(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;
and in calculating the costs of debt finance in respect of an accounting period
15
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
(within the meaning of section 103(1A) and (1B) of that Act),
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(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,
(d)
the financing cost implicit in a payment under a finance lease, and
25
(e)
any other costs arising from what would be considered, in accordance
with generally accepted accounting practice, to be a financing
transaction.
116
Minor or inadvertent breach
(1)
The Treasury may make regulations about the application of this Part to a
30
company if a requirement in section 106(5) or (6), 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
practicable if a requirement in section 106(5) or (6), 107 or 108 ceases to be
35
satisfied in relation to the company.
(3)
The regulations may, in particular—
(a)
provide for this Part to cease to apply to a company at a time specified
by or determined in accordance with the regulations (which may be
before the breach of a requirement);
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(b)
provide for this Part to continue to apply to a company with specified
modifications;
(c)
provide for sums to be charged to tax, or otherwise treated, in
accordance with the regulations;
(d)
make provision by reference to the extent of a failure to satisfy a
5
requirement;
(e)
make provision by reference to the number of requirements not
satisfied;
(f)
limit the number of occasions on which a provision of the regulations
may be relied upon by a company in respect of a specified period;
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(g)
include other provision for preventing tax avoidance;
(h)
confer a discretion on the Commissioners.
(4)
This section is subject to section 129.
117
Cancellation of tax advantage
(1)
This section applies if the Commissioners for Her Majesty’s Revenue and
15
Customs think that a company to which this Part applies has tried to obtain a
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)—
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(a)
a tax advantage obtained by the company shall be counteracted, in
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;
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(iv)
the computation or recomputation of profits or gains, or
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
30
corporation tax under Case VI of Schedule D as they think is equivalent
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
35
section 112).
(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—
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(a)
to create or inflate or apply a loss, deduction or expense (whether or not
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
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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
5
(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.
(2)
Profits or losses arising from a loan relationship entered into in connection
10
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).
(3)
For the purposes of section 108—
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(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
business.
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(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
(c)
held or invested in such other form as the Commissioners for Her
25
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)
and partly for the purposes of C (residual), this section shall apply to such part
30
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
119
Corporation tax
35
(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
section 13 of ICTA (small companies rate).
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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
(to profits of any kind).
5
(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,
(b)
a hedging derivative contract if or in so far as it relates to tax-exempt
10
business, or
(c)
embedded derivatives if or in so far as the host contract is entered into
for the purposes of tax-exempt business.
(4)
For the purposes of subsection (3)—
(a)
a derivative contract is hedging in relation to a company if or in so far
15
as it is acquired as a hedge of risk in relation to an asset,
(b)
a designation of a contract as wholly or partly hedging for the purposes
of a company’s accounts shall be conclusive, and
(c)
“embedded derivatives” and “host contract” have the meanings given
by paragraph 2(3) of Schedule 26 to FA 2002 (derivative contracts).
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(5)
Profits shall be computed without regard to items giving rise to credits or
debits which would be within Schedule 26 to FA 2002 (derivative contracts) but
for paragraph 4(2)(b) (exclusion of share-based and unit-trust-based contracts).
(6)
Income and expenditure relating partly to tax-exempt business and partly to
non-tax-exempt business shall be apportioned reasonably.
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(7)
Section 3(1) of CAA 2001 (claims for capital allowances) shall not apply; and
any allowance which the company could claim under that section shall be
made automatically and reflected in the calculation of profits.
121
Distributions: liability to tax
(1)
A distribution received by a shareholder of a company to which this Part
30
applies in respect of profits of C (tax-exempt) shall be treated—
(a)
in the case of a shareholder within the charge to corporation tax, as
profits of a Schedule A business, and
(b)
in the case of a shareholder within the charge to income tax, as the
profits of a UK property business (within the meaning of section 264 of
35
ITTOIA 2005).
(2)
A distribution received by a shareholder who is not resident in the United
Kingdom—
(a)
if the shareholder is a company within the charge to corporation tax,
shall be chargeable to tax as profits of a Schedule A business,
40
(b)
if the shareholder is a person other than a company within the charge
to corporation tax, shall be chargeable to tax as profits of a UK property
business (within the meaning of section 264 of ITTOIA 2005), and
(c)
in either case, shall not be chargeable to tax by virtue of section 42A of
ICTA (non-resident landlords).
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(3)
Subsection (1) shall not apply in relation to a shareholder if and in so far as he—
(a)
is a dealer in respect of distributions (within the meaning of section 95
of ICTA),
(b)
is a dealer in securities who is charged to tax under Part 2 of ITTOIA
2005 (trading income) in respect of distributions made by companies,
5
(c)
is an individual member of Lloyd’s (within the meaning given by
section 184(1) of FA 1993) and the distribution is made in respect of
assets forming part of—
(i)
a premium trust fund of his (within the meaning given by
section 174 of FA 1993), or
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(ii)
an ancillary trust fund of his (within the meaning given by
section 176 of FA 1993), or
(d)
is a corporate member of Lloyd’s (within the meaning given by section
230(1) of FA 1994) and the distribution is made in respect of assets
forming part of—
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(i)
a premiums trust fund belonging to it (within the meaning
given by section 222 of FA 1994), or
(ii)
an ancillary trust fund belonging to it (within the meaning
given by section 223 of FA 1994).
(4)
Section 114(1)(a) of ICTA (partnerships with companies as members) does not
20
disapply subsection (1) above.
(5)
Sections 231 of ICTA and 397 of ITTOIA 2005 (tax credits in respect of
qualifying distributions) shall not apply to distributions made by a company
to which this Part applies in respect of profits of C (tax-exempt).
(6)
Distributions from companies to which this Part applies and distributions from
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principal companies of groups to which this Part applies shall be treated, for
the purposes of subsection (1), as the profits of a single business (irrespective
of whether the shareholder receives different distributions in different
capacities) which is separate from—
(a)
any other Schedule A business carried on by the shareholder,
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(b)
any other UK property business (within the meaning of section 264 of
ITTOIA 2005) carried on by the shareholder,
(c)
any overseas property business (within the meaning of section 70A(4)
of ICTA) carried on by the shareholder, and
(d)
any overseas property business (within the meaning of section 265 of
35
ITTOIA 2005) carried on by the shareholder.
(7)
In the case of a shareholder which is a partnership, subsection (6) applies to
receipts by a partner of a share of any distribution as it applies to receipts by a
shareholder.
(8)
In subsection (1)—
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(a)
the reference to a company to which this Part applies includes a
reference to C (post-cessation), and
(b)
“profits” includes gains.
122
Distributions: deduction of tax
(1)
The Treasury may make regulations providing for the assessment, collection
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and recovery of tax where—

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(a)
a company to which this Part applies makes a distribution of profits of
C (tax-exempt), and
(b)
tax is or may become chargeable in respect of the distribution (whether
by virtue of section 121(1) or otherwise).
(2)
Regulations under this section may, in particular—
5
(a)
require a company to deduct tax at the basic rate before payment of
distributions;
(b)
specify classes of shareholder to whom distributions may be made
without deduction of tax;
(c)
make provision about the calculation of payments of tax to be made by
10
a company;
(d)
require a company to account for tax deducted;
(e)
apply an enactment (with or without modification) in respect of cases
where tax is deducted or treated as deducted from income;
(f)
specify the time at which a distribution is to be treated as made by a
15
company;
(g)
specify periods in respect of which payments of tax are to be made;
(h)
specify times at which payments of tax are to be made;
(i)
make provision about the making of claims and determinations in
respect of over-payment or under-payment (which may include
20
provision for appeals);
(j)
include provision requiring the payment of interest in respect of late
payments of tax (which may—
(i)
provide for payment without deduction of tax;
(ii)
allow interest paid as a deduction from profits of the company’s
25
tax-exempt business);
(k)
require a company to provide a shareholder with a certificate
containing specified information;
(l)
make provision about the repayment to a shareholder of sums
deducted and paid to the Commissioners in respect of tax;
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(m)
make provision for the payment of interest in respect of repayments
under paragraph (l);
(n)
require notices to be given by or to a company;
(o)
require a company to make returns;
(p)
require a company to make records available to the Commissioners for
35
inspection.
(3)
A reference in subsection (2) to a distribution in respect of profits of tax-exempt
business includes a distribution made after this Part has ceased to apply to a
company.
(4)
A distribution which is treated as having been made by virtue of section
40
107(9)(b) shall also be treated as having been made for the purposes of
regulations under this section.
(5)
In this section “profits” includes gains.
123
Attribution of distributions
Distributions made by a company to which this Part applies shall be
45
attributed—
(a)
first, to payments in satisfaction of Condition 4 of section 107,

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(b)
secondly, if or in so far as the company determines, to distribution of
amounts which derive from activities of a kind in respect of which
corporation tax is chargeable in relation to income,
(c)
thirdly, to distribution of profits of the property rental business,
(d)
fourthly, to distribution of gains accruing to C (tax-exempt) which by
5
virtue of section 124 are not chargeable gains, and
(e)
fifthly, to other distributions.
Capital gains
124
Corporation tax
(1)
A gain accruing to a company to which this Part applies on the disposal of an
10
asset shall not be a chargeable gain if—
(a)
the asset was used wholly and exclusively for the purposes of the
business of C (tax-exempt), or
(b)
the asset was used partly for the purposes of the business of C (tax-
exempt) and partly for the purposes of the business of C (residual)
15
during one or more periods of (in aggregate) less than a year, but was
otherwise used wholly and exclusively for the purposes of the business
of C (tax-exempt).
(2)
Where a gain accrues to a company to which this Part applies on the disposal
of an asset which for one or more periods of (in aggregate) at least a year has
20
been used partly for the purposes of the business of C (tax-exempt) and partly
for the purposes of the business of C (residual), such part of the gain as may
reasonably be attributed to the business of C (tax-exempt) (having regard to the
extent to which, and the length of the periods during which, the asset was used
for the different purposes) shall not be a chargeable gain.
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(3)
Corporation tax shall be charged in respect of gains accruing to C (residual) at
a rate determined without reference to section 13 of ICTA (small companies
rate).
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Movement of assets out of ring-fence
(1)
Subsection (2) applies when an asset which has been used wholly and
30
exclusively for the purposes of the business of C (tax-exempt) begins to be used
(otherwise than by being disposed of in the course of trade) wholly and
exclusively for the purposes of the business of C (residual).
(2)
The asset shall be treated as having been at that time—
(a)
disposed of by C (tax-exempt), and
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(b)
immediately re-acquired by C (residual).
(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 asset.
(4)
For the purposes of CAA 2001—
(a)
the sale and re-acquisition deemed under subsection (2)—
40
(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