House of Commons portcullis
House of Commons
Session 2005 - 06
Internet Publications
Other Bills before Parliament

Finance (No.2) Bill


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

181

 

Schedule 6

Section 76

 

Avoidance involving financial arrangements

Dividend stripping: subsequent sales etc of rights to receive dividends etc

1     (1)  

Section 730 of ICTA (transfers of rights to receive distributions in respect of

shares) is amended as follows.

5

      (2)  

Omit subsection (3) (proceeds of subsequent sales etc of rights to receive

distributions not to be regarded as income of the seller etc).

      (3)  

The amendment made by this paragraph has effect in relation to sales or

other realisations on or after 20th January 2006.

Deemed interest: cash collateral under stock lending arrangements

10

2     (1)  

After section 736B of ICTA (deemed manufactured payments in the case of

stock lending arrangements) insert—

“736C   

  Deemed interest: cash collateral under stock lending arrangements

(1)   

This section applies where—

(a)   

the borrower under a stock lending arrangement is treated

15

under section 736B(2) as paying under that arrangement an

amount representative of interest on any securities (“the

relevant securities”),

(b)   

an amount of money (“cash collateral”) is payable to or for the

benefit of the lender for the purpose of securing the discharge

20

of the requirement to transfer the relevant securities back to

the lender,

(c)   

the stock lending arrangement is designed to produce a

return to the borrower which equates, in substance, to the

return on an investment of money at interest, and

25

(d)   

the main purpose, or one of the main purposes, of the stock

lending arrangement is the obtaining of a tax advantage.

(2)   

Where this section applies—

(a)   

the Tax Acts are to apply as if the borrower receives an

amount of interest payable in respect of the cash collateral,

30

and

(b)   

the amount of the interest is calculated in accordance with the

following provisions of this section (see, in particular,

subsections (3) to (7)).

(3)   

The interest is treated for the purposes of the Tax Acts as if it were

35

received on the date (“the return date”) on which the borrower

transfers the relevant securities back to the lender.

(4)   

The interest is treated for the purposes of the Tax Acts as if it were

payable in respect of the period (“the interest period”)—

(a)   

beginning with the date on which the lender transfers the

40

relevant securities to the borrower, and

(b)   

ending with the return date.

 

 

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

182

 

(5)   

The rate of interest payable in respect of the cash collateral is a rate

that is reasonably comparable to the rate that the borrower could

obtain by placing the cash collateral on deposit for the interest

period.

(6)   

For the purposes of this section, the amount of the cash collateral on

5

which the interest is payable is taken to be—

(a)   

in any case where the amount of the cash collateral varies at

any time on or before the return date, the highest amount of

the cash collateral at any time on or before the return date,

and

10

(b)   

in any other case, the amount of the cash collateral as at the

return date.

(7)   

The amount of the interest which the borrower is treated as receiving

in respect of the cash collateral for the interest period is reduced (but

not below nil) by any interest which the borrower actually receives

15

in respect of that collateral for that period.

(8)   

If the borrower is a person within the charge to income tax, the

interest which the borrower is treated as receiving is charged to

income tax under Chapter 2 of Part 4 of ITTOIA 2005 (interest).

(9)   

If the borrower is a company within the charge to corporation tax—

20

(a)   

the interest which the borrower is treated as receiving is

treated for the purposes of Chapter 2 of Part 4 of the Finance

Act 1996 (loan relationships) as payable to it on a money debt,

(b)   

that money debt is treated for those purposes as a

relationship to which section 100 of the Finance Act 1996

25

applies (money debts etc not arising from the lending of

money), and

(c)   

the credits to be brought into account for those purposes in

respect of the interest must be determined using an

amortised cost basis of accounting.

30

(10)   

The fact that the borrower is treated as receiving an amount of

interest is not to be taken as implying that the interest is payable by

the lender or any other person.

(11)   

For the purposes of this section—

“money” includes money expressed in a currency other than

35

sterling,

“stock lending arrangement” and “securities” have the same

meanings as in section 263B of the 1992 Act,

“tax advantage” has the meaning given by section 709(1).

(12)   

For the purposes of this section—

40

(a)   

any reference to the transfer of securities back has the same

meaning as in section 263B of the 1992 Act (see, in particular,

sections 263B(5) and 263C(1) of that Act), but

(b)   

if it becomes apparent that the borrower will not comply with

the requirement to transfer any securities back, the borrower

45

is treated as if he transfers them back on the date on which it

becomes so apparent.

(13)   

For the purposes of this section it does not matter—

 

 

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

183

 

(a)   

whether the cash collateral is payable by the borrower or by

any other person,

(b)   

whether the cash collateral is payable under the stock lending

arrangement or under any other arrangement,

(c)   

whether collateral in another form is also provided in

5

connection with the stock lending arrangement.”.

      (2)  

Section 736C of ICTA has effect in relation to any stock lending arrangement

made on or after 5th December 2005.

      (3)  

In relation to any stock lending arrangement made on or after that date but

before 22nd March 2006, that section has effect as if subsection (6) were

10

omitted.

      (4)  

If—

(a)   

a stock lending arrangement was made before 5th December 2005 in

respect of any securities (“the original securities”), and

(b)   

on or after that date the lender under the stock lending arrangement

15

transfers securities (“the substituted securities”) in substitution for

some or all of the original securities,

           

section 736C of ICTA has effect as if that arrangement were made on the date

of the substitution (and the substituted securities were the relevant

securities).

20

Quasi-stock lending arrangements and quasi-cash collateral

3     (1)  

In section 736B of ICTA (deemed manufactured payments in the case of

stock lending arrangements) at the end insert—

“(4)   

See section 736D for provision treating certain arrangements as stock

lending arrangements for the purposes of this section.”.

25

      (2)  

In section 736C of ICTA (deemed interest: cash collateral under stock

lending arrangements), as inserted by paragraph 2 above, at the end insert—

“(14)   

See section 736D—

(a)   

for provision treating certain arrangements as stock lending

arrangements for the purposes of this section, and

30

(b)   

for provision treating certain amounts as cash collateral for

those purposes.”.

      (3)  

After that section insert—

“736D   

  Quasi-stock lending arrangements and quasi-cash collateral

(1)   

In this section “quasi-stock lending arrangement” means so much of

35

any arrangements between two or more persons as are not stock

lending arrangements, but are arrangements under which—

(a)   

a person (“the lender”) transfers securities to another person

(“the borrower”), and

(b)   

a requirement is imposed on a person to transfer any or all of

40

the securities, or any other property, back to the lender or any

other person,

   

and it does not matter whether the person on whom that

requirement is imposed is the borrower or any other person.

 

 

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

184

 

(2)   

In this section “quasi-cash collateral”, in relation to any stock lending

arrangement or quasi-stock lending arrangement, means—

(a)   

any money which is payable for a relevant purpose, plus

(b)   

any other property which is transferable for a relevant

purpose.

5

(3)   

Money or other property is payable or transferable for a relevant

purpose if it is payable or transferable to or for the benefit of—

(a)   

the lender under the stock lending arrangement or quasi-

stock lending arrangement, or

(b)   

a person connected with that lender,

10

   

for the purpose of securing the discharge of the requirement to

transfer any or all of the securities, or any other property, back to that

lender or any other person.

(4)   

For the purposes of sections 736B and 736C, a quasi-stock lending

arrangement is treated as if it were a stock lending arrangement.

15

(5)   

For the purposes of section 736C, in relation to any stock lending

arrangement or quasi-stock lending arrangement,—

(a)   

quasi-cash collateral is treated as if it were cash collateral, and

(b)   

the amount of the quasi-cash collateral in relation to the stock

lending arrangement or quasi-stock lending arrangement is

20

taken to be the amount of the cash collateral.

(6)   

If any property other than money is transferable for a relevant

purpose, the amount of the quasi-cash collateral so far as relating to

that property is determined by reference to its market value.

(7)   

In any case where—

25

(a)   

section 736C applies in relation to a quasi-stock lending

arrangement, and

(b)   

the person for whom the tax advantage was designed to be

obtained is a person (“the other person”) other than the

borrower under that arrangement,

30

   

that section has effect as if the other person were the person who

receives the amount of interest mentioned in that section.

(8)   

In any case where section 736C applies in relation to a quasi-stock

lending arrangement—

(a)   

any reference in that section to cash collateral being payable

35

to or for the benefit of the lender includes its being payable to

or for the benefit of a person connected with the lender,

(b)   

the reference in subsection (1)(c) of that section to a return to

the borrower includes a return to any other person, and

(c)   

any reference in that section to the transfer back of the

40

relevant securities by the borrower to the lender includes the

transfer back of any or all of the securities, or any other

property, by any person to the lender or any other person.

(9)   

Section 839 (connected persons) applies for the purposes of this

section.

45

(10)   

In this section—

 

 

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

185

 

“money” includes money expressed in a currency other than

sterling,

“property” means property in any form,

“stock lending arrangement” and “securities” have the same

meaning as in section 263B of the 1992 Act,

5

“transfer” means a transfer otherwise than by way of sale.”.

      (4)  

The amendments made by this paragraph have effect in relation to any

arrangement made on or after 22nd March 2006.

Loan relationships: mandatory convertibles

4     (1)  

Section 81 of FA 1996 (meaning of “loan relationship” etc) is amended as

10

follows.

      (2)  

In subsection (2) (meaning of “money debt”)—

(a)   

omit the “or” immediately before paragraph (b) (transfer of right to

settlement under a money debt), and

(b)   

at the end of that paragraph insert “, or

15

(c)   

by the issue or transfer of any shares in any

company,”.

      (3)  

The amendments made by this paragraph have effect in relation to

relationships to which a company is a party on or after 22nd March 2006.

      (4)  

The following provisions of this paragraph apply for the purposes of TCGA

20

1992 if—

(a)   

a company is a party to a relationship on 22nd March 2006,

(b)   

the relationship becomes a loan relationship on that date for the

purposes of Chapter 2 of Part 4 of FA 1996 as a result of the

amendments made by this paragraph,

25

(c)   

the relationship is a creditor relationship of the company, and

(d)   

immediately before that date the asset representing the relationship

was a chargeable asset in relation to the company.

      (5)  

The company is treated as if—

(a)   

it had made a disposal of the asset representing the relationship

30

immediately before 22nd March 2006, and

(b)   

the disposal had been for a consideration equal to the fair value of the

asset at that time (within the meaning given by section 103(1) of FA

1996).

      (6)  

Any chargeable gain or loss accruing to the company on the disposal is

35

treated as accruing to the company when it ceases to be a party to the

relationship.

      (7)  

For the purposes of this paragraph an asset is a chargeable asset in relation

to the company at any time if any gain accruing to it on the disposal of the

asset at that time would be a chargeable gain for the purposes of TCGA 1992.

40

Loan relationships: computation in accordance with generally accepted accounting practice

5     (1)  

Section 85A of FA 1996 (computation in accordance with generally accepted

accounting practice) is amended as follows.

 

 

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

186

 

      (2)  

In subsection (1) (amounts to be brought into account are those recognised

in determining company’s profit or loss) after “Subject to the provisions of

this Chapter” insert “(including, in particular, section 84(1))”.

Loan relationships: amounts not fully recognised for accounting purposes

6     (1)  

After section 85B of FA 1996 (amounts recognised in determining

5

company’s profit or loss) insert—

“85C    

Amounts not fully recognised for accounting purposes

(1)   

This section applies if—

(a)   

a company is, or is treated as being, a party to a creditor

relationship in any period,

10

(b)   

an amount is not fully recognised for the period in respect of

the creditor relationship,

(c)   

the company is, or is treated as being, a party to a debtor

relationship in the period or has at any time issued share

capital which falls to be treated for accounting purposes as a

15

liability (a “relevant accounting liability”) for the period,

(d)   

an amount is not fully recognised for the period in respect of

the debtor relationship or relevant accounting liability, and

(e)   

the amounts are not fully recognised as mentioned in

paragraphs (b) and (d) as a result of the application of

20

generally accepted accounting practice in relation to the

creditor relationship and the debtor relationship or relevant

accounting liability.

(2)   

For the purposes of subsection (1) an amount is not fully recognised

for the period in respect of any loan relationship or relevant

25

accounting liability of the company if—

(a)   

no amount in respect of the relationship or liability is

recognised in determining its profit or loss for the period, or

(b)   

an amount in respect of only part of the relationship or

liability is recognised in determining its profit or loss for the

30

period.

(3)   

In determining the credits and debits to be brought into account by

the company in respect of the creditor relationship for the period for

the purposes of this Chapter, the applicable assumption (see

subsection (6)) must be made.

35

(4)   

In any case where the condition in subsection (1)(c) is met by

reference to a debtor relationship of the company, in determining the

credits and debits to be brought into account by the company in

respect of that relationship for the period for the purposes of this

Chapter, the applicable assumption must be made.

40

(5)   

But the amount of any debits to be brought into account by the

company for any period for the purposes of this Chapter as a result

of subsection (4) must not exceed the amount of any credits to be

brought into account by the company for the period as a result of

subsection (3).

45

(6)   

For the purposes of this section, in relation to any loan relationship,

the applicable assumption is the assumption that an amount in

 

 

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

187

 

respect of the whole of the relationship is recognised in determining

the company’s profit or loss for the period.

(7)   

In any case where—

(a)   

apart from this section any credits or debits are brought into

account by the company in respect of any loan relationship

5

for the period for the purposes of this Chapter, and

(b)   

the relationship is one to which this section applies,

   

the credits and debits to be so brought into account as a result of this

section must be determined on the same basis of accounting on

which the credits or debits mentioned in paragraph (a) were

10

determined.

(8)   

In any other case, the credits and debits to be so brought into account

as a result of this section must be determined on the amortised cost

basis of accounting.”.

      (2)  

The amendment made by this paragraph has effect in relation to periods of

15

account ending on or after 22nd March 2006.

      (3)  

But, in relation to a period of account beginning before 22nd March 2006,

amounts are to be brought into account for the purposes of Chapter 2 of Part

4 of FA 1996 as a result of that amendment only if the amounts relate to any

time on or after that date.

20

Shares treated as loan relationships: shares subject to outstanding third party obligations

7     (1)  

Section 91A of FA 1996 (shares subject to outstanding third party

obligations) is amended as follows.

      (2)  

In subsection (1) (conditions for section to apply), in the opening words, for

“a company if at any time in an accounting period” substitute “the times in

25

a company’s accounting period during which”.

      (3)  

In subsection (2) (how Chapter has effect for the accounting period) after “as

if” insert “during those times”.

      (4)  

In subsection (5) (cases where a share is subject to outstanding third party

obligations)—

30

(a)   

in paragraph (a) (share is subject to obligations of description in

subsection (6)) after “the share is subject to” insert “, or will or might

under any relevant arrangements be subject to,”, and

(b)   

in paragraph (b) (obligations of a person other than the investing

company) after “the investing company” insert “or are obligations of

35

the investing company which, under any relevant arrangements,

will or might be discharged directly or indirectly by any other

person”.

      (5)  

After that subsection insert—

“(5A)   

For the purposes of subsection (5) above—

40

(a)   

“arrangements” includes any agreement or understanding

(whether or not legally enforceable),

(b)   

arrangements are “relevant” if they were entered into at any

time on or before the share was issued.”.

 

 

 
previous section contents continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 2006
Revised 23 June 2006