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
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.

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(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—

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(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.

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Schedule 6 — Avoidance involving financial arrangements
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(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—

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“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.

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      (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

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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.”.