rs1970507.779-783

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Report Stage Proceedings: 5th July 2006
779

Finance (N–[ [], continued

774C
Meaning of “structured finance arrangement” for purposes of s.774D

(1)
For the purposes of section 774D an arrangement is a structured

finance arrangement in relation to a partnership (“the borrower

partnership”) if condition A or B is met in relation to the borrower

partnership.

(2)
Condition A is that—

(a)
a person (“the transferor partner”) disposes of an asset (“the

security”) under the arrangement to the borrower partnership,

(b)
the transferor partner is a member of the borrower partnership

immediately after the disposal (whether or not a member

immediately before the disposal),

(c)
under the arrangement the borrower partnership receives from

another person (“the lender”) any money or other asset (“the

advance”) in any period,

(d)
in accordance with generally accepted accounting practice the

accounts of the borrower partnership for that period record a

financial liability in respect of the advance,

(e)
there is a relevant change in relation to the membership of the

borrower partnership involving the lender or a person

connected with the lender (see subsection (6)),

(f)
under the arrangement the share of the lender or person

connected with the lender in the profits of the borrower

partnership is determined by reference (wholly or partly) to

payments in respect of the security, and

(g)
in accordance with generally accepted accounting practice

those payments reduce the amount of the financial liability in

respect of the advance recorded in the accounts of the

borrower partnership.

(3)
For the purposes of condition A, references to the accounts of the

borrower partnership include the accounts of the transferor partner.

(4)
Condition B is that—

(a)
the borrower partnership holds an asset (“the security”) as a

partnership asset at any time before the arrangement is made,

(b)
under the arrangement the borrower partnership receives from

another person (“the lender”) any money or other asset (“the

advance”) in any period,

(c)
in accordance with generally accepted accounting practice the

accounts of the borrower partnership for that period record a

financial liability in respect of the advance,

(d)
there is a relevant change in relation to the membership of the

borrower partnership involving the lender or a person

connected with the lender,

(e)
under the arrangement the share of the lender or person

connected with the lender in the profits of the borrower

partnership is determined by reference (wholly or partly) to

payments in respect of the security, and

(f)
in accordance with generally accepted accounting practice

those payments reduce the amount of the financial liability in

respect of the advance recorded in the accounts of the

borrower partnership.

Report Stage Proceedings: 5th July 2006
780

Finance (N–[ [], continued

(5)
For the purposes of condition B, references to the accounts of the

borrower partnership include the accounts of any person who is a

member of the partnership immediately before the arrangement is

made.

(6)
For the purposes of this section and section 774D there is a relevant

change in relation to the membership of the borrower partnership

involving the lender or a person connected with the lender if directly

or indirectly in consequence of, or otherwise in connection with, the

arrangement—

(a)
the lender, or a person connected with the lender, becomes a

member of the borrower partnership at any time, or

(b)
there is at any time a change in the share of a member of the

borrower partnership in the profits of the borrower partnership

in a case where that member is the lender or a person

connected with the lender.

(7)
For the purposes of subsection (6)(b) the reference to a person

connected with the lender includes a person who at any time becomes

connected with the lender directly or indirectly in consequence of, or

otherwise in connection with, the arrangement.

774D
Disregard of intended effects of arrangement involving change in

relation to a partnership

(1)
This section applies if—

(a)
an arrangement is a structured finance arrangement in relation

to a partnership (“the borrower partnership”), and

(b)
any relevant change in relation to the membership of the

borrower partnership involving the lender or a person

connected with the lender would (disregarding this section)

have had the following effect.

(2)
The effect is that—

(a)
an amount of income on which a relevant member of the

borrower partnership would otherwise have been charged to

tax is not so charged,

(b)
an amount which would otherwise have been brought into

account in calculating for tax purposes any income of a

relevant member of the borrower partnership is not so brought

into account, or

(c)
a relevant member of the borrower partnership becomes

entitled to an income deduction.

(3)
In this section “relevant member of the borrower partnership”

means—

(a)
in any case where condition A in section 774C is met in

relation to the arrangement, the transferor partner, and

(b)
in any case where condition B in that section is met in relation

to the arrangement, any person other than the lender who is a

member of the borrower partnership immediately before the

time at which the relevant change in relation to the

membership of the borrower partnership involving the lender

or a person connected with the lender occurs.

(4)
Part 9 of ITTOIA 2005 and section 114 above are to have effect in

relation to any relevant member of the borrower partnership as if the

Report Stage Proceedings: 5th July 2006
781

Finance (N–[ [], continued

relevant change in relation to the membership of the borrower

partnership involving the lender or a person connected with the lender

had not occurred.


Accordingly, the structured finance arrangement is not to have the

effect mentioned in subsection (2).

(5)
The following provisions of this section confer relief from tax the

availability of which depends on which of the conditions in section

774C is met in relation to the arrangement.

(6)
In any case where condition A in section 774C is met, if—

(a)
the transferor partner is a person within the charge to income

tax, and

(b)
in accordance with generally accepted accounting practice the

accounts of the borrower partnership record an amount as a

finance charge in respect of the advance,


the transferor partner may treat the amount for income tax purposes as

interest payable by the transferor partner on a loan.

(7)
In any case where condition A in that section is met, if the transferor

partner is a company within the charge to corporation tax—

(a)
the advance is to be treated, in relation to the company, for the

purposes of paragraph 19 of Schedule 9 to the Finance Act

1996 (and the other provisions of Chapter 2 of Part 4 of that

Act) as a money debt owed by the borrower partnership,

(b)
the arrangement is to be treated, in relation to the company, as

a transaction for the lending of money from which that debt is

treated as arising for those purposes, and

(c)
any amount which, in accordance with generally accepted

accounting practice, is recorded in the accounts of the

borrower partnership as a finance charge in respect of the

advance is to be treated as interest payable by the company

under that transaction.

(8)
For the purposes of subsections (6) and (7), references to the accounts

of the borrower partnership include the accounts of the transferor

partner.

(9)
In any case where condition B in section 774C is met, if—

(a)
a relevant member of the borrower partnership is a person

within the charge to income tax, and

(b)
in accordance with generally accepted accounting practice the

accounts of the borrower partnership record an amount as a

finance charge in respect of the advance,


the relevant partner may treat the amount for income tax purposes as

interest payable by the borrower partnership on a loan.

(10)
In any case where condition B in that section is met, if a relevant

member of the borrower partnership is a company within the charge to

corporation tax—

(a)
the advance is to be treated, in relation to the company, for the

purposes of paragraph 19 of Schedule 9 to the Finance Act

1996 (and the other provisions of Chapter 2 of Part 4 of that

Act) as a money debt owed by that partnership,

Report Stage Proceedings: 5th July 2006
782

Finance (N–[ [], continued

(b)
the arrangement is to be treated, in relation to the company, as

a transaction for the lending of money from which that debt is

treated as arising for those purposes, and

(c)
any amount which, in accordance with generally accepted

accounting practice, is recorded in the accounts of the

borrower partnership as a finance charge in respect of the

advance is to be treated as interest payable by the borrower

partnership under that transaction.

(11)
For the purposes of subsections (9) and (10), references to the accounts

of the borrower partnership include the accounts of any relevant

member of the borrower partnership.

(12)
For the purpose of determining when any deemed interest in respect of

the advance is paid—

(a)
the payments mentioned in section 774C(2)(f) or (4)(e) are

treated as consisting of amounts for repaying the advance and

amounts (“the interest elements”) in respect of interest on the

advance, and

(b)
the interest elements of those payments are treated as paid

when those payments are paid,


and the deemed interest in respect of the advance is treated as paid at

the times when the interest elements are treated as paid.

(13)
In this section “deemed interest” means any amount which is treated

as interest as a result of any of subsections (6) to (10).

(14)
This section is subject to the exceptions contained in section 774E.

774E
Sections 774B and 774D: exceptions

(1)
Section 774B or 774D does not apply if the whole of the advance

under the structured finance arrangement—

(a)
is charged to tax on a relevant person (see subsection (7)) as

an amount of income,

(b)
is brought into account in calculating for tax purposes any

income of a relevant person, or

(c)
is brought into account for the purposes of any provision of

the Capital Allowances Act as a disposal receipt, or proceeds

from a balancing event or disposal event, of a relevant person.


For the purposes of this subsection the effect of section 785A (rent

factoring of leases of plant or machinery) is to be disregarded.

(2)
Subsection (1)(c) is not to be taken as met in any case where—

(a)
the receipt or proceeds gives rise to a balancing charge, and

(b)
the amount of the balancing charge is limited by any provision

of the Capital Allowances Act.

(3)
Section 774B or 774D does not apply if, at all times, the whole of the

advance under the structured finance arrangement—

(a)
is a debtor relationship of a relevant person for the purposes

of Chapter 2 of Part 4 of the Finance Act 1996 (loan

relationships), or

(b)
would be a debtor relationship of a relevant person for those

purposes if that person were a company within the charge to

corporation tax.

Report Stage Proceedings: 5th July 2006
783

Finance (N–[ [], continued


For the purposes of this subsection references to a debtor relationship

do not include a relationship to which section 100 of the Finance Act

1996 (money debts etc not arising from the lending of money) applies.

(4)
Section 774B or 774D does not apply in so far as the structured finance

arrangement is an arrangement in relation to which—

(a)
section 263A of the 1992 Act (agreements for sale and

repurchase of securities) applies,

(b)
paragraph 15 of Schedule 9 to the Finance Act 1996 (repo

transactions and stock-lending) applies, or

(c)
Chapter 5 of Part 2 of the Finance Act 2005 (alternative

finance arrangements) has effect.

(5)
Section 774B or 774D does not apply in so far as—

(a)
the security under the structured finance arrangement is plant

or machinery which is the subject of a sale and finance

leaseback, or

(b)
the structured finance arrangement is an arrangement in

relation to which sections 228B to 228D of the Capital

Allowances Act apply with the modifications contained in

section 228F of that Act (lease and finance leaseback).

(6)
For the purposes of subsection (5)(a), whether plant or machinery is

the subject of a sale and finance leaseback is determined in accordance

with section 221 of the Capital Allowances Act.


But, in applying that section, it is to be assumed that the words “and

which are not a long funding lease in the case of the lessor” were

omitted from section 219(1)(b) of that Act (meaning of “finance

lease”).

(7)
For the purposes of this section a “relevant person” means—

(a)
if section 774B applies, a person in relation to whom the

structured finance arrangement would (but for that section)

otherwise have had the relevant effect (within the meaning of

that section), and

(b)
if section 774D applies, a relevant member of the borrower

partnership (within the meaning of that section).

774F
Sections 774B and 774D: power to provide further exceptions

(1)
The Treasury may make regulations prescribing other circumstances

in which section 774B or 774D is not to apply in relation to a

structured finance arrangement.

(2)
Any regulations under subsection (1) may make provision amending

section 774E.

(3)
The power to make regulations under subsection (1) includes—

(a)
power to make provision having effect in relation to times

before the making of the regulations (but not times earlier than

6th June 2006),

(b)
power to make different provision for different cases or

different purposes, and

(c)
power to make incidental, supplemental, consequential or

transitional provision and savings.