Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
207

384
General restrictions on relief under Chapter
(1)
Relief is not to be given under this Chapter for interest on a debt incurred—
(a)
by overdrawing an account, or
(b)
by debiting the account of any person as the holder of a credit card or
under similar arrangements.
5
(2)
If interest is paid at a rate in excess of a reasonable commercial rate, relief is not
to be given under this Chapter for so much of the interest as represents the
excess.
385
General provisions about loans
(1)
References in this Chapter to a loan being used or used in any way—
10
(a)
are references to the money lent being applied or, as the case may be,
applied in that way, and
(b)
except in section 403 include references to a loan being used to meet
expenditure already incurred or, as the case may be, already incurred
on such a use.
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(2)
Sections 392, 396, 398, 401 and 403 apply to a loan only if it is made—
(a)
in connection with the use of money, and
(b)
on the occasion of its use or within what is in the circumstances a
reasonable time from its use.
(3)
Those sections apply to a loan only if the loan is used as mentioned in those
20
sections without first having been used for another purpose.
(4)
For the purposes of this Chapter the giving of credit for any money due from
the purchaser under a sale is treated as the making of a loan used by the
purchaser in making the purchase.
386
Loans partly meeting requirements
25
(1)
If, at the time a loan (“the mixed loan”) is used, only part of the mixed loan is a
loan to which any of the provisions specified in section 383(2) apply, for the
purposes of this Chapter that part (“the qualifying part”) is treated as a loan to
which the provision in question applies.
(2)
Accordingly, the corresponding proportion of the interest on the mixed loan is
30
eligible for relief.
(3)
If a mixed loan is partly repaid, for the purposes of this Chapter the
corresponding proportion of the repayment is treated as repaying the
qualifying part (but see section 406(5)).
(4)
In this section “the corresponding proportion” means the proportion that the
35
qualifying part bears to the whole of the mixed loan at the time the mixed loan
is used.
387
Exclusion of double relief etc
(1)
Interest for which relief is given under this Chapter is not allowable as a
deduction for any other income tax purposes.
40
(2)
No relief is given under this Chapter for any tax year for the payment of any
interest taken into account in calculating the profits of—

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
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(a)
any trade, profession or vocation,
(b)
any UK property business, or
(c)
any overseas property business.
(3)
If interest is so taken into account, no relief is given under this Chapter for any
relevant tax year for other interest on the same debt or liability.
5
(4)
A tax year is a relevant one if the interest has been taken into account in
calculating the profits of the trade, profession, vocation or business of the tax
year.
(5)
For the purposes of subsection (3) all interest which—
(a)
is capable of being taken into account in calculating the profits of a
10
trade, profession, vocation or business, and
(b)
is payable by the same person on money advanced to the person on
current account,

is treated as interest on the same debt.
(6)
It does not matter whether the money is advanced—
15
(a)
on one or more accounts, or
(b)
by the same or separate banks or other persons.
(7)
The reference in subsections (2) to (4) to interest taken into account is a
reference to interest allowed as a deduction in an assessment which can no
longer be varied (whether on appeal or otherwise).
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Loans for plant or machinery
388
Loan to buy plant or machinery for partnership use
(1)
This section applies to a loan that is used for capital expenditure on the
provision of plant or machinery to which subsection (2) applies.
(2)
This subsection applies to plant or machinery if—
25
(a)
it is in use for the purposes of a trade, profession or ordinary property
business carried on by a partnership, and
(b)
the partnership is entitled to a capital allowance or liable to a balancing
charge in respect of it under section 264 of CAA 2001 (partnership using
property of a partner) for the period of account in which the interest is
30
paid.
(3)
A partnership is treated as entitled to a capital allowance or liable to a
balancing charge in respect of plant or machinery for a period of account (“the
later period”) for the purposes of subsection (2)(b) if—
(a)
it has been so entitled or liable for a previous period of account, and
35
(b)
no disposal value has been brought into account in respect of it in the
later period or any earlier period of account.
(4)
In this section and sections 389 and 390—
“capital expenditure” has the meaning given in section 4 of CAA 2001,
“period of account” has the same meaning as in that Act (see section 6(2)
40
to (6) of that Act), and
“ordinary property business” has the same meaning as in Part 2 of that Act
(see section 16 of that Act).

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
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389
Eligibility requirements for interest on loans within section 388
(1)
Interest on a loan within section 388(1) is eligible for relief if conditions A and
B are met.
(2)
Condition A is that the interest is paid by an individual who is a member of the
partnership referred to in section 388(2).
5
(3)
Condition B is that the interest falls due and payable not later than 3 years after
the end of the period of account in which the loan was made.
(4)
If the machinery or plant is in use partly for the purposes of the trade,
profession or ordinary property business carried on by the partnership
referred to in section 388(2) (“trade purposes”) and partly for other purposes,
10
only part of the interest is eligible for relief.
(5)
That part is such part as it is just and reasonable to attribute to trade purposes,
having regard to all the relevant circumstances and, in particular, to the extent
of the use for other purposes.
390
Loan to buy plant or machinery for employment use
15
(1)
This section applies to a loan that is used for capital expenditure on the
provision of plant or machinery to which subsection (2) applies.
(2)
This subsection applies to plant or machinery if—
(a)
it is in use for the purposes of an office or employment held by an
individual in the tax year,
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(b)
the plant or machinery belongs to the individual, and
(c)
the individual is entitled to a capital allowance or liable to a balancing
charge in respect of it under Part 2 of CAA 2001 for the tax year.
(3)
An individual is treated as entitled to a capital allowance or liable to a
balancing charge in respect of plant or machinery for a tax year (“the later
25
year”) for the purposes of subsection (2)(c) if—
(a)
the individual has been so entitled or liable for a previous tax year, and
(b)
no disposal value has been brought into account in respect of it in the
later year or any earlier year.
(4)
An individual is also treated as so entitled or liable for the purposes of this
30
section if the individual would be so entitled or liable but for a contribution
made by the individual’s employer.
391
Eligibility requirements for interest on loans within section 390
(1)
Interest on a loan within section 390(1) is eligible for relief if conditions A and
B are met.
35
(2)
Condition A is that the interest is paid by the individual referred to in section
390(2).
(3)
Condition B is that the interest falls due and payable not later than 3 years after
the end of the tax year in which the loan was made.
(4)
If the machinery or plant is in use partly for the purposes of the office or
40
employment referred to in section 390(2) (“employment purposes”) and partly
for other purposes, only part of the interest is eligible for relief.

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Part 8 — Other reliefs
Chapter 1 — Interest payments
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(5)
That part is such part as it is just and reasonable to attribute to employment
purposes having regard to all the relevant circumstances and, in particular, to
the extent of the use for other purposes.
Loans for interests in close companies
392
Loan to buy interest in close company
5
(1)
This section applies to a loan to an individual that is used in one or more of the
ways specified in subsection (2).
(2)
The ways are—
(a)
acquiring any part of the ordinary share capital of a close company that
is not a close investment-holding company,
10
(b)
lending to such a company money which is used wholly and
exclusively—
(i)
for the purposes of the business of the company, or
(ii)
for the purposes of the business of any associated company of
the company which is also a close company that is not a close
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investment-holding company, or
(c)
repaying another loan to which this section applies.
(3)
Subsection (2)(a) does not apply if at any time the individual by whom the
shares are acquired or that individual’s spouse or civil partner—
(a)
makes a claim for relief in respect of them under Part 5 of this Act or, in
20
the case of shares issued before 6 April 2007, Chapter 3 of Part 7 of ICTA
(enterprise investment scheme), or
(b)
makes a claim in respect of them under Schedule 5B to TCGA 1992
(enterprise investment scheme: reinvestment).
(4)
In this section and section 393—
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“close investment-holding company” has the meaning given by section
13A(1) of ICTA (companies not qualifying for small companies’ relief),
and
“associated company” has the meaning given by section 416 of ICTA.
(5)
This section is subject to section 411 (ineligibility of interest where business is
30
occupation of commercial woodlands).
393
Eligibility requirements for interest on loans within section 392
(1)
Interest on a loan within section 392(1) to an individual is eligible for relief only
if—
(a)
when the interest is paid the company is not a close investment-holding
35
company, and
(b)
the capital recovery condition and either the full-time working
conditions or the material interest conditions are met.
(2)
The capital recovery condition is that in the period from the use of the loan to
the payment of the interest the individual has not recovered any capital from
40
the company, apart from any amount taken into account under section 406(2)
(recovered capital that is treated as a repayment of the loan).
(3)
The full-time working conditions are that—

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Chapter 1 — Interest payments
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(a)
when the interest is paid the individual holds part of the ordinary share
capital of the company, and
(b)
in the period from the use of the loan to the payment of the interest the
greater part of the individual’s time has been spent in the actual
management or conduct of the company or of an associated company
5
of the company.
(4)
The material interest conditions are that—
(a)
when the interest is paid the individual has a material interest in the
company (see section 394), and
(b)
if the company exists wholly or mainly for the purpose of holding
10
investments or other property, either—
(i)
the condition in subsection (3)(b) is met, or
(ii)
no property held by the company is used as a residence by the
individual.
394
Meaning of “material interest” in section 393
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(1)
For the purposes of section 393(4)(a) an individual has a material interest in a
company if a relevant person meets condition A or B.
(2)
In this section “relevant person” means—
(a)
the individual, either alone or with one or more associates (see section
395), or
20
(b)
any associate of the individual with or without such other associates.
(3)
Condition A is that the relevant person is the beneficial owner of, or able
directly or indirectly to control, more than 5% of the ordinary share capital of
the company.
(4)
Condition B is that the relevant person possesses, or is entitled to acquire, such
25
rights as would, in the event of the winding up of the company or in any other
circumstances, give an entitlement to receive more than 5% of the assets which
would then be available for distribution among the participators.
(5)
In this section—
“control” has the meaning given by section 416(2) to (6) of ICTA, and
30
“participator” has the meaning given by section 417(1) of ICTA.
395
Meaning of “associate” in section 394
(1)
For the purposes of determining under section 394 whether an individual has
a material interest in a company, in that section “associate”, in relation to that
individual and company, means—
35
(a)
a relative or partner of the individual,
(b)
the trustees of a settlement in relation to which—
(i)
the individual is a settlor, or
(ii)
a relative of the individual (living or dead) is or was a settlor,
(c)
if the individual is interested in any shares or obligations of the
40
company which are subject to a trust, the trustees of the settlement, and
(d)
if the individual is interested in any shares or obligations of the
company which are part of the estate of a deceased person, the personal
representatives.

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Chapter 1 — Interest payments
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(2)
But, despite subsection (1)(c), the trustees of an employee benefit trust are not
regarded for the purposes of section 394 as the associates of an individual
merely because the individual has an interest in shares or obligations of the
company as a beneficiary of the trust, unless subsection (3) applies.
(3)
This subsection applies if at any time after 26 July 1989 the individual, alone or
5
with associates, or an associate of the individual, alone or with other such
associates—
(a)
has been the beneficial owner of more than 5% of the ordinary share
capital of the company, or
(b)
has been able directly or indirectly to control more than 5% of that share
10
capital.
(4)
In subsection (3) “associate” has the meaning given by section 549(4) of ITEPA
2003.
(5)
Sections 552 to 554 of ITEPA 2003 (attribution of interests in company) apply
for the purposes of subsection (3) in relation to the individual as they apply for
15
the purposes of the provisions listed in section 549(2) of that Act in relation to
an employee.
(6)
In this section—
“control” has the meaning given by section 416(2) to (6) of ICTA,
“employee benefit trust” has the meaning given by section 550 of ITEPA
20
2003 except that the reference in section 550(3) of that Act to 13 March
1989 is to be read as a reference to 26 July 1989, and
“relative” means spouse or civil partner, ancestor or lineal descendant or
brother or sister.
Loans for interests in employee-controlled companies
25
396
Loan to buy interest in employee-controlled company
(1)
This section applies to a loan to an individual that is used in one or more of the
ways specified in subsection (2).
(2)
The ways are—
(a)
acquiring part of the ordinary share capital of a company that—
30
(i)
first becomes an employee-controlled company after the
acquisition, or
(ii)
first became such a company not later than 12 months before the
acquisition, and
(b)
repaying another loan to which this section applies.
35
(3)
For the purposes of this section and section 397, a company is employee-
controlled at any time when—
(a)
more than 50% of the issued ordinary share capital of the company is
owned beneficially by persons who are full-time employees of the
company, and
40
(b)
more than 50% of the voting power in the company is so owned.
(4)
If an individual owns beneficially more than 10% of the issued ordinary share
capital of, or voting power in, a company, for the purposes of subsection (3) the
excess is treated as being owned by an individual who is not a full-time
employee of the company.
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Chapter 1 — Interest payments
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(5)
In this section and section 397 “full-time employee”, in relation to a company,
means an individual the greater part of whose time is spent working as an
employee or director of the company or of a 51% subsidiary of the company.
(6)
This section is subject to section 411 (ineligibility of interest where business is
occupation of commercial woodlands).
5
397
Eligibility requirements for interest on loans within section 396
(1)
Interest on a loan within section 396 to an individual is eligible for relief only if
conditions A to D are met.
(2)
Condition A is that the company is, throughout the period beginning with the
date on which the shares are acquired and ending with the date on which the
10
interest is paid (“the payment date”)—
(a)
an unquoted company that is UK resident and is not resident outside
the United Kingdom, and
(b)
a trading company or the holding company of a trading group.
(3)
Condition B is that during the tax year in which the interest is paid the
15
company either—
(a)
first becomes an employee-controlled company, or
(b)
is such a company throughout a period of at least 9 months.
(4)
Condition C is that—
(a)
the individual is a full-time employee of the company throughout the
20
period beginning with the date on which the loan is used (“the use
date”) and ending with the payment date, or
(b)
the individual ceased to be such an employee not more than 12 months
before the payment date and was such an employee throughout the
period beginning with the use date and ending with the date the
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individual ceased to be such an employee.
(5)
Condition D is that in the period from the use of the loan to the payment of the
interest the individual has not recovered any capital from the company, apart
from any amount taken into account under section 406(2) (recovered capital
that is treated as a repayment of the loan).
30
(6)
In this section—
“holding company” means a company whose business (ignoring any
trade carried on by it) consists wholly or mainly of the holding of shares
or securities of one or more companies which are its 75% subsidiaries,
“trading company” means a company whose business consists wholly or
35
mainly of the carrying on of a trade or trades,
“trading group” means a group the business of whose members taken
together consists wholly or mainly of the carrying on of a trade or
trades (taking a group to consist of a company with one or more 75%
subsidiaries and those subsidiaries), and
40
“unquoted company” means a company none of whose shares is listed in
the Official List of the Stock Exchange.