Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
108

no-one else) has the right or obligation under the arrangement to acquire the
asset disposed of by that disposal at any subsequent time (whether or not the
right or obligation is subject to any conditions).”
      (3)
In subsection (3) (condition B: asset ceases to exist)—
(a)
in paragraph (a), for “subsequently ceases” substitute “will
5
subsequently cease”, and
(b)
in paragraph (b), for “that asset was held” substitute “it is intended
that that asset will be held”.
      (4)
After subsection (4) insert—
“(4A)
If, at any time after that disposal, it becomes apparent that—
10
(a)
the person making the disposal will not subsequently acquire
under the arrangement the asset disposed of by that disposal,
or
(b)
that asset will not be held as mentioned in subsection (3)(b),

that person is to be treated for the purposes of this Act as disposing
15
of that asset at that time for a consideration equal to its market value
at that time.”
      (5)
In subsection (5) (disregard of subsequent acquisitions), for “Any” substitute
“Except in a case falling within subsection (4A), any”.
      (6)
The amendments made by this paragraph have effect in relation to disposals
20
made on or after 6th March 2007.
      (7)
The amendments made by this paragraph also have effect in relation to any
disposal made by a person before that date if the person makes a claim to
that effect under this sub-paragraph.
Manufactured payments under arrangements having an unallowable purpose
25
9     (1)
In paragraph 7A(10) of Schedule 23A to ICTA (manufactured payments
under arrangements having an unallowable purpose), in the definition of
“manufactured payment”, after paragraph (c) insert—
“(d)
any payment which by virtue of paragraph 7(1)
constitutes a fee;”.
30
      (2)
The amendment made by sub-paragraph (1) has effect in relation to
payments made (or treated as made) on or after 6th December 2006.
      (3)
But, in the case of any payment made (or treated as made) by a company in
pursuance of old arrangements, that amendment has no effect in relation to
so much of the payment as (on such just and reasonable apportionments as
35
may be necessary) represents any old taxable income or gains arising or
accruing to the company as a result of those arrangements.
      (4)
For this purpose—
“old arrangements” means arrangements in pursuance of which (or of
any part of which) a transaction has taken place before 6th December
40
2006, and
“old taxable income or gains arising or accruing” means income or
gains within the charge to corporation tax arising or accruing (or
treated as arising or accruing) before that date.

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
109

Options and groups of companies
10    (1)
In section 171(2) of TCGA 1992 (exceptions to rule that disposals within the
same group of companies produce neither a gain nor a loss), after paragraph
(da) insert “or
(db)
a disposal by company A in fulfilment of its obligations
5
under an option granted to company B at a time when those
companies were not members of the same group;”.
      (2)
The amendment made by sub-paragraph (1) has effect in relation to cases
where the option is exercised on or after 6th March 2007 (whenever the
option was granted).
10
Shares treated as loan relationships
11    (1)
Section 91A of FA 1996 (shares subject to outstanding third party
obligations) is amended as follows.
      (2)
In subsection (4) (debits in respect of certain transactions to be ignored), for
“No debits are to be brought into account” substitute “In determining those
15
debits and credits there are to be left out of account amounts”.
      (3)
Insert at the end—
“(11)
In this section “share” does not include a share in a building society.”
      (4)
The amendment made by sub-paragraph (2) has effect in relation to
accounting periods ending on or after 6th March 2007.
20
      (5)
But, in relation to accounting periods beginning before that date, amounts
are to be left out of account as a result of that amendment only if they relate
to any time on or after that date.
      (6)
The amendment made by sub-paragraph (3) has effect in relation to shares
held on or after 6th March 2007.
25
12    (1)
Section 91B of FA 1996 (non-qualifying shares) is amended as follows.
      (2)
In subsection (4) (debits in respect of certain transactions to be ignored), for
“no debits are to be brought into account” substitute “in determining those
debits and credits there are to be left out of account amounts”.
      (3)
Insert at the end—
30
“(8)
In this section “share” does not include a share in a building society.”
      (4)
The amendment made by sub-paragraph (2) has effect in relation to
accounting periods ending on or after 6th March 2007.
      (5)
But, in relation to accounting periods beginning before that date, amounts
are to be left out of account as a result of that amendment only if they relate
35
to any time on or after that date.
      (6)
The amendment made by sub-paragraph (3) has effect in relation to shares
held on or after 6th March 2007.
13    (1)
In section 103(1) of FA 1996 (interpretation of Chapter 2 of Part 4), in the
definition of “share”, before “, in relation to a company,” insert “(except in
40
sections 91A to 91G)”.

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
110

      (2)
The amendment made by sub-paragraph (1) has effect in relation to shares
held on or after 6th March 2007.
Exchange gains and losses where loan not on arm’s length terms
14    (1)
In paragraph 11A of Schedule 9 to FA 1996 (exchange gains and losses where
loan not on arm’s length terms), insert at the end—
5
    “(7)
Where—
(a)
a company would be treated as having a debtor
relationship in any accounting period if a claim were made
under paragraph 6D(2) of Schedule 28AA to the Taxes Act
1988 in relation to that period, and
10
(b)
for that period there is a connection between that company
and the company which would have the corresponding
creditor relationship,

it shall be assumed that such a claim is made for the purpose of
determining the debits or credits to be brought into account for the
15
purposes of this Chapter in respect of any exchange gains or losses
arising in that period in respect of the liability representing that
debtor relationship.
      (8)
Section 87(3) and (4) (connection between a company and another
person) apply for the purposes of sub-paragraph (7)(b) above as
20
they apply for the purposes of section 87.
      (9)
Where, by virtue of any claim made (or assumed by virtue of sub-
paragraph (7) above to be made) under paragraph 6D(2) of
Schedule 28AA to the Taxes Act 1988, more than one company is
treated for any purpose as having a debtor relationship
25
represented by the same liability—
(a)
the total debtor exchange gains must not exceed the total
creditor exchange losses, and
(b)
the total debtor exchange losses must not exceed the total
creditor exchange gains.
30
     (10)
For the purposes of sub-paragraph (9) above—
(a)
any reference to the total debtor exchange gains is to the
total amount of the credits brought into account for the
purposes of this Chapter in respect of exchange gains from
those debtor relationships,
35
(b)
any reference to the total debtor exchange losses is to the
total amount of the debits brought into account for those
purposes in respect of exchange losses from those debtor
relationships,
(c)
any reference to the total creditor exchange gains is to the
40
total amount of the credits brought into account for those
purposes in respect of exchange gains from the
corresponding creditor relationship, and
(d)
any reference to the total creditor exchange losses is to the
total amount of the debits brought into account for those
45
purposes in respect of exchange losses from that
relationship.”

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
111

      (2)
The amendment made by sub-paragraph (1) has effect in relation to loan
relationships of any company in accounting periods ending on or after 6th
December 2006.
      (3)
But, in relation to an accounting period of any company beginning before
that date, that amendment has no effect if the company ceases to be a party
5
to the loan relationship before that date.
Loan relationships and collective investment schemes
15    (1)
Paragraph 4 of Schedule 10 to FA 1996 (company holdings in unit trusts and
offshore funds) is amended as follows.
      (2)
In sub-paragraph (2) (relevant holding treated as rights under creditor
10
relationship), for “and (4)” substitute “to (5)”.
      (3)
After sub-paragraph (4) insert—
    “(5)
In determining the debits and credits under sub-paragraph (3)
there shall be left out of account amounts relating to any
investment of the scheme or fund where—
15
(a)
the investment was made with the relevant avoidance
intention, or
(b)
any transaction (or series of transactions) was entered into
in relation to the investment with that intention.
      (6)
The relevant avoidance intention is the intention of—
20
(a)
eliminating or reducing the credits to be brought into
account for the purposes of this Chapter as respects the
company’s relevant holdings, or
(b)
creating or increasing the debits to be so brought into
account.”
25
      (4)
The amendments made by this paragraph have effect in relation to
accounting periods ending on or after 6th March 2007.
      (5)
But, in relation to accounting periods beginning before that date, amounts
are to be left out of account as a result of those amendments only if they
relate to any time on or after that date.
30
Plant or machinery subject to a lease and finance leaseback
16    (1)
Chapter 17 of Part 2 of CAA 2001 (plant and machinery allowances: anti-
avoidance) is amended as follows.
      (2)
In section 228A(2) (application of sections 228B to 228D in case of a lease and
finance leaseback), for “Sections 228B to 228D” substitute “Sections 228B and
35
228C”.
      (3)
In section 228F (lease and finance leaseback)—
(a)
in subsection (1), for “Sections 228B, 228C and 228D” substitute
“Sections 228B and 228C”,
(b)
omit subsection (4), and
40
(c)
in subsection (8), for “sections 228B to 228D” substitute “sections
228B and 228C” and omit paragraph (b) (together with the “and”
before it).

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Schedule 5 — Avoidance involving financial arrangements
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      (4)
In section 774E(5)(b) of ICTA (structured finance arrangements: exceptions),
for “sections 228B to 228D” substitute “sections 228B and 228C”.
      (5)
The amendments made by this paragraph have effect in relation to post-
commencement rentals that fall to be taken into account in calculating for tax
purposes the income or profits for any post-commencement period of
5
account.
      (6)
In this paragraph—
“post-commencement period of account” means any period of account
ending on or after 6th December 2006, and
“post-commencement rental” means—
10
(a)
any amount receivable on or after 6th December 2006 in
respect of any period beginning on or after that date, or
(b)
the appropriate fraction of any amount receivable on or after
that date in respect of any period beginning before, and
ending on or after, that date,
15
but does not include any amount received before that date.
      (7)
For this purpose the “appropriate fraction”, in relation to any amount
received in respect of any period, means the fraction—

where—
“PCP” means the number of days in the part of the period falling on or
20
after 6th December 2006, and
“WP” means the number of days in the whole of the period.
      (8)
Sub-paragraph (9) applies if the amounts that, in accordance with section
228D of CAA 2001 as applied by section 228F of that Act, fall to be taken into
account in calculating for tax purposes the income or profits for any post-
25
commencement period of account comprise both post-commencement
rentals and other amounts.
      (9)
For the purposes of section 228D of CAA 2001 as applied by section 228F of
that Act, the amount of the gross earnings is taken to be so much of the gross
earnings as, on a just and reasonable basis, relates to those other amounts.
30

“Gross earnings” has the meaning given by section 228D(5) of CAA 2001.
Derivative contracts: contracts treated for accounting purposes as financial asset or liability
17    (1)
In paragraph 17A of Schedule 26 to FA 2002 (computation in accordance
with generally accepted accounting practice), after sub-paragraph (1)
insert—
35
   “(1A)
But, in the case of a contract which is a derivative contract for the
purposes of this Schedule by virtue of paragraph 3(1)(b) (contracts
treated for accounting purposes as financial asset or liability), the
amounts to be so brought into account as respects the contract
must be determined on the basis of fair value accounting.”
40
      (2)
The amendment made by sub-paragraph (1) has effect in relation to periods
of account ending on or after 6th March 2007.

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Schedule 5 — Avoidance involving financial arrangements
113

      (3)
But, in relation to a period of account beginning before that date, the fair
value of the derivative contract at the beginning of that period is to be taken
to be the carrying value of the contract recognised for accounting purposes
at the beginning of that period.
      (4)
For this purpose “carrying value” has the same meaning as it has for the
5
purposes of paragraph 50A of Schedule 26 to FA 2002.
Derivative contracts: transfers of value to connected companies
18    (1)
Paragraph 26 of Schedule 26 to FA 2002 (transfers of value to connected
companies) is amended as follows.
      (2)
In sub-paragraph (1)(a) (transfer of value between connected companies as
10
a result of expiry of option), for “the expiry of an option of a company which,
until its expiry,” substitute “the failure to exercise in full all the rights under
an option of a company which, until that failure,”.
      (3)
In sub-paragraph (2) (rules for determining whether there is a transfer of
value)—
15
(a)
in paragraph (a), for “the option would not have expired” substitute
“all the rights under the option would have been exercised in full”,
and
(b)
in paragraph (b), for “it would have been exercised on the date on
which it expired” substitute “all those rights would have been
20
exercised in full on the latest date on which they were exercisable”.
      (4)
In sub-paragraph (3) (transferor to bring into account amount in respect of
the option), for “the expiry of the option” substitute “an option”.
      (5)
In sub-paragraph (4) (period in which amount is to be brought into account
and the amount to be brought into account)—
25
(a)
in paragraph (a), after “the option expired” insert “or would have
expired if none of the rights under it had been exercised”, and
(b)
for paragraph (b) substitute—
“(b)
the appropriate amount—
(i)
if the option expired, is the amount (if any)
30
paid by the transferor to the transferee for
the grant of the option by the transferee,
and
(ii)
if any rights under the option were
exercised (in whole or in part), is the
35
amount (if any) so paid less so much of it as
is referrable, on a just and reasonable basis,
to the rights which have been so exercised.”
      (6)
The amendments made by this paragraph have effect in relation to any
failure on or after 6th March 2007 to exercise in full all the rights under an
40
option.