Finance Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
31

CFCs
47
Controlled foreign companies
Schedule 15 contains provision in relation to controlled foreign companies.
R&D
48
Vaccine research relief: amount of deduction for SMEs
5
(1)
Part 2 of Schedule 13 to FA 2002 (manner of giving effect to vaccine research
relief: small and medium-sized companies) is amended as follows.
(2)
In paragraph 14 (deduction in computing profits of trade), for sub-paragraph
(2) substitute—
    “(2)
The appropriate deduction is 50% of the qualifying expenditure.”
10
(3)
In paragraph 15 (alternative treatment of pre-trading expenditure: deemed
trading loss)—
(a)
in sub-paragraph (2)(b), for the words from “not” to the end substitute
“non-Schedule 20 expenditure.”, and
(b)
after sub-paragraph (6) insert—
15
    “(7)
Qualifying expenditure is “non-Schedule 20 expenditure” if
the company is not entitled to relief under Schedule 20 to the
Finance Act 2000 in respect of it.”
(4)
In paragraph 16 (entitlement to tax credit), for sub-paragraph (3) substitute—
    “(3)
The amount of the surrenderable loss is equal to the lower of A and
20
B where—
A is so much of the trading loss referred to in sub-paragraph (2)
as is unrelieved, and
B is—
(a)
if paragraph 14 applies, the sum of the amount
25
deductible under that paragraph and so much of the
qualifying expenditure mentioned in that paragraph
as is non-Schedule 20 expenditure;
(b)
if paragraph 15 applies, the total deemed trading loss
under that paragraph.”
30
(5)
After sub-paragraph (5) of that paragraph insert—
    “(6)
Paragraph 15(7) (meaning of “non-Schedule 20 expenditure”) applies
for the purposes of sub-paragraph (3).”
(6)
The amendments made by this section have effect in relation to expenditure
incurred on or after 1st April 2007.
35
49
Research and development tax relief: definition of SME etc
(1)
In Part 1 of Schedule 20 to FA 2000 (entitlement to R&D tax relief), paragraph

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Part 3 — Income tax, corporation tax and capital gains tax
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2(1) (meaning of “small or medium-sized enterprise”) is amended as follows.
(2)
Before Qualification 1 insert—

“Qualification A1

In Article 2(1) of the Annex the references to 250 persons, 50 million
euros and 43 million euros are to be read as references to 500 persons,
5
100 million euros and 86 million euros (respectively).”
(3)
In Qualification 1—
(a)
after “micro, small or medium-sized enterprise” insert “(or would be if
the Annex were read as set out in Qualification A1)”;
(b)
at the end insert “(read as set out in Qualification A1)”.
10
(4)
Part 2 of Schedule 13 to FA 2002 (giving effect to VRR tax relief) is amended as
follows.
(5)
After paragraph 15 insert—
“Paragraphs 14 and 15: modifications for larger SMEs claiming R&D tax credits
15A   (1)
This paragraph applies in relation to a company for an accounting
15
period if—
(a)
the company is a larger SME in the accounting period, and
(b)
it claims a tax credit under paragraph 15 of Schedule 20 to the
Finance Act 2000 (R&D tax credit) for the accounting period.
      (2)
The appropriate deduction under paragraph 14 above is 50% of so
20
much of the qualifying expenditure as is non-Schedule 20
expenditure (as defined by paragraph 15(7)).
      (3)
Paragraph 15 above has effect as if sub-paragraph (2)(a) were
omitted.
      (4)
In this paragraph “larger SME” means a company which qualifies as
25
a small or medium-sized enterprise by virtue of Qualification A1 in
paragraph 2(1) of Schedule 20 to the Finance Act 2000.”
(6)
After paragraph 16 insert—
“Entitlement to tax credit: modification for larger SMEs
16A   (1)
Paragraph 16(3) has effect in relation to a larger SME as if for the
30
definition of “B” there were substituted—
“B is 150% of so much of the qualifying expenditure mentioned
in paragraph 14 or 15 as is non-Schedule 20 expenditure.”
      (2)
“Larger SME” has the same meaning as in paragraph 15A.”
(7)
The amendments made by this section have effect in relation to expenditure
35
incurred on or after such day as the Treasury may by order appoint.
(8)
A day before the day on which this Act is passed may be appointed, but not
one before 1st April 2007.
(9)
For the purpose of determining, in relation to expenditure incurred on or after
the appointed day, whether a company is a small or medium-sized enterprise,
40
the amendments are to be treated as always having had effect.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
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Venture capital schemes etc
50
Venture capital schemes etc
Schedule 16 contains provision about venture capital schemes (and provision
consequential on such provision).
REITs
5
51
Real Estate Investment Trusts
(1)
Schedule 17 contains provisions about Real Estate Investment Trusts.
(2)
The amendments made by that Schedule have effect in respect of—
(a)
an accounting period, of a company to which Part 4 of FA 2006 (REITs)
applies, which begins on or after 1st January 2007,
10
(b)
an accounting period, of the principal company of a group to which
that Part applies, which begins on or after 1st January 2007, and
(c)
a distribution to which section 121 of FA 2006 applies and which is
received on or after 1st January 2007.
Alternative finance
15
52
Alternative finance investment bond
(1)
In FA 2005, after section 48 insert—
“48A
Alternative finance arrangements: alternative finance investment
bond: introduction
(1)
Subject to section 52, arrangements fall within this section if—
20
(a)
the arrangements provide for one person (“the bond-holder”) to
pay a sum of money (“the capital”) to another (“the bond-
issuer”),
(b)
the arrangements identify assets, or a class of assets, which the
bond-issuer will acquire for the purpose of generating income
25
or gains directly or indirectly (“the bond assets”),
(c)
the arrangements specify a period at the end of which they
cease to have effect (“the bond term”),
(d)
the bond-issuer undertakes under the arrangements—
(i)
to dispose at the end of the bond term of any bond assets
30
which are still in the bond-issuer’s possession,
(ii)
to make a payment at the end of the bond term to the
bond-holder by way of repayment of the capital (“the
redemption payment”), and
(iii)
to pay to the bond-holder other payments on one or
35
more occasions during or at the end of the bond term
(“additional payments”),
(e)
the amount of the additional payments does not exceed an
amount which would be a reasonable commercial return on a
loan of the capital,
40
(f)
under the arrangements the bond-issuer undertakes to arrange
for the management of the bond assets with a view to

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generating income sufficient to pay the redemption payment
and additional payments,
(g)
the bond-holder is able to transfer the rights under the
arrangements to another person (who thereby becomes the
bond-holder),
5
(h)
the arrangements are a listed security on a recognised stock
exchange (within the meaning of section 1005 of ITA 2007), and
(i)
the arrangements are wholly or partly treated in accordance
with international accounting standards as a financial liability
of the bond-issuer (or would be if the bond-issuer applied those
10
standards).
(2)
For the purposes of subsection (1)—
(a)
the bond-issuer may acquire bond assets before or after the
arrangements take effect,
(b)
bond assets may be property of any kind, including rights in
15
relation to property owned by someone other than the bond-
issuer,
(c)
the identification of the bond assets mentioned in subsection
(1)(b) and the undertakings mentioned in subsection (1)(d) and
(f) may (but need not) be described as, or accompanied by a
20
document described as, a declaration of trust,
(d)
a reference to the management of assets includes a reference to
disposal,
(e)
the bond-holder may (but need not) be entitled under the
arrangements to terminate them, or participate in terminating
25
them, before the end of the bond term,
(f)
the amount of the additional payments may be—
(i)
fixed at the beginning of the bond term,
(ii)
determined wholly or partly by reference to the value of
or income generated by the bond assets, or
30
(iii)
determined in some other way,
(g)
if the amount of the additional payments is not fixed at the
beginning of the bond term, the reference in subsection (1)(e) to
the amount of the additional payments is a reference to the
maximum amount of the additional payments,
35
(h)
the amount of the redemption payment may (but need not) be
subject to reduction in the event of a fall in the value of the bond
assets or in the rate of income generated by them, and
(i)
entitlement to the redemption payment may (but need not) be
capable of being satisfied (whether or not at the option of the
40
bond-issuer or the bond-holder) by the issue or transfer of
shares or other securities.
(3)
An order under section 1005 of ITA 2007 (recognised stock exchanges:
designation) may designate a stock exchange for the purposes of that
section in its application for the purposes of this section only.
45
48B
Alternative finance arrangements: alternative finance investment
bond: effects
(1)
Additional payments under arrangements falling within section 48A
are alternative finance return for the purpose of this Chapter (subject to
the provisions in section 51A about the treatment of discount).
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(2)
For the purposes of an enactment about any tax (and irrespective of the
position for other purposes)—
(a)
a bond-holder shall not be treated as having a legal or beneficial
interest in the bond assets,
(b)
the bond-issuer shall not be treated as a trustee of the bond
5
assets,
(c)
profits and gains accruing to the bond-issuer in connection with
the bond assets are profits and gains of the bond-issuer and not
of the bond-holder (and do not arise to the bond-issuer in a
fiduciary or representative capacity),
10
(d)
payments made by the bond-issuer by way of redemption
payment or additional payment are not made in a fiduciary or
representative capacity, and
(e)
a bond-holder shall not be entitled to relief for capital
expenditure in connection with bond assets.
15
(3)
Arrangements falling within section 48A are securities for the purposes
of an enactment about any tax (including Chapters 1 to 5 of Part 7 of
ITEPA 2003); for which purpose—
(a)
a reference to redemption shall be taken as a reference to
making the redemption payment,
20
(b)
a reference to interest shall be taken as a reference to alternative
finance return, and
(c)
for the purposes of section 84 the bond issuer shall be treated as
being party as debtor to a capital market arrangement.
(4)
Arrangements falling within section 48A are a corporate bond, issued
25
on the date on which the arrangements are entered into, for the
purposes of section 117 of TCGA 1992 (qualifying corporate bonds) if—
(a)
the capital is expressed in sterling,
(b)
the arrangements do not include provision for the redemption
payment to be in a currency other than sterling,
30
(c)
entitlement to the redemption payment is not capable of
conversion (directly or indirectly) into an entitlement to the
issue of securities apart from other arrangements falling within
section 48A, and
(d)
the additional payments are not determined wholly or partly by
35
reference to the value of the bond assets;

and section 117(2) shall have effect for the purposes of this subsection
as for the purposes of section 117(1).
(5)
Arrangements falling within section 48A shall not be treated—
(a)
as a unit trust scheme for the purposes of TCGA 1992,
40
(b)
as a unit trust scheme for the purposes of section 469 of ICTA or
section 1007 of ITA 2007 (distributions),
(c)
as an offshore fund for the purposes of Chapter 5 of Part 17 of
ICTA (offshore funds), or
(d)
as a relevant holding for the purposes of paragraph 4 of
45
Schedule 10 to FA 1996 (loan relationships: collective
investment schemes).
(6)
A bond-issuer is not a securitisation company for the purposes of
section 83 (unless it is one by virtue of arrangements which do not fall
within section 48A).”
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(2)
Chapter 5 of Part 2 of FA 2005 (alternative finance arrangements) is amended
as follows.
(3)
In section 46 (introduction)—
(a)
in subsection (1), after “47A,” insert “48A,”, and
(b)
in subsection (2), after paragraph (d) (before “or” at the end) insert—
5
“(da)
a bond-issuer within the meaning of section 48A below,
but only in relation to any bond assets which are rights
under arrangements falling within section 47 or 47A,”.
(4)
In section 50(1) (treatment of alternative finance arrangements: companies), for
“or 47A” substitute “, 47A or 48A”.
10
(5)
After section 51 insert—
“51A
  Discount
(1)
This section applies where part of the additional payments in respect of
arrangements falling within section 48A equates in substance to
discount (“the discount element”).
15
(2)
The discount element shall not be treated as alternative finance return
for the purposes of income tax.
(3)
The discount element shall be treated—
(a)
in accordance with section 381 of ITTOIA 2005, or
(b)
where the arrangements falling within section 48A are deeply
20
discounted securities for the purpose of Chapter 8 of Part 4 of
ITTOIA 2005, in accordance with that Chapter.”
(6)
In section 52 (provision not at arm’s length)—
(a)
in subsection (1), after “47A,” insert “48A,”,
(b)
in subsection (3), after “47A,” insert “48A,”, and
25
(c)
in subsection (4), for “or 47A” substitute “, 47A or 48A”.
(7)
In section 53 (sale and purchase of asset)—
(a)
in subsection (1) (and in the heading), for “or 47A” substitute “, 47A or
48A”, and
(b)
in subsection (3), after “47A” insert “or 48A”.
30
(8)
In section 54 (return not to be treated as distribution)—
(a)
the existing provision becomes subsection (1),
(b)
after that subsection insert—
“(2)
Neither additional payments nor any part of the redemption
payment under arrangements falling within section 48A are to
35
be treated by virtue of section 209(2)(e)(iii) of ICTA as being a
distribution for the purposes of the Corporation Tax Acts.”, and
(c)
the heading accordingly becomes “Return not to be treated as
distribution”.
(9)
In Schedule 2 (supplementary provision), in paragraph 1(b) (definition of
40
“relevant arrangements”), after “section” insert “48A,”.
(10)
In section 117 of TCGA 1992 (qualifying corporate bonds), after subsection (6C)

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insert—
“(6D)
Section 48B(4) of the Finance Act 2005 (alternative finance
arrangements) provides for certain arrangements falling within section
48A to be a corporate bond for the purposes of this section.”
(11)
In section 127(1)(ca) of FA 1995 (persons not treated as UK representatives), for
5
“subsection (5) of section 47” substitute “Chapter 5 of Part 2”.
(12)
In section 148(5A) of FA 2003 (meaning of “permanent establishment”), for
“subsection (5) of section 47” substitute “Chapter 5 of Part 2”.
(13)
Section 56 of FA 2005 (commencement and transitional) shall have effect in
relation to the commencement of this section—
10
(a)
as if references to Chapter 5 of Part 2 of that Act were references to this
section,
(b)
as if references to 6th April 2005 were references to—
(i)
1st April 2007 in relation to corporation tax, and
(ii)
6th April 2007 in relation to income tax and capital gains tax,
15
and
(c)
as if references to section 49 were references to sections 48A and 48B.
(14)
But—
(a)
for the purposes of income tax and capital gains tax in relation to the
disposal after 6th April 2007 of arrangements to which new section 48A
20
applies (whenever entered into) that section and new section 48B shall
be treated as always having had effect, and
(b)
an order made after the passing of this Act under section 1005 of ITA
2007 (recognised stock exchanges: designation) and by virtue of new
section 48A(3) may be expressed—
25
(i)
to have effect as from 1st April 2007 for the purposes of
arrangements entered into on or after that date, and
(ii)
for the purposes mentioned in paragraph (a), as always having
had effect.
53
Profit share agency
30
In section 49A(3) of FA 2005 (profit share agency: principal not treated as
entitled to agent’s share of profits), insert at the end “(and the agent is treated
as entitled to the profits specified in subsection (1)(c) and (d))”.
Trusts
54
Trust income
35
(1)
In section 686A(2)(a) of ICTA (receipts to be treated as income subject to special
rate of tax: payment by company), after “made” insert “by way of qualifying
distribution”.
(2)
In Type 1(b) in section 482 of ITA 2007 (types of amount to be charged at special
rates for trustees), after “made” insert “by way of qualifying distribution”.
40
(3)
The amendments made by this section have effect in respect of payments made
to the trustees of a settlement on or after 6th April 2006.