Finance Bill

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Session 2007 - 08
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Finance Bill

Finance Bill (Volume II)
Schedule 15 — Changes in trading stock
Part 1 — Income tax
249

(b)
so far as relating to income tax, have effect for the tax year 2008-09
and subsequent tax years.
      (2)
The amendments made by paragraph 3 to 5 also have effect in relation to
deemed surrenders under paragraph 6(1) of Schedule 13.
Schedule 15
Section 35

Changes in trading stock
Part 1
Income tax
1
ITTOIA 2005 is amended as follows.
2
After section 172 insert—
“Chapter 11A
Trade profits: changes in trading stock
Introduction
172A
Meaning of “trading stock”
(1)
In this Chapter “trading stock”, in relation to a trade, means anything
(whether land or other property)—
(a)
which is sold in the ordinary course of trade, or
(b)
which would be so sold if it were mature or its manufacture,
preparation or construction were complete.
(2)
It does not include—
(a)
materials used in the manufacture, preparation or
construction of any such thing,
(b)
any services performed in the ordinary course of the trade, or
(c)
any article produced, or any material used, in the
performance of any such services.
Transfers of trading stock between trade and trader
172B
Trading stock appropriated by trader
(1)
This section applies if trading stock of a person’s trade is
appropriated by the person for any other purpose.
(2)
In calculating the profits of the trade—
(a)
the amount which the stock appropriated would have
realised if sold in the open market at the time of the
appropriation is brought into account as a receipt, and
(b)
the value of anything in fact received for it is left out of
account.

Finance Bill (Volume II)
Schedule 15 — Changes in trading stock
Part 1 — Income tax
250

(3)
The receipt is treated as arising on the date of the appropriation.
172C
Trading stock supplied by trader
(1)
This section applies if something that—
(a)
belongs to a person carrying on a trade, but
(b)
is not trading stock of the trade,

becomes trading stock of the trade.
(2)
In calculating the profits of the trade—
(a)
the cost of the stock is taken to be the amount which it would
have realised if sold in the open market at the time it became
trading stock of the trade, and
(b)
the value of anything in fact given for it is left out of account.
(3)
The cost is treated as being incurred on the date it became trading
stock of the trade.
Other disposals not made in the course of trade
172D
Disposals not made in the course of trade
(1)
This section applies if—
(a)
trading stock of a trade is disposed of otherwise than in the
course of a trade, and
(b)
section 172B does not apply.
(2)
In calculating the profits of the trade—
(a)
the amount which the stock disposed of would have realised
if sold in the open market at the time of the disposal is
brought into account as the receipt, and
(b)
any consideration obtained for it is left out of account.
(3)
The receipt is treated as arising on the date of the disposal.
(4)
This section is subject to section 172F.
172E
Acquisitions not made in the course of trade
(1)
This section applies if—
(a)
trading stock of a trade has been acquired otherwise than in
the course of trade, and
(b)
section 172C does not apply.
(2)
In calculating the profits of the trade—
(a)
the cost of the stock is taken to be the amount which it would
have realised if sold in the open market at the time of the
acquisition, and
(b)
the value of anything in fact given for it is left out of account.
(3)
The cost is treated as being incurred on the date of the acquisition.
(4)
This section is subject to section 172F.

Finance Bill (Volume II)
Schedule 15 — Changes in trading stock
Part 2 — Corporation tax
251

Relationship with transfer pricing rules
172F
Transfer pricing rules to take precedence
(1)
Section 172D or 172E does not apply if the relevant consideration—
(a)
falls to be adjusted for tax purposes under Schedule 28AA to
ICTA, or
(b)
falls within that Schedule without falling to be so adjusted.
(2)
For the purposes of subsection (1)(b), the relevant consideration falls
within Schedule 28AA to ICTA without falling to be adjusted under
that Schedule if—
(a)
the conditions in paragraph 1(1) of that Schedule are met, but
(b)
either—
(i)
the actual provision does not differ from the arm’s
length provision, or
(ii)
the exception in paragraph 8, 10 or 13 of that Schedule
applies.
(3)
In this section “relevant consideration” means—
(a)
in relation to section 172D, the consideration for the disposal
of the stock, and
(b)
in relation to section 172E, the consideration for the
acquisition of the trading stock.”
3
In the heading of Chapter 12 of Part 2, insert at the end insert “on cessation
of trade“.
4
In Schedule 4, in the table in Part 2, after the entry relating to “trade” insert—

“trading stock (in relation to a trade) (in
section 172A”.

Chapter 11 A of Part 2)

Part 2
Corporation tax
Introduction
5     (1)
This Part applies for the purposes of corporation tax.
      (2)
In this Part “trading stock”, in relation to a trade, means anything (whether
land or other property)—
(a)
which is sold in the ordinary course of trade, or
(b)
which would be so sold if it were mature or its manufacture,
preparation or construction were complete.
      (3)
It does not include—
(a)
materials used in the manufacture, preparation or construction of
any such thing,
(b)
any services performed in the ordinary course of the trade, or
(c)
any article produced, or any material used, in the performance of any
such services.

Finance Bill (Volume II)
Schedule 15 — Changes in trading stock
Part 2 — Corporation tax
252

Transfers of trading stock between trade and trader
6     (1)
This paragraph applies if trading stock of a person’s trade is appropriated
by the person for any other purpose.
      (2)
In calculating the profits of the trade—
(a)
the amount which the stock appropriated would have realised if sold
in the open market at the time of the appropriation is brought into
account as a receipt, and
(b)
the value of anything in fact received for it is left out of account.
      (3)
The receipt is treated as arising on the date of the appropriation.
7     (1)
This paragraph applies if something that—
(a)
belongs to a person carrying on a trade, but
(b)
is not trading stock of the trade,

becomes trading stock of the trade.
      (2)
In calculating the profits of the trade—
(a)
the cost of the stock is taken to be the amount which it would have
realised if sold in the open market at the time it became trading stock
of the trade, and
(b)
the value of anything in fact given for it is left out of account.
      (3)
The cost is treated as being incurred on the date it became trading stock of
the trade.
Other disposals not made in the course of trade
8     (1)
This paragraph applies if—
(a)
trading stock of a trade is disposed of otherwise than in the course of
a trade, and
(b)
paragraph 6 does not apply.
      (2)
In calculating the profits of the trade—
(a)
the amount which the stock disposed of would have realised if sold
in the open market at the time of the disposal is brought into account
as the receipt, and
(b)
any consideration obtained for it is left out of account.
      (3)
The receipt is treated as arising on the date of the disposal.
      (4)
This paragraph is subject to paragraph 10.
9     (1)
This paragraph applies if—
(a)
trading stock of a trade has been acquired otherwise than in the
course of trade, and
(b)
paragraph 7 does not apply.
      (2)
In calculating the profits of the trade—
(a)
the cost of the stock is taken to be the amount which it would have
realised if sold in the open market at the time of the acquisition, and
(b)
the value of anything in fact given for it is left out of account.
      (3)
The cost is treated as being incurred on the date of the acquisition.
      (4)
This paragraph is subject to paragraph 10.

Finance Bill (Volume II)
Schedule 16 — Non-residents: investment managers
Part 1 — Eligibility to be UK representative
253

Relationship with transfer pricing rules
10    (1)
Paragraph 8 or 9 does not apply if the relevant consideration—
(a)
falls to be adjusted for tax purposes under Schedule 28AA to ICTA,
or
(b)
falls within that Schedule without falling to be so adjusted.
      (2)
For the purposes of sub-paragraph (1)(b), the relevant consideration falls
within Schedule 28AA to ICTA without falling to be adjusted under that
Schedule if—
(a)
the conditions in paragraph 1(1) of that Schedule are met, but
(b)
either—
(i)
the actual provision does not differ from the arm’s length
provision, or
(ii)
the exception in paragraph 8, 10 or 13 of that Schedule
applies.
      (3)
In this paragraph “relevant consideration” means—
(a)
in relation to paragraph 8, the consideration for the disposal of the
stock, and
(b)
in relation to paragraph 9, the consideration for the acquisition of the
trading stock.
Schedule 16
Section 36

Non-residents: investment managers
Part 1
Eligibility to be UK representative
1
In section 127 of FA 1995 (persons not treated as UK representatives), in
subsection (3)—
(a)
at the end of paragraph (d), insert “and”, and
(b)
omit paragraph (f) (and the word “and” preceding it).
2     (1)
In section 127 of FA 1995, for subsections (12) and (13) substitute—
“(12)
In this section “investment transaction” means any transaction of a
description specified for the purposes of this section in regulations
made by the Commissioners for Her Majesty’s Revenue and
Customs.
(13)
Provision made in regulations under subsection (12) may, in
particular, have effect in relation to the tax year current on the day on
which the regulations are made.”
      (2)
In section 1014(2) of ITA 2007 (orders and regulations under the Income Tax
Acts: excluded powers), after paragraph (b) insert—
“(ba)
section 127(12) of FA 1995,”.

Finance Bill (Volume II)
Schedule 16 — Non-residents: investment managers
Part 3 — Non-residents liable to tax: disregarded investment income or profits
254

Part 2
Eligibility to be agent of independent status
FA 2003
3     (1)
In Schedule 26 of FA 2003 (non-resident companies: transactions through
broker, investment manager or Lloyd’s agent), for paragraph 3(3) and (4)
substitute—
    “(3)
In sub-paragraph (1) “investment transaction” means any
transaction of a description specified for the purposes of this
paragraph in regulations made by the Commissioners for Her
Majesty’s Revenue and Customs.
      (4)
Provision made in regulations under sub-paragraph (3) may, in
particular, have effect in relation to accounting periods current on
the day on which the regulations are made.”
      (2)
In section 828(2) of ICTA (orders and regulations), after “Finance Act 1989”
insert “or paragraph 3(3) of Schedule 26 to the Finance Act 2003”.
ITA 2007
4
ITA 2007 is amended as follows.
5     (1)
Section 827 (meaning of “investment transaction”) is amended as follows.
      (2)
For subsections (2) and (3) substitute—
“(2)
In this section “investment transaction” means any transaction of a
description specified for the purposes of this section in regulations
made by the Commissioners for Her Majesty’s Revenue and
Customs.
(3)
Provision made in regulations under subsection (2) may, in
particular, have effect in relation to the tax year current on the day on
which the regulations are made.”
6     (1)
Section 1014(2) (orders and regulations under the Income Tax Acts:
excluded powers) is amended as follows.
      (2)
In paragraph (g)(iia), omit “and”.
      (3)
After paragraph (g)(iia) insert—
“(iib)
section 827(2) (meaning of “investment transaction”),
and”.
Part 3
Non-residents liable to tax: disregarded investment income or profits
FA 2003
7
FA 2003 is amended as follows.
8     (1)
Section 152 (non-resident companies: transactions carried out through
broker, investment manager or Lloyd’s agent) is amended as follows.

Finance Bill (Volume II)
Schedule 16 — Non-residents: investment managers
Part 3 — Non-residents liable to tax: disregarded investment income or profits
255

      (2)
The existing provision of section 152 becomes subsection (1) of that section.
      (3)
After subsection (1) insert—
“(2)
Schedule 26 also contains provision about disregarding profits of
certain investment transactions carried out on behalf of non-resident
companies when attributing profits under section 11AA of the Taxes
Act 1988.”
9     (1)
Schedule 26 (non-resident companies: transactions through broker,
investment manager or Lloyd’s agent) is amended as follows.
      (2)
In paragraph 3(2)—
(a)
at the end of paragraph (d), insert “and”, and
(b)
omit paragraph (f) (and the “and” before it).
      (3)
Omit paragraph 4(5).
      (4)
After paragraph 5 insert—
“Profits attributable to permanent establishment: disregard of profits of certain
investment transactions
5A    (1)
This paragraph applies if—
(a)
an investment manager carries out one or more investment
transactions (“relevant investment transactions”) on behalf
of a non-resident company (whether or not the investment
manager also carries out other transactions of any kind on
behalf of the company), and
(b)
as regards the non-resident company, the investment
manager is not regarded as an agent of independent status
acting in the ordinary course of his business (whether
because conditions in paragraph 3 are not met in relation
to relevant investment transactions or otherwise).
      (2)
In determining under section 11AA of the Taxes Act 1988 the
amount of the profits attributable to the permanent establishment
represented by the investment manager acting as an agent on
behalf of the non-resident company, chargeable profits that derive
from a relevant investment transaction are to be disregarded in
either of the following cases.
      (3)
The first case is where the conditions in paragraph 3 are met in
relation to the transaction.
      (4)
The second case is where the conditions in paragraph 3, except for
the requirements of the 20% rule, are met in relation to the relevant
investment transaction.
      (5)
But, in the second case, the chargeable profits are to be
disregarded only to the extent that they do not represent relevant
excluded income of the company to which the investment
manager or a person connected with the investment manager has
or has had any beneficial entitlement.
      (6)
Expressions used in this paragraph and in paragraph 3 or 4 have
the same meaning in this paragraph as in paragraph 3 or 4.”