Finance Bill

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Session 2007 - 08
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Finance Bill

Finance Bill (Volume II)
Schedule 22 — Avoidance involving financial arrangements
305

      (4)
In determining the credits to be brought into account by the
company for the period for the purposes of this Schedule, it is to
be assumed that the whole of the consideration is recognised in
determining the company’s profit or loss for the relevant
accounting period.
      (5)
But this paragraph does not apply if paragraph 1(2) of Schedule
28AA to the Taxes Act 1988 (provision not at arm’s length)
operates in relation to the disposal so as to increase the tax liability
of the company.”
      (3)
The amendments made by this paragraph have effect in relation to disposals
on or after 16 May 2008.
Avoidance relying on continuity of treatment provisions
5     (1)
In paragraph 12 of Schedule 9 to FA 1996 (loan relationships: continuity of
treatment), after sub-paragraph (2C) insert—
   “(2D)
This paragraph does not apply where—
(a)
the transferor company is party to arrangements in
accordance with which there is likely to be a transfer of
rights or liabilities under the loan relationship by the
transferee company to another person in circumstances in
which this paragraph would not apply, and
(b)
the purpose, or one of the main purposes, of the
arrangements is to secure a tax advantage for the
transferor company or a person connected with it.
     (2E)
In sub-paragraph (2D) above—
(a)
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions,
(b)
“tax advantage” has the meaning given by section 840ZA
of the Taxes Act 1988, and
(c)
“transfer” includes any arrangement which equates in
substance to a transfer (including an acquisition or
disposal, or increase or decrease, in a share of the profits or
assets of a partnership);

and section 839 of the Taxes Act 1988 (connected persons) applies
for the purposes of that sub-paragraph.
     (2F)
This paragraph does not apply in relation to a disposal if
paragraph 11B above applies in relation to it.”
      (2)
In paragraph 28 of Schedule 26 to FA 2002 (derivative contracts: continuity
of treatment), after sub-paragraph (3ZA) insert—
  “(3ZB)
This paragraph does not apply where—
(a)
the transferor company is party to arrangements in
accordance with which there is likely to be a transfer of
rights or liabilities under the derivative contract by the
transferee company to another person in circumstances in
which this paragraph would not apply, and
(b)
the purpose, or one of the main purposes, of the
arrangements is to secure a tax advantage for the
transferor company or a person connected with it.

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Schedule 22 — Avoidance involving financial arrangements
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    (3ZC)
In sub-paragraph (3ZB) above—
(a)
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions,
(b)
“tax advantage” has the meaning given by section 840ZA
of the Taxes Act 1988, and
(c)
“transfer” includes any arrangement which equates in
substance to a transfer (including an acquisition or
disposal, or increase or decrease, in a share of the profits or
assets of a partnership);

and section 839 of the Taxes Act 1988 (connected persons) applies
for the purposes of that sub-paragraph.
    (3ZD)
This paragraph does not apply in relation to a disposal if
paragraph 27A applies in relation to it.”
      (3)
The amendments made by this paragraph have effect in relation to
transactions taking place, or a series of transactions of which the first takes
place, on or after 16 May 2008.
Distributions from shares treated as loan relationships
6     (1)
In FA 1996, in—
(a)
section 91A(2)(b) (distributions in respect of shares subject to
outstanding third party obligations), and
(b)
section 91B(2)(b) (distributions in respect of non-qualifying shares),

omit “falling within section 209(2)(a) or (b) of the Taxes Act 1988”.
      (2)
The repeals made by sub-paragraph (1) have effect in relation to
distributions on or after 9 October 2007.
Depreciatory transactions
7     (1)
Section 91A of FA 1996 (shares treated as loan relationship: shares subject to
outstanding third party obligations which are interest-like investments) is
amended as follows.
      (2)
After subsection (2) insert—
“(2A)
No debits are to be brought into account by the investing company
for the purposes of this Chapter as respects the share.”
      (3)
In subsections (3) and (4), omit “debits and”.
8     (1)
Section 91B of FA 1996 (shares treated as loan relationship: non-qualifying
shares) is amended as follows.
      (2)
After subsection (2) insert—
“(2A)
No debits are to be brought into account by the investing company
for the purposes of this Chapter as respects the share.”
      (3)
In subsections (3) and (4), omit “debits and”.
      (4)
After subsection (6) insert—
“(6A)
Where a share is a non-qualifying share for the purposes of this
section by reason of the Condition in section 91E being satisfied—
(a)
subsection (2A) does not apply in relation to the share, but

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Schedule 22 — Avoidance involving financial arrangements
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(b)
the amount of the debits brought into account by the
investing company as respects the share are not to exceed the
amount of the credits brought into account in respect of the
associated transactions under Schedule 26 to the Finance Act
2002.”
9
The amendments made by paragraphs 5 and 6 have effect in relation to
accounting periods ending on or after 12 March 2008 but, in the case of an
accounting period beginning before that date, only if the debits relate to any
time on or after that date.
Falsifying transactions
10    (1)
Section 91A of FA 1996 (shares treated as loan relationship: shares subject to
outstanding third party obligations) is amended as follows.
      (2)
In subsection (7), for “paragraph (b) above” substitute “this subsection”.
      (3)
In subsection (8)(b), after “will be” insert “or has been”.
11    (1)
Section 91C of FA 1996 (shares treated as loan relationship: shares likely to
increase in value at rate representing return on investment of money) is
amended as follows.
      (2)
In subsection (1), for “paragraph (b) above” substitute “this subsection”.
      (3)
In subsection (6), for “entered into by the investing company” substitute “or
has been entered into”.
12
The amendments made by paragraphs 8 and 9 have effect in relation to times
on or after 12 March 2008.
Non-qualifying shares
13    (1)
In section 91B(5)(a) of FA 1996 (debits and credits to be brought into account
where Condition 3 in section 91E is satisfied), omit “by the investing
company”.
      (2)
The repeal made by sub-paragraph (1) has effect in relation to credits and
debits relating to any time on or after 16 May 2008.
Income producing assets
14    (1)
In section 91C(3) of FA 1996 (assets which are income producing), for
paragraph (c) substitute—
“(c)
any share as respects which the condition in section 91D(1)(b)
below is satisfied;”.
      (2)
The amendment made by sub-paragraph (1) has effect in relation to times on
or after 16 May 2008.
Exit arrangements
15    (1)
In section 91D(2) of FA 1996 (shares treated as loan relationship: redeemable
shares), omit “or” at the end of paragraph (a) and insert at the end “or
(c)
it is reasonable to assume that the investing company will or
might become entitled to qualifying redemption amounts.”

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Schedule 22 — Avoidance involving financial arrangements
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      (2)
The amendment made by sub-paragraph (1) has effect in relation to times on
or after 12 March 2008.
Schemes etc designed to reproduce interest-like return
16    (1)
Section 91E of FA 1996 (shares treated as loan relationship: schemes etc
designed to produce return equating to return on investment of money at
interest) is amended as follows.
      (2)
In subsection (1)—
(a)
after “arrangement” insert “(whether or not the investing company is
a party to it)”, and
(b)
after “return” insert “(for any one or more persons)”.
      (3)
In subsection (3), insert at the end (but not as part of paragraph (d))—

          “and acquiring rights or receiving benefits in respect of other shares.”
      (4)
The amendments made by this paragraph have effect in relation to times on
or after 12 March 2008.
Partnerships
17    (1)
In FA 1996, after section 91G insert—
“Partnerships
91H
Payments in return for capital contribution
(1)
This section applies where a company is a party to relevant
arrangements under which—
(a)
a partnership of which it is a member is or may become
entitled to receive a capital contribution from any person
(whether directly or indirectly), and
(b)
that person, or a person connected with that person, receives
a sum of money or other asset from the company (whether
directly or indirectly).
(2)
In subsection (1) “relevant arrangements” means arrangements—
(a)
which are designed to produce for the company a return
which equates, in substance, to a return on the investment of
the money or other asset at a commercial rate of interest, and
(b)
the purpose or one of the main purposes of the arrangements
is to secure a tax advantage.
(3)
The return is to be treated for the purposes of this Chapter as a profit
from a loan relationship of the company; and the credits to be
brought into account in respect of the loan relationship are to be
determined on the amortised cost basis of accounting.
(4)
But where the return to any extent represents partnership profits in
respect of which the company is chargeable to corporation tax
(whether for the same or any earlier accounting period), the charge
to corporation tax is to be reduced to such extent as is just and
reasonable.

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(5)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of subsection (1).
(6)
In subsection (2)—
(a)
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions, and
(b)
“tax advantage” has the meaning given by section 840ZA of
the Taxes Act 1988.
91I
Change of partnership shares
(1)
This section applies where a company is a party to relevant
arrangements under which—
(a)
the company makes a capital contribution to a partnership of
which it is a member,
(b)
profits of the partnership fall to be shared in a way such that
the company is not allocated the whole of its due share of the
profits, and
(c)
the capital of the partnership falls to be shared in a way such
that the company or a person connected with the company is
entitled to more than the whole of its due share of the capital.
(2)
In subsection (1) “relevant arrangements” means arrangements—
(a)
which are designed to produce for the company a return
which equates, in substance, to a return on the investment of
the capital contribution at a commercial rate of interest, and
(b)
the purpose or one of the main purposes of the arrangements
is to secure a tax advantage.
(3)
The return is to be treated for the purposes of this Chapter as a profit
from a loan relationship of the company; and the credits to be
brought into account in respect of the loan relationship are to be
determined on the amortised cost basis of accounting.
(4)
But where the return to any extent represents partnership profits in
respect of which the company is chargeable to corporation tax
(whether for the same or any earlier accounting period), the charge
to corporation tax is to be reduced to such extent as is just and
reasonable.
(5)
For the purposes of subsection (1) a company’s “due share” of any
profits or capital is the share that the company would have been
allocated or entitled to if allocation or entitlement were determined
by reference to the proportion of the total capital contributed to the
partnership that was contributed by it.
(6)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of subsection (1).
(7)
In subsection (2)—
(a)
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions, and
(b)
“tax advantage” has the meaning given by section 840ZA of
the Taxes Act 1988.”

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      (2)
In section 131 of FA 2004 (companies in partnership), insert at the end—
“(10)
Subsection (4) does not apply if and to the extent that the chargeable
amount is brought into account under section 91H or 91I of the
Finance Act 1996.”
      (3)
The amendments made by this paragraph have effect in relation to returns
arising on or after 12 March 2008.
Loan relationships treated differently by debtor and creditor
18    (1)
In FA 1996, after section 94A insert—
“94B
Loan relationships treated differently by connected debtor and
creditor
(1)
This section applies where there are two companies which are
connected and conditions A, B and C are met.
(2)
Condition A is that one of the companies (“the debtor company”), in
accordance with generally accepted accounting practice, treats the
rights and liabilities under a loan relationship to which it is a party
as debtor as divided between—
(a)
rights and liabilities under a loan relationship (“the host
contract”), and
(b)
rights and liabilities under one or more derivative financial
instruments or equity instruments.
(3)
Condition B is that the other company is party to the loan
relationship as creditor (“the creditor company”) and, in accordance
with generally accepted accounting practice, does not treat its rights
and liabilities under the loan relationship as so divided.
(4)
Condition C is that the debits brought into account by the debtor
company under this Chapter in respect of the host contract for any
accounting period exceed the credits brought into account
(otherwise than by virtue of this section) in respect of the loan
relationship by the creditor company for the corresponding
accounting period or periods of the creditor company.
(5)
The creditor company is to be treated for the purposes of this
Chapter as bringing into account for the corresponding accounting
period or periods additional credits in respect of the loan
relationship of an amount equal to the excess.
(6)
But where the creditor company is party to the loan relationship as
creditor during only part of the corresponding accounting period (or
any of the corresponding periods) it is to be treated for those
purposes as bringing into account for the period only such portion of
the excess as is just and reasonable.
(7)
The references in this section to a company which is party to a loan
relationship as debtor or creditor include a company which
indirectly stands in the position of a debtor or creditor as respects the
loan relationship by reference to a series of loan relationships or
money debts which would be loan relationships if a company
directly stood in the position of debtor or creditor.

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(8)
For the purposes of this section an accounting period of the creditor
company corresponds with an accounting period of the debtor
company if it coincides with it or falls wholly or partly within it.
(9)
Where a corresponding accounting period of the creditor company
does not coincide with that of the debtor company such
apportionments as are just and reasonable are to be made for the
purposes of this section.
(10)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of this section; but two companies are also connected for
the purposes of this section if their accounting results are reflected in
the consolidated group accounts of a group of companies.”
      (2)
In paragraph 7 of Schedule 6 to F(No.2)A 2005 (loan relationships with
embedded derivatives), after sub-paragraph (1) insert—
   “(1A)
An election under this paragraph does not have effect in relation
to any relevant assets in the case of which section 94B of FA 1996
applies.”
      (3)
The amendments made by sub-paragraph (1) have effect in relation to debits
and credits arising on or after 12 March 2008.
      (4)
The amendment made by sub-paragraph (2) has effect in relation to elections
made on or after that date.
Commercial rate of interest
19    (1)
In section 103 of FA 1996 (interpretation of Chapter 2 of Part 4), omit
subsections (3A) and (3B) (meaning of “commercial rate of interest”).
      (2)
Accordingly—
(a)
in section 91A(7)(a) of FA 1996, omit “(see section 103(3A))”, and
(b)
in Schedule 7 to F(No.2)A 2005, omit paragraph 13.
      (3)
The amendments made by this paragraph have effect in relation to times on
or after 12 March 2008.
Derivative contracts
20    (1)
Schedule 26 to FA 2002 (derivative contracts) is amended as follows.
      (2)
In paragraph 3(1)(b)(ii) (contract must be treated for accounting purposes as
financial asset or liability), for “is treated for accounting purposes as, or as
forming” substitute “for accounting purposes is, or forms”.
      (3)
In paragraph 4(2)(b) (contracts excluded by virtue of underlying subject
matter) after “(2D)” insert “and which are not designed to produce a return
which equates, in substance, to the return on an investment of money at a
commercial rate of interest”.
      (4)
The amendments made by this paragraph have effect in relation to
accounting periods ending on or after 12 March 2008.
      (5)
But where a company was, immediately before that date, a party to a
relevant contract that becomes a derivative contract for the purposes of
Schedule 26 to FA 2002 by virtue of those amendments, it is to be regarded
for those purposes as having been entered into by the company on that date