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Corporation Tax Bill


Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

239

 

502     

Meaning of “financial institution”

(1)   

In this Chapter “financial institution” means—

(a)   

a bank, as defined by section 840A of ICTA,

(b)   

a building society within the meaning of the Building Societies Act 1986

(c. 53),

5

(c)   

a wholly-owned subsidiary of a bank within paragraph (a) or a

building society within paragraph (b),

(d)   

a person authorised by a licence under Part 3 of the Consumer Credit

Act 1974 (c. 39) to carry on a consumer credit business or consumer hire

business within the meaning of that Act,

10

(e)   

a bond-issuer, within the meaning of section 507, but only in relation to

any bond assets which are rights under purchase and resale

arrangements or diminishing shared ownership arrangements, or

(f)   

a person authorised in a jurisdiction outside the United Kingdom—

(i)   

to receive deposits or other repayable funds from the public,

15

and

(ii)   

to grant credits for its own account.

(2)   

For the purposes of subsection (1)(c) a company is a wholly-owned subsidiary

of a bank or building society (“the parent”) if it has no members except—

(a)   

the parent or persons acting on behalf of the parent, and

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(b)   

the parent’s wholly-owned subsidiaries or persons acting on behalf of

the parent’s wholly-owned subsidiaries.

Arrangements that are alternative finance arrangements

503     

Purchase and resale arrangements

(1)   

This section applies to arrangements if—

25

(a)   

they are entered into between two persons (“the first purchaser” and

“the second purchaser”), one or both of whom are financial institutions,

and

(b)   

under the arrangements—

(i)   

the first purchaser purchases an asset and sells it to the second

30

purchaser,

(ii)   

the sale occurs immediately after the purchase or in the

circumstances mentioned in subsection (2),

(iii)   

all or part of the second purchase price is not required to be paid

until a date later than that of the sale,

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(iv)   

the second purchase price exceeds the first purchase price, and

(v)   

the excess equates, in substance, to the return on an investment

of money at interest.

(2)   

The circumstances are that—

(a)   

the first purchaser is a financial institution, and

40

(b)   

the asset referred to in subsection (1)(b)(i) was purchased by the first

purchaser for the purpose of entering into arrangements within this

section.

(3)   

In this section—

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

240

 

“the first purchase price” means the amount paid by the first purchaser in

respect of the purchase, and

“the second purchase price” means the amount payable by the second

purchaser in respect of the sale.

(4)   

This section is subject to section 508 (provision not at arm’s length: exclusion

5

of arrangements from this section and sections 504 to 507).

504     

Diminishing shared ownership arrangements

(1)   

This section applies to arrangements if under them—

(a)   

a financial institution (“the first owner”) acquires a beneficial interest in

an asset,

10

(b)   

another person (“the eventual owner”) also acquires a beneficial

interest in it,

(c)   

the eventual owner is to make payments to the first owner amounting

in aggregate to the consideration paid for the acquisition of the first

owner’s beneficial interest (but subject to any adjustment required for

15

such a reduction as is mentioned in subsection (5)),

(d)   

the eventual owner is to acquire the first owner’s beneficial interest

(whether or not in stages) as a result of those payments,

(e)   

the eventual owner is to make other payments to the first owner

(whether under a lease forming part of the arrangements, or

20

otherwise),

(f)   

the eventual owner has the exclusive right to occupy or otherwise to

use the asset, and

(g)   

the eventual owner is exclusively entitled to any income, profit or gain

arising from or attributable to the asset (including, in particular, an

25

increase in its value).

(2)   

For the purposes of subsection (1)(a) it does not matter if—

(a)   

the first owner acquires its beneficial interest from the eventual owner,

(b)   

the eventual owner, or another person who is not the first owner, also

has a beneficial interest in the asset, or

30

(c)   

the first owner also has a legal interest in it.

(3)   

Subsection (1)(f) does not prevent the eventual owner from granting an interest

or right in relation to the asset if the conditions in subsection (4) are met.

(4)   

The conditions are that—

(a)   

the grant is not to—

35

(i)   

the first owner,

(ii)   

a person controlled by the first owner, or

(iii)   

a person controlled by a person who also controls the first

owner, and

(b)   

the grant is not required by the first owner or arrangements to which

40

the first owner is a party.

(5)   

Subsection (1)(g) does not prevent the first owner from—

(a)   

having responsibility for any reduction in the asset’s value, or

(b)   

having a share in a loss arising out of any such reduction.

(6)   

This section is subject to section 508 (provision not at arm’s length: exclusion

45

of arrangements from section 503, this section and sections 505 to 507).

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

241

 

505     

Deposit arrangements

(1)   

This section applies to arrangements if under them—

(a)   

a person (“the depositor”) deposits money with a financial institution,

(b)   

the money, together with money deposited with the institution by

other persons, is used by it with a view to producing a profit,

5

(c)   

from time to time the institution makes or credits a payment to the

depositor out of profit resulting from the use of the money,

(d)   

the payment is in proportion to the amount deposited by the depositor,

and

(e)   

the payments so made or credited by the institution equate, in

10

substance, to the return on an investment of money at interest.

(2)   

This section is subject to section 508 (provision not at arm’s length: exclusion

of arrangements from sections 503 and 504, this section, and sections 506 and

507).

506     

Profit share agency arrangements

15

(1)   

This section applies to arrangements if under them—

(a)   

a person (“the principal”) appoints a financial institution as agent,

(b)   

the agent uses money provided by the principal with a view to

producing a profit,

(c)   

the principal is entitled, to a specified extent, to profits resulting from

20

the use of the money,

(d)   

the agent is entitled to any additional profits resulting from its use (and

may also be entitled to a fee paid by the principal), and

(e)   

payments made because of the principal’s entitlement to profits equate,

in substance, to the return on an investment of money at interest.

25

(2)   

This section is subject to section 508 (provision not at arm’s length: exclusion

of arrangements from sections 503 to 505, this section and section 507).

507     

Investment bond arrangements

(1)   

This section applies to arrangements if—

(a)   

they provide for one person (“the bond-holder”) to pay a sum of money

30

(“the capital”) to another (“the bond-issuer”),

(b)   

they identify assets, or a class of assets, which the bond-issuer will

acquire for the purpose of generating income or gains directly or

indirectly (“the bond assets”),

(c)   

they specify a period at the end of which they cease to have effect (“the

35

bond term”),

(d)   

the bond-issuer undertakes under the arrangements—

(i)   

to dispose at the end of the bond term of any bond assets which

are still in the bond-issuer’s possession,

(ii)   

to make a repayment of the capital (“the redemption payment”)

40

to the bond-holder during or at the end of the bond-term

(whether or not in instalments), and

(iii)   

to pay to the bond-holder other payments on one or more

occasions during or at the end of the bond term (“additional

payments”),

45

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

242

 

(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,

(f)   

under the arrangements the bond-issuer undertakes to arrange for the

management of the bond assets with a view to generating income

sufficient to pay the redemption payment and additional payments,

5

(g)   

the bond-holder is able to transfer the rights under the arrangements to

another person (who becomes the bond-holder because of the transfer),

(h)   

the arrangements are a listed security on a recognised stock exchange,

and

(i)   

the arrangements are wholly or partly treated in accordance with

10

international accounting standards as a financial liability of the bond-

issuer, or would be if the bond-issuer applied those standards.

(2)   

For the purposes of subsection (1)—

(a)   

the bond-issuer may acquire bond assets before or after the

arrangements take effect,

15

(b)   

the bond assets may be property of any kind, including rights in

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 document described as, a

20

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 them, before the end of

25

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 bond-issuer or the

40

bond-holder) by the issue or transfer of shares or other securities.

(3)   

This section is subject to section 508.

508     

Provision not at arm’s length: exclusion of arrangements from sections 503 to

507

(1)   

Arrangements to which this section applies are not—

45

(a)   

purchase and resale arrangements,

(b)   

diminishing shared ownership arrangements,

(c)   

deposit arrangements,

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

243

 

(d)   

profit share agency arrangements, or

(e)   

investment bond arrangements.

(2)   

This section applies to arrangements if—

(a)   

apart from this section they would be alternative finance arrangements,

(b)   

paragraph 1(2) of Schedule 28AA to ICTA (provision not at arm’s

5

length) requires the profits and losses of a person who is a party to the

arrangements to be calculated for tax purposes as if the arm’s length

provision referred to in paragraph 1(2)(a) of that Schedule had been

made or imposed, rather than in accordance with the arrangements,

(c)   

any person who is an affected person for the purposes of that Schedule

10

(“the affected person”) is entitled to—

(i)   

relevant return in relation to the arrangements, or

(ii)   

an amount representing relevant return in relation to them, and

(d)   

the affected person is not subject—

(i)   

to income tax or corporation tax, or

15

(ii)   

to any corresponding tax under the law of a territory outside the

United Kingdom,

   

on the relevant return or the amount representing it.

(3)   

In this section “relevant return”, in relation to arrangements, means any

amount which would be alternative finance return if the arrangements were

20

alternative finance arrangements.

(4)   

For the meaning of “alternative finance return”, see sections 511 to 513.

Treatment as loan relationships

509     

Application of Part 5: general

(1)   

Part 5 applies in relation to alternative finance arrangements to which a

25

company (“A”) is a party as if the arrangements were a loan relationship to

which A is a party.

(2)   

Accordingly, references in the Corporation Tax Acts to a loan relationship

include references to such alternative finance arrangements.

(3)   

Section 510 makes further provision about the way in which Part 5 applies to

30

particular descriptions of alternative finance arrangements.

510     

Application of Part 5 to particular alternative finance arrangements

(1)   

In the case of purchase and resale arrangements, Part 5 applies in relation to A

as if—

(a)   

the first purchase price were the amount of a loan made by the first

35

purchaser to the second purchaser, and

(b)   

alternative finance return payable under the arrangements were

interest payable on the loan.

(2)   

In the case of diminishing shared ownership arrangements, Part 5 applies in

relation to A as if—

40

(a)   

the consideration paid by the first owner for the acquisition of the first

owner’s beneficial interest (“the acquisition consideration”) were the

amount of a loan made by A to the eventual owner, and

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

244

 

(b)   

alternative finance return payable under the arrangements were

interest payable on the loan.

(3)   

In the case of deposit arrangements, Part 5 applies in relation to A as if—

(a)   

any amount deposited under the arrangements were the amount of a

loan made by the depositor to the financial institution, and

5

(b)   

alternative finance return payable under them were interest on the

loan.

(4)   

In the case of profit share agency arrangements, Part 5 applies in relation to A

as if—

(a)   

any amount provided under the arrangements were the amount of a

10

loan made by the principal to the agent, and

(b)   

alternative finance return payable under them were interest on the

loan.

(5)   

In the case of investment bond arrangements, Part 5 applies in relation to A as

if alternative finance return payable to or by A under them were interest

15

payable under the loan relationship.

(6)   

In this section—

“the depositor” has the same meaning as in section 505 (see subsection (1)

of that section),

“the eventual owner” has the same meaning as in section 504 (see

20

subsection (1) of that section),

“the first owner” has the same meaning as in section 504 (see subsection

(1) of that section),

“the first purchaser” has the same meaning as in section 503 (see

subsection (1) of that section),

25

“the first purchase price” has the same meaning as in section 503 (see

subsection (3) of that section),

“the principal” has the same meaning as in section 506 (see subsection (1)

of that section), and

“the second purchaser” has the same meaning as in section 503 (see

30

subsection (1) of that section).

(7)   

For the meaning of “alternative finance return”, see sections 511 to 513.

Meaning of “alternative finance return”

511     

Purchase and resale arrangements

(1)   

In the case of purchase and resale arrangements, so much of the second

35

purchase price as is specified under the following provisions of this section is

alternative finance return for the purposes of this Part.

(2)   

If under the arrangements the whole of the second purchase price is paid on

one day, the alternative finance return equals the amount by which the second

purchase price exceeds the first purchase price.

40

(3)   

If under the arrangements the second purchase price is paid by instalments, the

alternative finance return in each instalment equals the appropriate amount.

(4)   

The appropriate amount is an amount equal to the interest which would have

been included in the instalment on the assumptions in subsection (5).

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements

245

 

(5)   

The assumptions are that—

(a)   

interest is payable on a loan by the first purchaser to the second

purchaser of an amount equal to the first purchase price,

(b)   

the total interest payable on the loan is equal to the amount by which

the second purchase price exceeds the first purchase price,

5

(c)   

the instalment is a part repayment of the principal of the loan with

interest, and

(d)   

the loan is made on arm’s length terms and accounted for under

generally accepted accounting practice.

(6)   

In this section expressions used in section 503 have the same meaning as in that

10

section.

512     

Diminishing shared ownership arrangements

(1)   

In the case of diminishing shared ownership arrangements, payments by the

eventual owner under the arrangements are alternative finance return for the

purposes of this Part, except so far subsection (2) or (3) applies to them.

15

(2)   

This subsection applies to the payments so far as they amount to payments of

the kind described in section 504(1)(c) (payments to be made by the eventual

owner to the institution, amounting to the consideration paid for the

acquisition of the institution’s beneficial interest).

(3)   

This subsection applies to the payments so far as they amount to payments in

20

respect of any arrangement fee or legal or other expenses which the eventual

owner is required under the arrangements to pay.

(4)   

In this section “the eventual owner” has the same meaning as in section 504.

513     

Other arrangements

(1)   

In the case of deposit arrangements, amounts paid or credited as mentioned in

25

section 505(1)(c) by a financial institution under the arrangements (payments

to depositor out of profits resulting from use of money) are alternative finance

return for the purposes of this Part.

(2)   

In the case of profit share agency arrangements, amounts paid or credited by a

financial institution in accordance with such an entitlement as is mentioned in

30

section 506(1)(c) (principal’s entitlement to profits under the arrangements) are

alternative finance return for the purposes of this Part.

(3)   

In the case of investment bond arrangements, the additional payments under

the arrangements are alternative finance return for the purposes of this Part.

(4)   

In subsection (3) “additional payments” has the same meaning as in section 507

35

(see subsection (1)(d)(iii) of that section).

Treatment for other tax purposes

514     

Exclusion of alternative finance return from consideration for sale of assets

(1)   

If under purchase and resale arrangements an asset is sold by one party to the

arrangements to the other party, the alternative finance return is excluded in

40

determining the consideration for the sale and purchase of the asset for the

purposes of the Corporation Tax Acts (apart from section 503).

 
 

 
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