Corporation Tax Bill

House of Commons

Session 2008 - 09
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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,
35
(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—

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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.
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(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”),
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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
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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,

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Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements
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(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

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Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements
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(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).

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Part 6 — Relationships treated as loan relationships etc
Chapter 6 — Alternative finance arrangements
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(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).