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Corporation Tax Bill


Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 8 — Returns from partnerships

256

 

535     

Shares ceasing to be shares to which section 523 applies

(1)   

This section applies if at any time section 523 (application of Part 5 to certain

shares as rights under creditor relationship) ceases to apply in the case of a

share held by the investing company.

(2)   

The company is treated for the purposes of Part 5—

5

(a)   

as having disposed of the share immediately before that time for

consideration of an amount equal to its fair value at that time, and

(b)   

as having immediately reacquired it for consideration of the same

amount.

Chapter 8

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Returns from partnerships

536     

Introduction to Chapter

(1)   

This Chapter applies if a company is a party to certain arrangements involving

a firm of which it is a member.

(2)   

Under the following provisions of this Chapter the return designed to be

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produced for the company by the arrangements is treated as a profit from a

loan relationship for the purposes of Part 5—

(a)   

section 537(3) (payments in return for capital contribution to

partnership), and

(b)   

section 538(3) (change of partnership shares).

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(3)   

In this Chapter “arrangements” includes any scheme, agreement,

understanding, transaction or series of transactions.

537     

Payments in return for capital contribution to partnership

(1)   

This section applies if a company is a party to relevant arrangements under

which—

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(a)   

a firm 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

30

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

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(b)   

of which the purpose, or one of the main purposes, is to secure a tax

advantage.

(3)   

The return is treated for the purposes of Part 5 as a profit from a loan

relationship of the company.

(4)   

The credits to be brought into account in respect of the loan relationship are to

40

be determined on the amortised cost basis of accounting.

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 9 — Manufactured interest etc

257

 

(5)   

Subsection (6) applies if the return to any extent represents profits of the firm

in respect of which the company is chargeable to corporation tax (whether for

the same or any earlier accounting period).

(6)   

The charge to corporation tax is to be reduced to such extent as is just and

reasonable.

5

538     

Change of partnership shares

(1)   

This section applies if a company is a party to relevant arrangements under

which—

(a)   

it makes a capital contribution to a firm of which it is a member,

(b)   

profits of the firm fall to be shared in such a way that the company is

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not allocated the whole of its due share of the profits (see subsection

(7)), and

(c)   

the capital of the firm falls to be shared in such a way that the company

or a person connected with the company is entitled to more than the

whole of the company’s due share of the capital (see subsection (7)).

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(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)   

of which the purpose, or one of the main purposes, is to secure a tax

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advantage.

(3)   

The return is treated for the purposes of Part 5 as a profit from a loan

relationship of the company.

(4)   

The credits to be brought into account in respect of the loan relationship are to

be determined on the amortised cost basis of accounting.

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(5)   

Subsection (6) applies if the return to any extent represents profits of the firm

in respect of which the company is chargeable to corporation tax (whether for

the same or any earlier accounting period).

(6)   

The charge to corporation tax is to be reduced to such extent as is just and

reasonable.

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(7)   

For the purposes of subsection (1) a company’s “due share” of any profits or

capital is the share which 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 firm which was contributed by the

company.

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Chapter 9

Manufactured interest etc

539     

Introduction to Chapter

(1)   

This Chapter deals with the application of Part 5 to manufactured interest

relationships and payments representative of interest.

40

(2)   

For the purposes of the Corporation Tax Acts a company has a manufactured

interest relationship if conditions A and B are met.

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 9 — Manufactured interest etc

258

 

(3)   

Condition A is that—

(a)   

an amount is payable by or on behalf of the company or to the company

under any arrangements, and

(b)   

the arrangements relate to the transfer of an asset representing a loan

relationship.

5

(4)   

Condition B is that the amount—

(a)   

is representative of interest under the loan relationship, or

(b)   

will fall to be treated as representative of such interest when it is paid.

(5)   

In this Chapter—

“manufactured interest”, in relation to a manufactured interest

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relationship, means an amount within subsection (3)(a), and

“the real interest” means the interest mentioned in subsection (4)(a).

(6)   

References in the Corporation Tax Acts to a company being a party to a

manufactured interest relationship are to be read in accordance with this

section.

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(7)   

For cases where a payment representative of interest is treated as having been

made for the purposes of this Chapter, see section 736B(2) of ICTA (deemed

manufactured payments in the case of stock lending arrangements).

540     

Manufactured interest treated as interest under loan relationship

(1)   

If a company has a manufactured interest relationship under which

20

manufactured interest is payable by it, Part 5 applies to the company and the

manufactured interest as it would if the manufactured interest were interest

payable on a loan to the company (and so were interest under a loan

relationship to which the company is a party).

(2)   

If a company has a manufactured interest relationship under which

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manufactured interest is payable to it, Part 5 applies to the company and the

manufactured interest as it would if—

(a)   

the manufactured interest were interest payable on a loan by the

company (and so were interest under a loan relationship to which the

company is a party), and

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(b)   

the manufactured interest relationship were the loan relationship

under which the real interest is payable.

(3)   

Accordingly, subject to subsection (2)(b), references in the Corporation Tax

Acts to a loan relationship include a reference to a manufactured interest

relationship.

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(4)   

Subsection (5) applies if a company—

(a)   

has a manufactured interest relationship, but

(b)   

enters into a related transaction in respect of the right to receive

manufactured interest as a result of which the manufactured interest is

not payable to the company.

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(5)   

Even though the manufactured interest is not payable to the company, for the

purpose of bringing credits into account in respect of that or any other related

transaction because of the application of subsection (2), the company is still

treated as having a manufactured interest relationship.

(6)   

This section is subject to Chapter 10 (repos).

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Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos

259

 

541     

Debits for deemed interest under stock lending arrangements disallowed

(1)   

This section applies if a company is the borrower under a stock lending

arrangement for the purposes of section 736B(2) of ICTA (which treats such a

borrower as having made a payment representative of interest for the purposes

of this Chapter).

5

(2)   

In accordance with section 736B(2A) of that Act (which prevents deductions or

group relief for the borrower in stock lending cases), the company may not

bring debits into account for the purposes of Part 5 in respect of the

representative payment which is treated as having been made under section

736B(2) of that Act.

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Chapter 10

Repos

Introduction

542     

Introduction to Chapter

(1)   

The purpose of this Chapter is to secure that in the case of an arrangement—

15

(a)   

which involves the sale of securities and the subsequent purchase of

those or similar securities, and

(b)   

which equates, in substance, to a transaction for the lending of money

at interest from or to a company, with the securities which were sold as

collateral for the loan,

20

   

the charge to corporation tax reflects the fact that the arrangement equates, in

substance, to such a transaction.

(2)   

Sections 543 to 547 make provision about arrangements which are creditor

repos or creditor quasi-repos.

(3)   

Sections 548 to 551 make provision about arrangements which are debtor repos

25

or debtor quasi-repos.

Creditor repos and creditor quasi-repos

543     

Meaning of creditor repo

(1)   

For the purposes of this Chapter a company (“the lender”) has a creditor repo

if each of conditions A to E is met.

30

(2)   

Condition A is that under an arrangement another person (“the borrower”)

receives from the lender any money or other asset (“the advance”).

(3)   

Condition B is that, in accordance with generally accepted accounting practice,

the accounts of the lender for the period in which the advance is made record

a financial asset in respect of the advance.

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(4)   

Condition C is that under the arrangement the borrower sells any securities at

any time to the lender.

 
 

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos

260

 

(5)   

Condition D is that the arrangement makes provision conferring a right or

imposing an obligation on the lender to sell those or similar securities at any

subsequent time.

(6)   

Condition E is that, in accordance with generally accepted accounting practice,

the subsequent sale of those or similar securities would extinguish the financial

5

asset in respect of the advance recorded in the accounts of the lender.

(7)   

For the purposes of conditions A to E references to the lender include a firm of

which the lender is a member.

544     

Meaning of creditor quasi-repo

(1)   

For the purposes of this Chapter a company (“the lender”) has a creditor quasi-

10

repo in any case if—

(a)   

the lender does not have a creditor repo in that case, and

(b)   

each of conditions A to E is met in that case.

(2)   

Condition A is that under an arrangement a person receives from the lender

any money or other asset (“the advance”).

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(3)   

Condition B is that, in accordance with generally accepted accounting practice,

the accounts of the lender for the period in which the advance is made record

a financial asset in respect of the advance.

(4)   

Condition C is that under that or any other arrangement a person sells any

securities at any time to the lender or any other person.

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(5)   

Condition D is that the arrangement or other arrangement—

(a)   

makes provision conferring a right or imposing an obligation on the

lender to sell the securities or any other securities at any subsequent

time, or

(b)   

makes provision conferring such a right or imposing such an obligation

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on any other person and makes other relevant provision.

(6)   

For this purpose an arrangement makes other relevant provision if it makes

provision—

(a)   

for the receipt of any money, securities or other asset from the lender

under that arrangement for the purpose of enabling the other person to

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make that subsequent sale, or

(b)   

for the discharge of any liability to the lender under that arrangement

for that purpose (whether by way of set off or otherwise).

(7)   

Condition E is that, in accordance with generally accepted accounting

practice—

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(a)   

the subsequent sale of the securities or the other securities by the

lender, or

(b)   

the receipt of the asset from the lender, or the discharge of the liability

to the lender, under the arrangement or other arrangement,

   

would extinguish the financial asset in respect of the advance recorded in the

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accounts of the lender.

(8)   

For the purposes of conditions A to E references to the lender include a firm of

which the lender is a member.

 
 

 
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Revised 9 December 2008