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Chapter 8: Connected parties relationships: late interest

Overview

1165.     This Chapter gives the rules for bringing into account debits for interest which is either not paid or paid late where the two parties to the loan are connected in some way.

Clause 372: Introduction to Chapter

1166.     This clause explains the purpose of the Chapter and provides an overview. It is based on paragraph 2 of Schedule 9 to FA 1996.

Clause 373: Late interest treated as not accruing until paid in some cases

1167.     This clause sets out the basic rule: where interest is not paid within 12 months after the end of the accounting period and corresponding credits are not brought into account the interest is allowed on a paid rather than an accruals basis where one of the circumstances set out in the following clauses applies. It is based on paragraph (1), (2) and (6) of Schedule 9 to FA 1996.

Clause 374: Connection between debtor and person standing in position of creditor

1168.     This clause gives the first circumstance when clause 373 applies and this is where the debtor and creditor companies are connected under clause 466. It is based on paragraph 2(1A) of Schedule 9 to FA 1996.

Clause 375: Loans to close companies by participators etc

1169.     This clause gives the second circumstance when clause 373 applies: where the company making the loan is a close company (other than a CIS-based close company or CIS limited partnership) and the creditor is a participator or similar. (CIS is an abbreviation of “collective investment scheme”.) It is based on paragraph 2(1B) and (1E) to (1G) of Schedule 9 to FA 1996.

Clause 376: Interpretation of section 375

1170.     This clause gives the meaning of various terms used in clause 375. It is based on paragraph 2(5) to (6) of Schedule 9 to FA 1996.

Clause 377: Party to loan relationship having major interest in other party

1171.     This clause gives the third condition when clause 373 applies: where either the debtor or creditor has a major interest (defined in clause 473) in the other. It is based on paragraph 2(1C) of Schedule 9 to FA 1996.

Clause 378: Loans by trustees of occupational pension schemes

1172.     This clause gives the fourth and final condition when clause 373 applies: where the loan is made by a trustee of an occupational pension scheme and there is a specified relationship between the debtor company and the employees benefiting from the scheme or their employing company. It is based on paragraph 2(1D) of Schedule 9 to FA 1996.

Clause 379: Persons indirectly standing in the position of creditor

1173.     This clause provides that the preceding clauses on late interest which refer to the creditor company include companies which stand indirectly in that position as a result of a series of loan relationships or money debts. It is based on paragraph 2(3) and (4) of Schedule 9 to FA 1996.

Chapter 9: Partnerships involving companies

Overview

1174.     This Chapter provides special rules for determining debits and credits on loan relationships where a money debt is owed by or to a partnership in which one or more of the members is a company.

Clause 380: Partnerships involving companies

1175.     This clause gives the basic rule for computing the debits and credits where a money debt is owed by or to a partnership in which one or more of the members is a company. It is based on paragraph 19(1) and (2) of Schedule 9 to FA 1996.

1176.     “Profession” in paragraph 19(1)(a) has not been rewritten on the grounds that a company cannot carry on a profession for corporation tax purposes either as a partner or otherwise.

Clause 381: Determinations of credits and debits by company partners: general

1177.     This clause expands on the basic rule given in subsection (3) of the previous clause. It is based on paragraph 19(3) to (6) of Schedule 9 to FA 1996. Each company partner is treated as owing or being owed the debt and the credits and debits in relation to those debts are treated as those of the company partner in its profit-sharing ratio.

1178.     “Gross” in paragraph 19(5) and (6) of Schedule 9 means that the total credits and debits are calculated notwithstanding that the debt is treated as owed to or by each company partner and this is brought out in subsection (5).

Clause 382: Company partners using fair value accounting

1179.     This clause provides that company partners using fair value accounting must bring debits and credits into account on the same basis. It is based on paragraph 19(11) of Schedule 9 to FA 1996. Without this provision it might be assumed that the deeming required by this Chapter did not require a company to adopt its normal accounting method.

Clause 383: Lending between partners and the partnership

1180.     This clause provides the rules for determining whether a company partner controls a partnership in circumstances where a money debt exists between the partnership and a company partner. It is based on paragraph 19(7) to (9) and (14) of Schedule 9 to FA 1996. If there is such a money debt the rule in clause 349 applies under which debits and credits on a loan relationship are determined under the amortised cost basis.

Clause 384: Treatment of exchange gains and losses

1181.     This clause disapplies, in certain circumstances, the rule on exchange gains and losses in clause 328 which disallows a credit or debit on an exchange gain or loss which is taken directly to a company’s reserves. It is based on paragraph 19(12) of Schedule 9 to FA 1996. Only where the exchange gain or loss by-passes the partnership’s profit and loss account will that clause apply.

1182.     The words “subsection (3) of section 84A of this Act does not apply .. except to the extent that ... exchange gains and losses are recognised” in paragraph 19(12) of Schedule 9 to FA 1996 are rewritten to clarify the meaning that the clause rewriting section 84A(3) applies so far as the exchange gains and losses` are recognised rather than the possible meaning that the clause applies only if they are recognised.

1183.     Subsection (2) updates the references in paragraph 19(12) of Schedule 9 to FA 1996 to a company’s statement of income and gains, etc in line with current accountancy practice.

1184.     Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals paragraph 19(12) of Schedule 9 to FA 1996 with effect from a day to be appointed. This clause, which rewrites that sub-paragraph, will therefore cease to have effect from an appointed day (see Part 8 (loan relationships) of Schedule 2 to the Bill).

Clause 385: Company partners’ shares where firm owns deeply discounted securities

1185.     This clause treats deeply discounted securities held by a partnership as if they were held by each company partner in its profit-sharing ratio. It is based on paragraph 19(13) of Schedule 9 to FA 1996.

1186.     Subsection (3)(b) adopts the language (“in accordance with the firm’s profit-sharing arrangements”) of clause 1262 in Part 17 (partnerships) which rewrites section 114(2) of ICTA.

Chapter 10: Insurance companies

Overview

1187.     This Chapter rewrites the provisions on insurance companies from Schedule 11 to FA 1996. These mainly deal with the treatment of deficits.

Clause 386: Overview of Chapter

1188.     This clause sets out what is in the Chapter and gives signposts to other provisions specific to insurance companies. It is new.

Clause 387: Treatment of deficit on basic life assurance and general annuity business: introduction

1189.     This is the first of five clauses providing special rules for the treatment of deficits on loan relationships of insurance companies which arise on basic life assurance and general annuity business. It is based on paragraph 4(1) of Schedule 11 to FA 1996.

Clause 388: Basic rule: deficit set off against income and gains of deficit period

1190.     This clause gives the basic rule on set-off. It is based on paragraph 4(2) of Schedule 11 to FA 1996.

1191.     Subsection (1) requires the deficit to be offset first against any income and gains relating to basic life assurance and general annuity business of the deficit period. This avoids the necessity of a claim. See Change 58 in Annex 1.

1192.     Paragraph 4(2)(a) of Schedule 11 requires the deficit to be set off to be against any income or gains of the deficit period referable to basic life assurance and general annuity business and arising or accruing otherwise than in respect of loan relationships. The words “arising or accruing otherwise than in respect of loan relationships” have not been rewritten. If a company has such income and gains they must be other than in respect of loan relationships since, by definition, the company has a loan relationship deficit and no non-trading income and gains on its loan relationships.

Clause 389: Claim to carry back deficit

1193.     This clause provides for a claim to be made to carry back the excess if a deficit exceeds the income and gains of the deficit period. It is based on paragraph 4(3), (5) and (15) of Schedule 11 to FA 1996. The deficit must be set off against the company’s “available profits”, defined in the following clause.

1194.     Subsection (5) replaces “the Board” in paragraph 4(15) with “an officer of Revenue and Customs”. See Change 1 in Annex 1.

Clause 390: Meaning of “available profits”

1195.     This clause explains what is meant by “available profits” in the preceding clause. It is based on paragraph 4(7) to (11) of Schedule 11 to FA 1996.

Clause 391: Carry forward of surplus deficit to next accounting period

1196.     This clause provides that the deficit should be carried forward to the next accounting period so far as it is neither set off against the deficit period nor carried back to a period before the deficit period. It is based on paragraph 4(4) of Schedule 11 to FA 1996.

Clause 392: Exclusion of loan relationships of members of Lloyd’s

1197.     This clause prevents this Part from applying to loan relationships of corporate members of Lloyds which are assets or liabilities of a premium trust fund. It is based on paragraph 7 of Schedule 11 to FA 1996.

Clause 393: General rules for some debtor relationships

1198.     This clause provides rules for determining the credits and debits of a debtor loan relationship of an insurance company which is referable to any category of an insurance company’s long-term insurance fund. It is based on paragraph 3A of Schedule 11 to FA 1996.

Clause 394: Special rules for some debtor relationships

1199.     This clause provides special rules for referring credits and debits in respect of those debtor relationships which are liabilities of a long-term insurance fund to particular categories of the company’s long-term business. It is based on paragraph 3A of Schedule 11 to FA 1996.

1200.     Subsections (4), (5) and (6) deal with deposit back arrangements. Deposit back arrangements arise where reinsurers of pension annuities deposit back all or a substantial proportion of the premium paid with the original insurer. The original insurer may then pay interest to the reinsurer on that deposit back. “Deposit back arrangements” are defined in section 431(2) of ICTA.

Chapter 11: Other special kinds of company

Overview

1201.     This Chapter provides rules for determining the profits and losses on the loan relationships of particular types of companies: investment trusts, venture capital trusts and credit unions.

Clause 395: Investment trusts: profits or losses of a capital nature

1202.     This clause excludes profits and losses of a capital nature on loan relationships from being taken into account by an investment trust. It is based on paragraph 1A of Schedule 10 to FA 1996 and the Investment Trusts and Venture Capital Trusts (Definition of Capital Profits, Gains or Losses) Order 2006 (SI 2006/1182). Before FA 1996 investment trusts were treated as exempt from profits arising on the disposal of investments and that position was preserved by the loan relationships regime.

1203.     Subsections (2) and (3) rewrite article 3 of SI 2006/1182 rather than referring to the appropriate SI as does paragraph 1A(3).

1204.     Subsection (5) allows orders to be made for “such incidental, supplemental, consequential and transitional provision and savings”. This is the standard formulation in this Bill for the additional amendments that can be introduced under an order and regulation-making power. It is not considered a change in the law.

Clause 396: Venture capital trusts: profits or losses of a capital nature

1205.     This clause excludes profits and losses of a capital nature on loan relationships from being taken into account by a venture capital trust. It is based on paragraphs 1B and 9(1) of Schedule 10 to FA 1996 and the Investment Trusts and Venture Capital Trusts (Definition of Capital Profits, Gains or Losses) Order 2006 (SI 2006/1182). Before FA 1996 venture capital trusts were treated as exempt from tax on profits arising from the disposal of investments and that position was preserved in the loan relationships regime.

1206.     Subsections (2) and (3) rewrite article 3 of SI 2006/1182 rather than referring to the SI as does paragraph 1B(3).

1207.     Subsection (5) allows orders to be made for “such incidental, supplemental, consequential and transitional provision and savings”. This is the standard formulation in this Bill for the additional amendments that can be introduced under an order and regulation-making power. It is not considered a change in the law.

Clause 397: Credit unions

1208.     This clause provides that credits and debits on loan relationships of credit unions with union members are not brought into account under this Part. It is based on section 487(1), (2) and (3A) of ICTA.

Chapter 12: Special rules for particular kinds of securities

Overview

1209.     This Chapter brings together a number of loan relationship rules from within and outside Chapter 2 of Part 4 of FA 1996 on particular types of securities.

1210.     Section 96 of FA 1996, which one might expect to be rewritten here, is not. That section prevents any rise in capital value of certain gilts from being brought into charge as credits on a loan relationship. The two gilts identified in the section are expressly protected from a capital gains charge and it was considered improper that a charge should arise on changes in capital value under the loan relationships legislation. Therefore the interest component only in any credit is taxed.

1211.     31/2% Funding Stock 1999-2004 was redeemed in June 2003. Section 96 of FA 1996 is rewritten in Schedule 2 to this Bill.

Clause 398: Overview of Chapter

1212.     This clause explains how the Chapter is organised. It is new.

Clause 399: Index-linked gilt-edged securities: basic rules

1213.     This and the following clause provide special rules for dealing with index-linked securities. It is based on section 94(1), (2) and (7) of FA 1996. The clause contains the main rule that fair value accounting must be used and requires adjustments under the following clause. It also defines terms used in this and the following clause.

Clause 400: Index-linked gilt-edged securities: adjustments for changes in index

1214.     This clause applies to remove a profit or loss arising on an index-linked gilt-edged security by adjusting the value of the security in the accounts by the change in the retail prices index. It is based on section 94(2) to (6) of FA 1996. The clause also provides for Treasury powers to amend the adjustments required under this clause.

Clause 401: Gilt strips

1215.     This clause gives the rules that apply when a gilt-edged security is converted into strips and when strips are consolidated into a single security; in each case there is a deemed redemption and acquisition. It is based on section 95(1) to (3) of FA 1996.

1216.     Section 95(1) of FA 1996, which subsection (1) rewrites, refer to “a gilt-edged security or a strip of a gilt-edged security”. Section 103(1) of FA 1996 (rewritten in clause 476(1)) adopts the definition of “gilt-edged security” in Schedule 9 to TCGA. Paragraph 1A of that Schedule brings strips within the definition of a gilt and subsection (1)(b) of this clause reflects this by referring to any other gilt-edged security.

Clause 402: Market value of securities

1217.     This clause explains what is meant by the market value of a security in clause 401 and gives the Treasury power to amend that meaning. It is based on section 95(4) to (6) of FA 1996.

1218.     Subsection (3) allows orders to be made for “such incidental, supplemental, consequential and transitional provision and savings”. This is a standard formulation in this Bill for the additional amendments that can be introduced under an order and regulation-making power. It is not considered a change in the law.

Clause 403: Meaning of “strip”

1219.     This clause gives the meaning of “strip” for this Chapter, rewriting in full the definition from FA 1942 instead of relying on a cross-reference to that section as does section 95(7) of FA 1996. It is based on section 47 of FA 1942 and section 95(7) of FA 1996.

Clause 404: Restriction on deductions etc relating to FOTRA securities

1220.     This clause prevents debits arising on FOTRA securities where the profits are exempt under clause 1279. It is based on section 154(6) and (8) of FA 1996 and section 161(1), (4) and (7) of FA 1998.

Clause 405: Certain non-UK residents with interest on 31/2% War Loan 1952 Or After

1221.     This clause restricts a debit for borrowing costs where a non-UK resident company holds 31/2% War Loan for use in a business of banking, insurance or dealing in securities. It is based on section 475 of ICTA. Interest on 31/2% War Loan is paid without deduction of tax and is exempt in the hands of a non-UK resident company. Because a company may borrow to acquire these securities an allowable debit may arise on the cost of the borrowing but without giving rise to a taxable credit. Consequently the appropriate proportion of the costs of borrowing is disallowed as a loan relationships debit.

1222.     Step 2 in subsection (3) makes reference only to “interest which is not brought into account .. under this Part” (although section 475(2) and (4) of ICTA might be read as comprising other interest for corporation tax purposes) since interest can only be brought into account under loan relationships rules as a result of section 337A(2)(a) of ICTA.

1223.     Subsections (1), (3) and (4) rewrite “31/2% War Loan 1952 or after” as “31/2% War Loan 1952 Or After” to prevent the reader attaching the words “or after” to any following words, thereby adopting the solution used in section 154(8)(b) of FA 1996.

Clause 406: Introduction

1224.     This clause introduces the following six clauses which all deal with deeply discounted securities. It is based on paragraphs 17(3) and (4) and 18(2B) and (3) of Schedule 9 to FA 1996.

Clause 407: Postponement until redemption of debits for connected companies’ deeply discounted securities

1225.     This clause provides that debits on a deeply discounted security are, in certain circumstances, only brought into account under this Part on redemption where the debtor and creditor are connected. It is based on paragraph 17(1) to (3) and (5) of Schedule 9 to FA 1996.

Clause 408: Companies connected for section 407

1226.     This clause explains what is meant by two companies being connected for the previous clause. It is based on paragraph 17(5) and (9) of Schedule 9 to FA 1996.

Clause 409: Postponement until redemption of debits for close companies’ deeply discounted securities

1227.     This clause provides that debits on a deeply discounted security can only be brought into account under this Part on redemption if the creditor is a participator, etc in the debtor company. It is based on paragraph 18(1) to (2B) of Schedule 9 to FA 1996.

Clause 410: Exceptions to section 409

1228.     This clause provides exceptions to the preceding clause, where either credits equalling debits are brought into account under this Part or where the debtor company is a CIS-based close company or a CIS limited partnership. It is based on paragraph 18(1ZA) to (1C) and (4) of Schedule 9 to FA 1996.

1229.     “The debtor company” in paragraph 18(1C)(c) of Schedule 9 has been rewritten for consistency in subsection (4) as “the issuing company”, the term used elsewhere in that paragraph.

Clause 411: Interpretation of section 409

1230.     This clause provides definitions and deals with other matters necessary to interpret clause 409. It is based on paragraph 18(3B) to (5) of Schedule 9 to FA 1996.

Clause 412: Persons indirectly standing in the position of creditor

1231.     This clause enables clauses 407 and 409 to apply where there is a series of loan relationships or money debts between the company issuing the deeply discounted security and the person in the creditor relationship. It is based on paragraphs 17(8) and (8A) and 18(2C) and (2D) of Schedule 9 to FA 1996.

1232.     Paragraph 18(2D) of Schedule 9 refers to the term “corresponding creditor relationship” in sub-paragraph (1A)(c). That sub-paragraph was repealed by FA 2002. The reference to paragraph (1A)(c) has been rewritten as if it referred to sub-paragraph (1A)(b), the sub-paragraph containing the reference to the person standing in the position of a creditor.

Clause 413: Issue of funding bonds

1233.     This clause treats issues of funding bonds as interest payments. It is based on section 582(1) and (3) to (4) of ICTA. The corresponding rule for income tax is in section 380 of ITTOIA.

1234.     Subsection (2) rewrites, for clarification, “value of the bonds at the time of their issue” in section 582(1)(a) as “market value of the bonds at their issue”.

1235.     For the rewrite of the Schedule D Case VI charge in section 582(2A) of ICTA see Change 59 in Annex 1.

Clause 414: Redemption of funding bonds

1236.     This clause prevents repayments of funding bonds from being a payment of interest if the issue was treated as such in the hands of an individual or company. It is based on section 582(1) and (4) of ICTA. The corresponding rule for income tax is in section 754 of ITTOIA.

 
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Prepared: 5 December 2008