Clause 886: Assets representing production expenditure on films: time of creation     116

Clause 887: General rule     116

Clause 888: Cases where chargeable gains rule applies     116

Clause 889: Cases where capital allowances general rule applies     117

Clause 890: Fungible assets: application of section 858     117

Clause 891: Realisation and acquisition of fungible assets     117

Clause 892: Certain assets acquired on transfer of business     118

Clause 893: Assets whose value derives from pre-FA 2002 assets     118

Clause 894: The preserved status conditions etc     118

Clause 895: Assets acquired in connection with disposals of pre-FA 2002 assets     118

Clause 896: Application to royalties     118

Clause 897: Application to pre-FA 2002 assets consisting of telecommunication rights     119

Clause 898: Relief where assets disposed of on or after 1 April 2002     119

Clause 899: Relief where degrouping charge on asset arises on or after 1 April 2002     119

Clause 900: Meaning of “chargeable asset within TCGA” in sections 898 and 899     119

Chapter 17: Insurance companies     120

Clause 901: Effect of application of the I minus E basis: non-trading amounts     120

Clause 902: Excluded assets     120

Clause 903: Elections to exclude capital expenditure on computer software     120

Clause 904: Transfers of life assurance business: transfers of assets treated as tax-neutral     120

Clause 905: Pre-FA 2002 assets: Lloyd’s syndicate capacity     120

Chapter 18: Priority rules     120

Clause 906: Priority of this Part for corporation tax purposes     120

Part 6: Relationships treated as loan relationships etc

Overview

1340.     The overview for this Part is included in the overview for Part 5.

Chapter 1: Introduction

Clause 477: Overview of Part

1341.     This clause outlines the structure of this Part. It is new.

Chapter 2: Relevant non-lending relationships

Overview

1342.     This Chapter brings within the loan relationship provisions money debts which do not fall within the definition of a loan relationship in clause 302 because they do not arise from a transaction for the lending of money. The Chapter is based on section 100 of FA 1996.

Clause 478: Relevant non-lending relationships: introduction

1343.     This clause sets out the purpose of the Chapter and provides definitions. It is new.

Clause 479: Relevant non-lending relationships not involving discounts

1344.     This clause deals with the first type of debt which is not a loan relationship because it does not arise from a transaction for the lending of money. It is based on section 100(1) of FA 1996.

1345.     The debts within this type do not involve discounts and are debts on which interest, exchange movements or impairment losses arise.

Clause 480: Relevant non-lending relationships involving discounts

1346.     This clause deals with the second type of debt which is not a loan relationship because it does not arise from a transaction for the lending of money. It is based on section 100(1A), (1B) and (3A) of FA 1996.

1347.     This type of debt involves discounts, in particular the discount that arises where a sum due in respect of the sale of an asset is payable at a later date with the discount representing compensation for the late payment.

Clause 481: Application of Part 5 to relevant non-lending relationships

1348.     This clause explains how the provisions of Part 5 are to be applied to the preceding clauses on non-lending relationships. It is based on section 100(1), (2) to (2ZB) and (3A) of FA 1996.

Clause 482: Miscellaneous rules about amounts to be brought into account because of this Chapter

1349.     This clause provides miscellaneous rules regarding non-lending relationships. It is based on section 100(3B) and (7) of FA 1996.

Clause 483: Exchange gains and losses: amounts treated as money debts

1350.     This clause brings exchange gains and losses on currency holdings and liabilities into the loan relationships legislation by treating them as money debts owed to or by the company. It is based on section 100(10) to (12) of FA 1996.

Clause 484: Provision not at arm’s length: meaning of “interest” and “money debt”

1351.     This clause requires references to interest on money debts within this Chapter to include amounts treated as such under Schedule 28AA of ICTA (transfer pricing). It is based on section 100(3) of FA 1996.

Clause 485: Exclusion of debts where profits or losses within Part 7 or 8

1352.     This clause excludes amounts from being brought into account under this Chapter if they are brought into account under the regimes for derivative contracts or intangible fixed assets. It is based on section 100(14) of FA 1996.

Clause 486: Exclusion of exchange gains and losses in respect of tax debts etc

1353.     This clause precludes exchange gains and losses from being taken into account under this Chapter where they arise on certain tax payments or are on sums which are not deductible against trading profits or as management expenses. It is based on section 100(9) of FA 1996.

Chapter 3: OEICs, unit trusts and offshore funds

Overview

1354.     This Chapter provides the rules for calculating debits and credits under Part 5 where a company holds an interest in an open-ended investment company (OEIC), unit trust scheme or offshore fund and the assets held by those entities are at least 60% “qualifying investments” by value. Qualifying investments are broadly assets that are or represent loan relationships. Such holdings are treated as rights under a creditor relationship.

Clause 487: Overview of Chapter

1355.     This clause explains what the Chapter does. It is new.

Clause 488: Meaning of “open-ended investment company” etc

1356.      This clause gives the definition of “open-ended investment company”. It is based on paragraph 8(7A), (7B) and (7D) of Schedule 10 to FA 1996 and regulation 95(2) of the Authorised Investment Funds (Tax) Regulations 2006.

1357.     The definition is by reference to sections 468A(2) to (4) of ICTA because the definition in section 468A(2), read with section 468A(3) and (4), is in substance the same as that in paragraph 8(7A)(b), read with paragraph 8(7B) and (7D) of Schedule 10 to FA 1996 and any differences are negligible.

Clause 489: Meaning of “offshore fund” etc

1358.     This clause gives a definition of “offshore fund” and also for “a material interest in such a fund” for this Chapter. It is based on paragraphs 7(1) and (2) and 8(7F) of Schedule 10 to FA 1996.

1359.     The definition of “offshore fund” in paragraph 7 of Schedule 10 to FA 1996 has been applied throughout the Chapter. See Change 60 in Annex 1.

Clause 490: Holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights

1360.     This clause provides the basic rule: if at any time in an accounting period an OEIC, unit trust scheme or offshore fund fails the qualifying investments test, a company’s holdings in such entities are treated as rights under a creditor relationship and the credits and debits are to be brought into account on the basis of fair value. It is based on paragraphs 4(1) to (4) and 7(1) of Schedule 10 to FA 1996, section 48B(5) of FA 2005 and regulation 95(2) of the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964).

1361.     Subsection (1)(a)(i) refers to ownership of “shares” in an open-ended investment company. Paragraph 4(1) of Schedule 10 to FA 1996, as modified by regulation 95 of the above regulations, refers to a company holding “rights” in an open-ended investment company. The term “shares” has been used in this clause because regulation 93 of those Regulations provides that the modification made by regulation 95 is in relation to “shareholders” in authorised investment funds. Referring to shares in an open-ended investment company also aligns this clause with clause 587.

1362.     In subsection (5), the meaning of “interest distributions” is provided by regulation 18(3) of the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964).

Clause 491: Holding coming within section 490: opening valuations

1363.     This clause provides the opening valuation for holdings of a company in an OEIC, unit trust scheme or offshore fund when clause 490 first applies. It is based on paragraphs 5(1) and 6 of Schedule 10 to FA 1996.

1364.     The words “the value of that asset” in paragraph 6 of Schedule 10 to FA 1996 have been rewritten as the “value of the holding” since the words in paragraph 6 refer directly back to “valuation of the holding” in sub-paragraph (b) of that paragraph.

Clause 492: Disregard of investments made and liabilities incurred with avoidance intention etc

1365.     This clause provides that in determining credits and debits to be brought into account by any company in respect of its holding (“the relevant holding”) under the deemed creditor relationship, there shall be left out of account amounts relating to any investment or liability of the collective investment scheme or fund where the investment was made or the liability was incurred, or any transaction (or series of transactions) relating to the investment or liability was entered into, with a “relevant avoidance intention”. It is based on paragraph 4(5) and (6) of Schedule 10 to FA 1996 and regulation 95(2) of the Authorised Investment Funds (Tax) Regulations 2006.

Clause 493: The qualifying investments test

1366.     This clause explains what is meant by the qualifying investment test and how “qualifying investment” is to be interpreted when applied to OEICs, unit trust schemes or offshore funds. It is based on paragraph 8(1), (5), (5A), (7A), and (7C) of Schedule 10 to FA 1996 and regulation 95(3) of the Authorised Investment Funds (Tax) Regulations 2006.

1367.     Subsection (2)(b) explains the meaning of references to investments of OEICs for cases where under section 468A(3) of ICTA parts of umbrella companies are themselves regarded as separate OEICs. This involves rewriting the reference in paragraph 8(5A) of Schedule 10 to FA 1996 to “investments comprised in the scheme property of that company” with the changes made by paragraph 8(7B) to (7D) for such parts. Paragraph 8(7C)(a) converts these words to a reference to such of the investments of the umbrella company as form part of the separate pool in question. But for paragraph 8(7C)(a), paragraph 8(7C)(b) would operate on the reference in paragraph 8(5A) to scheme property in the case of such parts, but once paragraph 8(7C)(a) has applied, there are no references to scheme property on which paragraph 8(7C)(b) can operate and so it is otiose and has not been rewritten.

Clause 494: Meaning of “qualifying investments”

1368.     This clause lists the investments which constitute “qualifying investments”. It is based on paragraph 8(2), (7) and (7E) of Schedule 10 to FA 1996, paragraph 1 of Schedule 2 to FA 2005 and regulation 95(3) of the Authorised Investment Funds (Tax) Regulations 2006.

1369.     Paragraphs 1 and 9 of Schedule 2 to FA 2005 require the reference to “money placed at interest” in paragraph 8(2)(a) of Schedule 10 to FA 1996 to include a reference to arrangements falling within section 47, 48A, 49 or 49A of FA 2005 (rewritten in Chapter 6 of this Part). It does not include diminishing shared ownership arrangements under section 47A of FA 2005.

1370.     The Unit Trust Schemes and Offshore Funds (Non-qualifying Investments Test) Order, SI 2006/981 also added a new paragraph 8(2)(h) to the list of qualifying investments in Schedule 10 to FA 1996 to cover “alternative finance arrangements”. They are defined in paragraph 8(7I) of that Schedule by reference to section 46(1) of FA 2005 as arrangements within section 47, 47A, 48A, 49 or 49A of FA 2005.

1371.     Therefore, diminishing shared ownership arrangements (section 47A of FA 2005) are included as qualifying investments. However, paragraph 8(2)(e) of Schedule 10 to FA 1996 provides that derivative contracts are only included where the underlying subject matter consists of investments within paragraph 8(2)(a) to (d) of that Schedule. Therefore derivative contracts that consist mainly of diminishing shared ownership arrangements (section 47A) are not included, and hence the exclusion of these arrangements under subsection (1)(f)(i).

1372.     The definition of “derivative contract” in paragraph 8(7E) of Schedule 10 to FA 1996 has not been rewritten. If a contract is treated as a derivative contract in Part 7 then it is also treated as a derivative contract for the purposes of this clause because the definition of “derivative contract” in section 834(1) of ICTA (which refers to Schedule 26 to FA 2002 and is consequentially amended to refer to Part 7) applies for the purposes of the Corporation Tax Acts.

Clause 495: Qualifying holdings

1373.     This clause explains what is meant by “qualifying holdings” in an OEIC, unit trust scheme or offshore fund within the qualifying investments list in the preceding clause. It is based on paragraph 8(3), (3A), (4), (6) and (7C) of Schedule 10 to FA 1996.

1374.     Paragraph 8(3)(b) of Schedule 10 to FA 1996 has been rewritten to make it clear that “the same accounting period” refers to the accounting period of the company holding the investment in the unit trust scheme etc and not the accounting period of the unit trust scheme etc.

1375.     Paragraphs 8(6A) and (6B) of that Schedule have not been rewritten because they are considered unnecessary and add nothing to the operation of paragraph 8(6)(c). It does not matter for the purposes of paragraph 8(6)(c) whether the shares are of different denominations; all that matters is their value.

Clause 496: Meaning of “hedging relationship”

1376.     This clause provides the meaning of “hedging relationship”. It is based on paragraph 8(7G) and (7H) of Schedule 10 to FA 1996.

Clause 497: Power to change investments that are qualifying investments

1377.     This clause gives the Treasury power to amend this Chapter. It is based on paragraphs 8(8) and 9 of Schedule 10 to FA 1996.

1378.     Subsection (1) includes a change that allows the Treasury to amend the descriptions of qualifying investments of an open-ended investment company. See Change 61 in Annex 1.

1379.     Subsection (2) allows orders to be made for such “incidental, supplemental, consequential and transitional provision and savings”. This is a standard formulation for this Bill for the extra things that can be done under an order and regulation-making powers. It is not considered a change in the law.

Chapter 4: Building societies

Overview

1380.     This Chapter brings payments in respect of shares in building societies into the loan relationship regime. It provides that dividends and interest payable in respect of shares in, or deposits with, or loans to, a building society should be treated as a liability arising under a loan relationship of the building society.

Clause 498: Building society dividends and interest

1381.     This clause brings dividends and interest payable by building societies into the loan relationship regime so far as they would not otherwise be within it. It is based on section 477A(3), (4), (9) and (10) of ICTA. The corresponding provision for income tax is section 372 of ITTOIA.

Chapter 5: Industrial and provident societies

Overview

1382.     This Chapter brings payments in respect of shares in industrial and provident societies and agricultural or fishing co-operatives into the loan relationship regime. It does not treat the shares themselves as a loan relationship other than to allow dividends etc on shares held for the purposes of a trade to be treated as trading income.

Clause 499: Industrial and provident society payments treated as interest under loan relationship

1383.     This clause treats certain payments by an industrial and provident society and agricultural or fishing co-operatives as payments of interest on a loan relationship. It is based on section 486(1), (4), (9) and (12) of ICTA. The corresponding provision for income tax is section 379 of ITTOIA.

1384.     Subsection (2) treats dividends, bonuses and other sums payable on shareholdings held for the purposes of a trade or for other purposes as if that shareholding were a loan relationship so held. See Change 62 in Annex 1.

Clause 500: Exclusion of interest where failure to make return

1385.     This clause disallows a debit for interest paid by industrial and provident societies where returns under section 887 of ITA are not made within the specified period. Section 887 requires such companies to make returns of interest paid without deduction of tax. It is based on section 486(1), (7) and (12) of ICTA.

Chapter 6: Alternative finance arrangements

Overview

1386.     This Chapter treats arrangements that comply with Shari’a law as falling within the loan relationships regime. Shari’a law prohibits transactions that involve interest, and arrangements for the borrowing or lending of money will usually involve some form of risk sharing instead. The rules are not limited to Shari’a compliant products but also apply to any finance arrangement that falls within their terms. In this Chapter these arrangements are known as “alternative finance arrangements”.

1387.     The rules covering alternative finance arrangements do not change the nature of the finance arrangements, nor do they in any way impute interest, or deem interest to arise where there is none. What they do is bring certain types of finance arrangements and the returns from those arrangements, into the same tax rules as those that apply to interest, providing a level playing field for tax between certain types of economically equivalent, but differently structured, finance arrangements.

1388.     The Chapter sets out the nature of the five types of alternative finance arrangements in clauses 503 to 507. Clauses 509 to 513 explain which elements of the arrangements are treated as if they were loan relationships.

1389.     Sections 48(1), 48B(4), 51, 51A and 56(3) of FA 2005 are not relevant for corporation tax purposes and therefore have not been rewritten in this Bill. They remain in FA 2005 for non-corporation tax purposes.

Clause 501: Introduction to Chapter

1390.     This clause provides an introduction to the Chapter by explaining what it does and provides definitions for the Chapter. It is based on paragraph 8(7I) of Schedule 10 to FA 1996 and section 46(1) of FA 2005 and is new in part.

Clause 502: Meaning of “financial institution”

1391.     This clause gives the meaning of “financial institution”. It is based on section 46(2) and (3) of FA 2005.

Clause 503: Purchase and resale arrangements

1392.     This clause deals with the first type of alternative finance arrangement, whereby an asset is purchased by a financial institution and then sold to another person with the payment by that second person left on credit. It is based on section 47(1) to (3) of FA 2005. The price paid by that second person exceeds the price paid by the financial institution. The difference between the two prices equates to the return from an investment at interest and is treated as an alternative finance return (see clause 511).

Clause 504: Diminishing shared ownership arrangements

1393.     This clause deals with a second type of alternative finance arrangement. It is based on section 47A(1) to (4) of FA 2005. Two persons, at least one of them a financial institution, acquire an interest in an asset. The financial institution receives payments from the other party for that party’s use of the financial institution’s share as well as (usually leasing) payments, with the ownership of the asset passing by degrees to the other party. The other party in the arrangement has full use of the asset being acquired and may grant rights in the asset. Payments made by the other party in excess of the payments for the beneficial interest being acquired are treated as an alternative finance return.

Clause 505: Deposit arrangements

1394.     This clause deals with a third type of alternative finance arrangement whereby deposits are made with a financial institution and payments are made to the depositor out of profits earned by the use of the money. It is based on section 49(1) of FA 2005. The payments must equate to a return from an investment at interest. The return is treated as an alternative finance return.

Clause 506: Profit share agency arrangements

1395.     This clause deals with a fourth type of alternative finance arrangement. It is based on section 49A(1) of FA 2005. Here the investor appoints an agent to whom a sum of money is given to be invested at a specified return. Any additional sum above that specified return is retained by the agent as an incentive fee.

Clause 507: Investment bond arrangements

1396.     This clause deals with a fifth type of alternative finance arrangement and sets out the conditions that must be present for arrangements to be treated as an investment bond arrangement. It is based on section 48A(1) and (2) of FA 2005. Investment bond arrangements are a new variety of alternative finance arrangement that share some characteristics of a bond.

1397.     An investment bond arrangement exists where the “bond-issuer” uses the subscription proceeds to acquire assets, which are specified in the arrangement, and are held for the benefit of the “bond-holder”. Income generated from the assets is distributed to the bond-holder and, on maturity of the bond, the assets are sold under pre-existing arrangements and the proceeds returned to the bond-holder.

Clause 508: Provision not at arm’s length: exclusion of arrangements from sections 503 to 507

1398.      This clause excludes arrangements from clauses 503 to 507 where the parties are connected persons within the transfer pricing legislation in Schedule 28AA of ICTA, the arrangements are not at arm’s length and the recipient of the alternative finance return is not subject to income or corporation tax or a similar non-United Kingdom tax. It is based on section 52(1) to (3) of FA 2005.

1399.     In subsection (2)(c)(ii) “an amount representing relevant return” covers back to back arrangements where there is an intermediary between the two parties to the arrangements.