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Clause 509: Application of Part 5: general
1400. This clause applies Part 5 to the five kinds of alternative finance arrangements. It is based on section 50(1) to (3) of FA 2005.
Clause 510: Application of Part 5 to particular alternative finance arrangements
1401. This clause provides, for each of the five alternative finance arrangements, the rules for what is to be treated as interest under that deemed loan relationship. It also provides some definitions for terms used in this clause. It is based on section 50(1) to (2A) and (4) of FA 2005 and paragraph 7 of Schedule 2 to that Act.
Clause 511: Purchase and resale arrangements
1402. This clause explains the meaning of “alternative finance return” in relation to the purchase and resale arrangements in clause 503. It is based on section 47(4), (6), (7) and (8) of FA 2005. It provides for where the second purchase price is paid either immediately or in instalments.
Clause 512: Diminishing shared ownership arrangements
1403. This clause explains the meaning of “alternative finance return” in relation to the diminishing shared ownership arrangements in clause 504. It is based on section 47A(5) of FA 2005.
1404. “Costs and expenses” in section 47A(5) has been reduced to “expenses” in subsection (3) to avoid tautology.
Clause 513: Other arrangements
1405. This clause explains the meaning of “alternative finance return” in relation to deposit arrangements, profit share agency arrangements and investment bond arrangements. It is based on sections 48B(1), 49(2) and 49A(2) of FA 2005.
1406. In FA 2005 the return on some alternative investment arrangements is called “alternative finance return”, but the return on deposit arrangements and profit share agency arrangements is called “profit share return”. However, there is no material difference in the returns on these arrangements to justify different terminology. So “profit share return” has been replaced with “alternative finance return” in relation to deposit arrangements (clause 505) and profit share agency arrangements (clause 506). These are then consistent with purchase and resale arrangements, diminishing shared ownership arrangements and investment bond arrangements.
1407. Chapter 5 of Part 2 of FA 2005 is being amended to remove the term “profit share return” for income tax purposes.
Clause 514: Exclusion of alternative finance return from consideration for sale of assets
1408. This clause excludes the profits dealt with as interest under a loan relationship in relation to the arrangements under clauses 503, 504 and 507 from determining the sale or purchase price for other tax purposes (eg trading or capital gains). It is based on section 53(1) to (3) of FA 2005. It does not prevent other tax provisions applying which substitute a different sum for a sale or purchase amount.
Clause 515: Diminishing shared ownership arrangements not partnerships
1409. This clause provides that diminishing shared ownership arrangements are not treated as a partnership for the purposes of the Corporation Tax Acts. It is based on section 47A(6) of FA 2005.
Clause 516: Treatment of principal under profit sharing agency arrangements
1410. This clause ensures that in the case of profit sharing arrangements the deposit-taker is taxable in respect of all of the profit resulting from the use of the money - both the depositor’s share of profit made under the arrangements and also the amount that the deposit-taker can retain. It is based on section 49A(3) of FA 2005. The deposit-taker is entitled to relief for the depositor’s share of profit.
Clause 517: Treatment of bond-holder under investment bond arrangements
1411. This clause provides that whatever the documentation accompanying investment bond arrangements may say, for tax purposes the bond-holder is not treated as having a legal or beneficial interest in the assets, and so is not entitled to capital allowances, nor is the bond-issuer treated as a trustee, or as making payments in a fiduciary or representative capacity. It is based on section 48B(2) of FA 2005.
Clause 518: Investment bond arrangements: treatment as securities
1412. This clause provides that alternative finance investment bonds are securities for the purposes of the Corporation Tax Acts. It is based on section 48B(3) of FA 2005.
Clause 519: Investment bond arrangements: other provisions
1413. This clause provides the rules about how investment bond arrangements impact on the regimes for securitisation companies, close companies and group relief. It is based on section 48B(6) to (8) of FA 2005.
Clause 520: Provision not at arm’s length: non-deductibility of relevant return
1414. This clause prevents any deduction in calculating profits for corporation tax purposes as a result of alternative finance arrangements where the arm’s length rule in clause 508 applies. It is based on section 52(4) and (5) of FA 2005.
Clause 521: Power to extend this Chapter to other arrangements
1415. This clause provides the Treasury with powers to introduce further arrangements into this Chapter and make consequential amendments to the Tax Acts as necessary. It is based on section 98 of FA 2006.
Chapter 7: Shares with guaranteed returns etc
Overview
1416. The rules in this Chapter counter avoidance through the use of shares which function in a similar way to loan relationships but which fall outside the definition. The schemes making use of these shares exploit the fact that increases in value and gains from the disposal of shares are subject only to the rules for corporation tax on chargeable gains, if at all. The schemes use derivatives in conjunction with shares, or deferred subscription agreements to create what is in form a share but in economic substance a deposit or loan. In most of them the risks associated with equity investments, as well as the rewards, are removed or significantly reduced, leaving the share giving a return, either by the payment of “dividends” or by a wholly predictable increase in value, which is the type of return expected from debt.
Clause 522: Introduction to Chapter
1417. This clause sets out what the Chapter does, how it is arranged and some useful cross-references. It is based on sections 91A(1), (10) and (11), 91B(1), (7) and (8), 91C(7), 91D(13) and 91E(4) of FA 1996.
1418. Subsection (6) provides that the full definition of “share” in clause 476 does not apply for the purposes of this Chapter. The part of the definition that does apply to this Chapter is that the meaning of “share” does not include a share in a building society.
Clause 523: Application of Part 5 to certain shares as rights under creditor relationship
1419. This clause treats rights in shares as loan relationships and distributions from such shares as debits or credits under this Part where either clause 524 or 526 applies. It is based on sections 91A(1), (2) and (2A) and 91B(1), (2), (2A) and (6A) of FA 1996.
Clause 524: Shares subject to outstanding third party obligations
1420. This clause deals with the first type of shares to fall within clause 523: shares which increase in value in a similar way to an investment return as a result of an obligation by a third party. It is based on section 91A(1) and (5) to (6) of FA 1996.
Clause 525: Meaning of “interest-like investment”
1421. This clause explains a term used in the previous clause. It is based on section 91A(7) to (9) of FA 1996.
Clause 526: Non-qualifying shares
1422. This clause deals with the second type of shares to fall within clause 523: shares (“non-qualifying shares”) which produce predictable gains because of the nature of the assets underlying them. It is based on section 91B(1) and (6) of FA 1996. One of three conditions, dealt with in clauses 527 and 529 to 532, must be met for shares to fall within this category.
Clause 527: The increasing value condition
1423. This clause gives the first of the conditions necessary for a share to be a non-qualifying share within clause 526. It is based on section 91C(1) to (3) and (6) of FA 1996. This is where the assets of the company in which the shares are held increase at a rate similar to commercial interest but which are not income-producing.
Clause 528: Regulations about income-producing assets
1424. This clause gives powers to the Treasury to add to the list of income-producing assets in clause 527. It is based on section 91C(4) and (5) of FA 1996.
Clause 529: The redemption return condition
1425. This clause gives the second of the conditions necessary for a share to be a non-qualifying share within clause 526. It is based on section 91D(1) to (2A) of FA 1996. This is where a redeemable share (with certain exceptions) produces a return similar to commercial interest.
Clause 530: The redemption return condition: excepted shares
1426. This clause explains which redeemable shares are excluded from being shares which may meet the condition dealt with by clause 529. It is based on section 91D(3) to (8) and (11) of FA 1996.
1427. “Independent person” in section 91D has been rewritten in this clause as “persons not connected with the company” which is the definition in section 91D(11). Given that the definition in section 839 of ICTA applies, “persons” here refers to both companies and individuals. Section 839 is not separately referred to in this Part as the definition of “connected persons” in clause 1316 applies for the purposes of the Bill. The use of “independent person” appears twice in Chapter 2 of Part 4 of FA 1996 with two quite different definitions. The other definition is in section 103 of FA 1996. The use of both terms has been replaced by their definitions.
Clause 531: The redemption return condition: unallowable purposes
1428. This clause explains what is meant by an unallowable purpose to ascertain whether a share is a qualifying publicly issued share for the purposes of clause 530 and thus excluded from the redemption return condition as an excepted share. It is based on section 91D(9) to (11) of FA 1996.
Clause 532: The associated transactions condition
1429. This clause gives the third and final condition necessary for a share to be a non-qualifying share within clause 526. It is based on section 91E(1) to (3) of FA 1996. This is where neither of the other conditions is met but there is a scheme or arrangement under which the combined effect of the shares and another transaction produce a return similar to a commercial rate of interest.
Clause 533: Power to change conditions for non-qualifying shares
1430. This clause gives the Treasury the power to vary the conditions to be met under which shares may be “non-qualifying shares” for the purposes of clause 526. It is based on section 91F of FA 1996.
Clause 534: Amounts to be brought into account where section 523 applies
1431. This clause sets out rules concerning the amounts to be brought into account for the purposes of this Part by the company holding the shares. It is based on section 91A(3), (4) and (9) and section 91B(3), (4) and (6A) of FA 1996.
1432. Subsection (7) overrides the requirement for amortised cost basis where both this clause and clause 349 apply. See Change 57 in Annex 1.
Clause 535: Shares ceasing to be shares to which section 523 applies
1433. This clause treats shares which cease to fall within section 523 as having been disposed of and reacquired. It is based on section 91G(2) of FA 1996.
Chapter 8: Returns from partnerships
Overview
1434. This Chapter deals with arrangements involving firms that are intended to give rise to interest-like returns. It brings into the loan relationship provisions those arrangements that function in a similar way to loan relationships but which fall outside the definition. It is based on sections 91H and 91I of FA 1996 (inserted by paragraph 17 of Schedule 22 to FA 2008).
Clause 536: Introduction to Chapter
1435. This clause sets out what the Chapter does and how it is arranged. It is based on sections 91H(1), (2) and (6), and 91I(1), (2) and (7) of FA 1996.
Clause 537: Payments in return for capital contribution to partnership
1436. This clause deals with arrangements under which a company obtains a return by acquiring an interest in a firm for an amount which will increase in value in a similar way to interest. It is based on section 91H(1) to (4) of FA 1996.
1437. In accordance with the Partnership Act 1890, in this Bill reference to the relationship between the partners is a “partnership”, but the collection of partners is a “firm”.
Clause 538: Change of partnership shares
1438. This clause deals with arrangements under which a company invests money in a firm in the form of capital contributions, initially receiving a share of the firm’s profits that is smaller than would be received by reference to that contribution but with a compensating greater entitlement to capital of the firm later on. It is based on section 91I(1) to (5) of FA 1996.
Chapter 9: Manufactured interest etc
Overview
1439. This Chapter treats “manufactured interest” (payments representing interest under a stock-lending arrangement) as interest under a loan relationship.
Clause 539: Introduction to Chapter
1440. This clause explains when a company has a “manufactured interest relationship”. It is based on section 97(1) and (4) of FA 1996.
Clause 540: Manufactured interest treated as interest under loan relationship
1441. This clause provides the main rule that the manufactured interest is treated as if it were interest under a loan relationship and the manufactured interest relationship is treated as if it were a loan relationship. It is based on section 97(2), (2A) and (4B) of FA 1996. It also ensures that debits and credits in respect of related transactions can still be taken into account after the company no longer has the right to receive manufactured interest (to prevent the sale of rights to receive such interest to third parties).
Clause 541: Debits for deemed interest under stock lending arrangements disallowed
1442. This clause disallows a debit under the loan relationship provisions for representative payments under section 736B(2) of ICTA. It is based on section 97(4A) of FA 1996.
Chapter 10: Repos
Overview
1443. The rules in this Chapter provide for the tax treatment of repo transactions to follow their accounting treatment under generally accepted accounting practice (GAAP). These rules have been rewritten from Schedule 13 to FA 2007.
Clause 542: Introduction to Chapter
1444. This clause sets out the purpose of the Chapter and how it is arranged. It is based on paragraph 1(1) of Schedule 13 to FA 2007.
1445. The purpose of the Chapter is that arrangements involving the sale and subsequent purchase of securities that equate in substance to the lending of money by or to a company (with the securities in substance acting as collateral) are to be taxed in accordance with their economic substance and accounting treatment.
Clause 543: Meaning of creditor repo
1446. This clause provides the definition of creditor repo - that is, a repo from the point of view of the lender, the company that purchases the securities as collateral. It is based on paragraph 7 of Schedule 13 to FA 2007.
1447. The securities are purchased with cash that, although legally a purchase price, equates in substance to a loan. Commercially this is known as a “reverse repo”. It is intended to cover normal repos executed under standard market documentation (although since it does not require the lender to sell the securities back to “the borrower” it goes wider than this).
Clause 544: Meaning of creditor quasi-repo
1448. This clause provides the definition of creditor quasi-repo. It is based on paragraph 8 of Schedule 13 to FA 2007. A creditor quasi-repo is intended to cover arrangements that are economically equivalent to standard creditor repos but are on non-standard terms.
Clause 545: Ignoring effect on lender etc of sale of securities
1449. This clause contains the first of two operative rules that apply when a company (“the lender”) has a creditor repo or creditor quasi-repo. It is based on paragraph 9 of Schedule 13 to FA 2007.
1450. The rule is intended to secure that the lender is not taxed on any income that arises on the securities during the period of the repo and does not obtain tax relief for any manufactured payments made, so long as neither is recognised in determining the lender’s profit or loss. This rule reflects the fact that for accounts purposes neither the income nor the payment will generally be recognised.
Clause 546: Charge on lender for finance return in respect of the advance
1451. This clause contains the second operative rule for creditor repos and creditor quasi-repos. It is based on paragraph 10 of Schedule 13 to FA 2007. It treats the financial asset as a loan relationship and the finance charge reflected in the accounts as deemed interest on that loan.
Clause 547: Repo under arrangement designed to produce quasi-interest: tax avoidance
1452. This clause is an anti-avoidance provision. It is based on paragraph 12 of Schedule 13 to FA 2007.
Clause 548: Meaning of debtor repo
1453. This clause introduces the concept of “debtor repo” - that is, a repo from the point of view of the borrower, the company that sells securities as collateral. It is based on paragraph 2 of Schedule 13 to FA 2007. It is intended to cover normal repos executed under standard market documentation (although since it does not require the borrower to buy the securities back from “the lender” it goes slightly wider than this).
Clause 549: Meaning of debtor quasi-repo
1454. This clause is the counterpart of clause 544 and introduces the concept of “debtor quasi-repo” which is intended to cover arrangements that are economically equivalent to standard debtor repos but are on non-standard terms. It is based on paragraph 3 of Schedule 13 to FA 2007.
Clause 550: Ignoring effect on borrower of sale of securities
1455. This clause contains the first of two operative rules that apply when a company (“the borrower”) has a debtor repo or debtor quasi-repo. It is based on paragraph 4 of Schedule 13 to FA 2007. It also contains a special rule that applies where a person has entered into a “relevant arrangement”.
1456. It provides for the sale of securities by a company and the manufactured payment made by the other company in respect of the securities to be ignored. The borrower is taxed on the interest (or dividends) from the securities the borrower is selling and any manufactured interest the borrower receives representing that income is ignored.
Clause 551: Relief for borrower for finance charges in respect of the advance
1457. This clause sets out the second operative rule for debtor repos and debtor quasi-repos which is that the borrower obtains relief for any finance charge shown in its accounts that represents its cost of borrowing. It is based on paragraph 5 of Schedule 13 to FA 2007.
Clause 552: General provisions about arrangements
1458. This clause provides a number of rules for the purpose of applying other clauses in this Chapter. It is based on paragraph 14(5) to (7) of Schedule 13 to FA 2007.
Clause 553: Persons buying or selling for others
1459. This clause ensures that where the sale or purchase of securities is made by a person for the benefit of another, the rules operate by reference to beneficial ownership. It is based on paragraph 14(3) of Schedule 13 to FA 2007.
Clause 554: Power to modify this Chapter
1460. This clause contains a power to modify some of the provisions of the Chapter to deal with non-standard repos or cases involving redemption arrangements. It is based on paragraph 15(1), (6), (7) and (9) of Schedule 13 to FA 2007.
Clause 555: Cases where section 554 applies: non-standard repos
1461. This clause sets out the situations when the powers under clause 554 may be used. It is based on paragraph 15(2) to (5) of Schedule 13 to FA 2007.
Clause 556: Meaning of securities and similar securities
1462. This clause explains the meaning of “securities” for the other clauses. It is based on paragraph 14 of Schedule 13 to FA 2007.
Clause 557: Meaning of person receiving an asset
1463. This clause provides that receiving an asset or payments in respect of an asset includes obtaining the value of, or a benefit from, an asset, whether directly or indirectly. It is based on paragraph 14(2) of Schedule 13 to FA 2007.
Clause 558: Interpretation of accounting expressions
1464. This clause explains accounting expressions used in the Chapter. It is based on paragraph 14(9) and (11) of Schedule 13 to FA 2007.
Clause 559: Minor definitions
1465. This clause provides further definitions for expressions used in this Chapter. It is based on paragraph 14(1) of Schedule 13 to FA 2007.
Chapter 11: Investment life insurance contracts
Overview
1466. This Chapter contains provisions that treat investment life insurance contracts as falling within the loan relationship rules. It is based on Schedule 13 to FA 2008.
Clause 560: Introduction to Chapter
1467. This clause sets out the purpose of the Chapter, how it is arranged and provides definitions for the Chapter. It is based on paragraph 1(1) and (2) of Schedule 13 to FA 2008.
Clause 561: Meaning of “investment life insurance contract”
1468. This clause defines “investment life insurance contract”, and also states the types of policies that are excluded from that definition. It is based on paragraph 1(1) to (3) of Schedule 13 to FA 2008.
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