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Sections 155 of ITTOIA
3507. This amendment allows as a deduction all levies and costs under FISMA. See Change 22 in Annex 1.
Sections 175 to 184 of ITTOIA
3508. These amendments cater for the possibilities that trading stock is transferred to a person carrying on a profession or vocation or that work in progress is transferred to a person carrying on trade. See Change 39 in Annex 1.
Section 303 of ITTOIA
3509. This amends Rule 1 in section 303 of ITTOIA so that the rule remains the same for income tax as it is for corporation tax. See Change 50 in Annex 1.
Section 860 of ITTOIA
3510. This amendment makes clear that the section applies to property businesses. See Change 88 in Annex 1.
Section 749A of ITTOIA
3511. Section 749A of ITTOIA rewrites section 826(5) of ICTA which was overlooked in the preparation of ITTOIA. It exempts from income tax interest on corporation tax repayments.
Sections 861 and 862 of ITTOIA
3512. These amendments make clear how the rules about spreading receipts from the sale of patent rights apply when there is a change in persons carrying on a trade. See Change 89 in Annex 1.
FA 2005
Section 49(2) of FA 2005
3513. This amendment is a consequence of replacing the term “profit share return” with “alternative finance return”. Refer to the commentary on clause 513. Amendments for the same reason are also required for sections 49A, 51, 52, 56 and 57 of FA 2005.
FA 2006
Sections 46 and 47 of FA 2006
3514. The provisions about film production companies, film tax relief and supporting definitions in sections 31 to 36 of FA 2006 are rewritten. Those definitions are repealed along with the other provisions that are rewritten. But since those FA 2006 definitions also apply for the purposes of sections 46 and 47 of FA 2006 (withdrawal of existing reliefs), this amendment ensures that the rewritten definitions apply for the purposes of sections 46 and 47 of FA 2006.
Section 121 of FA 2006
3515. Section 114(1)(a) of ICTA does not apply to payments received by companies carrying on a trade etc in partnership. So subsection (4) of this section is repealed. See Change 85 in Annex 1.
Paragraph 28 of Schedule 10 to FA 2006
3516. This paragraph determines a company’s share in the profits or losses of a business. Sub-paragraph (2) refers to section 114(2) of ICTA. That reference is replaced by one to clause 1262 of this Bill.
3517. Clauses 1263 and 1264 legislate a non-statutory practice (see Change 86 in Annex 1). The rules in those clauses would not have been taken into account for the purposes of Schedule 10 to FA 2006. So they are excluded by the amendment.
3518. The reference in sub-paragraph (2)(b) to a share in capital allowances and balancing charges has no effect because such allowances and charges are taken into account in calculating the profits or losses of the business. So paragraph (b) is not reproduced in the amendment.
ITA
Section 835A of ITA
3519. The residence rules in section 66 of FA 1988 and section 249 of FA 1994 apply for the purposes of the Taxes Acts as defined in section 118 of TMA. This Bill rewrites those rules for the purposes of the Corporation Tax Acts (Chapter 3 of Part 2). Because the Corporation Tax Acts are defined more narrowly (Schedule 1 to the Interpretation Act 1978) than the Taxes Acts, this new section is introduced into ITA to apply the rules given in Chapter 3 of Part 2 for the purposes of income tax.
Schedule 2: Transitionals and savings
Part 1: General provisions
3520. These paragraphs ensure continuity of the law, despite the fact that this Bill repeals and rewrites provisions.
3521. Paragraph 2 makes clear that the proposition about the continuity of the law in paragraph 1 does not apply to changes in the law made by this Bill.
3522. The paragraphs in this Part stand instead of section 17(2) of the Interpretation Act 1978 and provide a comprehensive set of transitional arrangements.
Part 2: Changes in the law
3523. This paragraph allows anyone affected by a minor change in the law made by this Bill to elect that the change does not apply to events occurring before 1 April 2009. This allows the Bill to be applied as soon as possible without imposing charges retrospectively.
Part 3: Charge to corporation tax on income
Effect of repeal of section 9(1) of ICTA on relevance of case law
3524. The case law to which the saving is relevant is the case law relating to the construction of source legislation rewritten in the Bill whose application for corporation tax purposes depended on section 9(1) of ICTA (which applies income tax principles for corporation tax purposes).
Part 5: Company residence: exceptions to section 14
3525. These paragraphs apply where a company incorporated in the United Kingdom carried on business before 15 March 1988, the commencement date for section 66 of FA 1988 (rewritten in Chapter 3 of Part 2). These paragraphs rewrite parts of paragraphs 1, 2 and 5 of Schedule 7 to FA 1988. Paragraphs 4 and 5 of that Schedule are spent.
3526. United Kingdom incorporated companies which received Treasury consent to migrate from the United Kingdom before the commencement date (paragraph 1) and those with an application in the pipeline before the commencement date (paragraph 2) retain their foreign residence (despite clause 14) until they cease to carry on business or become resident in the United Kingdom under other rules. The provision for the Treasury to consent to company migrations (most recently section 765 of ICTA) was repealed with effect from the commencement date for section 66 of FA 1988.
Part 6: Trading income
Reserves of marketing authorities etc
3527. This paragraph makes clear that the status of schemes or arrangements approved by or made with the National Assembly for Wales before 26 May 2007 is preserved. See Change 15 in Annex 1.
Part 7: Property income
Lease premiums: time limits for claims for repayment of tax
3528. This paragraph provides that the time limit for claims for repayment of tax under clause 238 or 239 is six years after the events described in those clauses. This preserves the period of six years mentioned in section 36(2)(b) of ICTA (charge on sale of land with right to reconveyance) until the Treasury make an order under this paragraph.
Part 8: Loan relationships
Exemption for interest on tax overpaid for accounting periods ending before 1 July 1999
3529. Section 34 of FA 1998 removed the exemption from corporation tax for interest under section 826(1) of ICTA (interest on tax overpaid) for payments made in accounting periods ending on or after 1 July 1999. Section 826(5A) of ICTA, which provides that the exemption does not apply for corporation tax purposes, is not rewritten in this Bill as the interest naturally falls to be charged as income by Part 5 of this Bill.
51/2% Treasury Stock 2008-2012 not redeemed before 6 April 2009
3530. Because this Treasury Stock may be redeemed within a maximum of three years the exemption from charge under Part 5 for amounts other than interest (section 96(2) of FA 1996) is rewritten in this Schedule. See the commentary in the overview of Chapter 12 of Part 5.
Part 10: Derivative contracts
Extended meaning of reference in section 591(6)(b)
3531. This paragraph extends the list of provisions relevant to condition E in clause 591 (conditions A to E mentioned in section 589(5)). It is based on paragraph 4(2D) of Schedule 26 to FA 2002.
Disapplication of section 645
3532. This paragraph disapplies clause 645 (creditor relationships: embedded derivatives which are options) to a derivative contract if paragraph 9(2) of Schedule 10 to FA 2004 has effect in relation to the asset representing the creditor relationship which hosts the derivative contract. It is based on paragraphs 12(11C) and 45D(2) and (4) of Schedule 26 to FA 2002.
3533. That provision of FA 2004 deems an asset representing a creditor relationship no longer to be such if the asset was in existence at a date not later than 31 December 2005. See the following paragraphs for the rules that apply if a derivative contract would be within clause 645 if this paragraph did not apply.
Existing assets representing creditor relationships: options
3534. This paragraph, supplemented by the next two, disapplies clause 574 (non-trading credits and debits to be brought into account under Part 5) in respect of a derivative contract and modifies the application of TCGA in respect of the “original creditor relationship” mentioned in clause 645 (creditor relationships: embedded derivatives which are options), if that clause would have applied to the derivative contract but for the disapplication in the preceding paragraph. This paragraph is based on paragraphs 12(11C) and (11D), 45A(2) and 45FA(1), (3), (4), (6) and (8) of Schedule 26 to FA 2002.
3535. Sub-paragraph (2) disapplies clause 574 in respect of the “relevant credits and debits” arising on the option. Any gain or loss on the exercise or abandonment of the option is dealt with under the provisions of TCGA, as those provisions apply to the creditor relationship. “Relevant credits and debits” are defined in clause 659.
3536. The first modification of TCGA in respect of the original creditor relationship, in sub-paragraph (3), is the same as that made by clause 645(8). The creditor relationship is not treated as a “qualifying corporate bond” although section 117(A1) of TCGA would otherwise treat it as such.
3537. The second modification, in sub-paragraph (4), is to the amount or value of the consideration applicable to the asset representing the creditor relationship on a disposal of that asset. So much of any interest in respect of the creditor relationship as is brought into account under Part 5 (loan relationships) but, because of the terms of the disposal, is not paid or payable to the company to which it accrues, is deducted from the consideration. In effect, the charge under that Part is given priority over the charge to corporation tax on chargeable gains.
3538. The third modification, in sub-paragraph (6), also affects the amount of that consideration. It adjusts that amount for any “relevant exchange gains” and “relevant exchange losses”, as those terms are defined in the paragraph below. The consideration is first increased by any such losses and then reduced by any such gains. If that reduction would exceed the amount of the consideration, that amount becomes nil and, under sub-paragraph (7), the excess is added to incidental costs of acquisition under section 38 of TCGA.
3539. The definition of “relevant exchange gains” and “relevant exchange losses” refers to such gains and losses in respect of the asset representing the creditor relationship as are brought into account under Part 5 (loan relationships) for an accounting period throughout which the company holds the asset. Gains and losses are apportioned as necessary if the company only holds the asset for part of an accounting period. The effect of the adjustments to the consideration is to reverse the application of that Part to exchange gains and losses in respect of the asset in question so that those exchange adjustments are taken into account only in the chargeable gains arising in respect of the asset representing the creditor relationship.
3540. The second of these paragraphs provides definitions for the purposes of the first paragraph. It is based on paragraphs 12(11C) and 45FA(7) of Schedule 26 to FA 2002.
3541. The third of these paragraphs provides for the meaning in the first paragraph of the asset representing the creditor relationship if there has been a reorganisation of share capital. It is based on paragraphs 12(11C) and 45FA(5) of Schedule 26 to FA 2002.
Disapplication of section 648
3542. This paragraph disapplies clause 648 (creditor relationships: embedded derivatives which are exactly tracking contracts for differences) to a derivative contract if paragraph 11(2) of Schedule 10 to FA 2004 has effect in relation to the asset representing the creditor relationship. It is based on paragraphs 12(11C) and 45F(2) and (7) of Schedule 26 to FA 2002.
3543. That provision of FA 2004 deems an asset representing a creditor relationship linked to the value of assets no longer to be such if the asset was in existence at a date not later than 31 December 2005. See the following paragraphs for the rules that apply if a derivative contract would be within clause 648 if this paragraph did not apply.
Existing assets representing creditor relationships: contracts for differences
3544. This paragraph and the next one make, with one exception, corresponding provision in respect of a derivative contract and its host contract, if clause 648 (creditor relationships: embedded derivatives which are exactly tracking contracts for differences) would apply to the derivative contract but for the disapplication in the preceding paragraph, to that made by the paragraphs above for “existing assets representing creditor relationships: options”. The exception is that these paragraphs do not provide specially for exchange gains and losses (“relevant exchange gains” and “relevant exchange losses” in the earlier paragraphs). These paragraphs are based on paragraphs 12(11C) and (11D) and 45FA(1), (2), (3), (4) and (5) of Schedule 26 to FA 2002.
Disapplication of section 658
3545. This paragraph disapplies clause 658 (chargeable gain or allowable loss treated as accruing when certain debtor relationships come to an end) to a derivative contract (and makes a consequential provision) if the liability representing the debtor relationship that hosts the derivative contract was owed before a date that is usually in 2005. It is based on paragraphs 45K(2) and 45KA(1) of Schedule 26 to FA 2002.
3546. The consequential provision is that, if clause 658 would apply to a derivative contract but for this paragraph, this paragraph disapplies clause 574 (non-trading credits and debits to be brought into account under Part 5) in respect of the relevant credits and debits arising on the derivative contract. Any gain or loss arising on the contract for differences is dealt with under the provisions of TCGA, as those provisions apply to the liability representing the debtor relationship. “Relevant credits” and “relevant debits” are defined in clause 659.
Disapplication of section 661
3547. This paragraph disapplies clause 661 (contract which became derivative contract) if the time when the relevant contract became a derivative contract was before 30 December 2006 (the date by reference to which the amendments made by the Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (SI 2006/3269) have effect.). It is based on paragraph 43A(4) of Schedule 26 to FA 2002.
Disapplication of section 666
3548. This paragraph disapplies clause 666 (allowable loss treated as accruing where amount paid in discharge of obligations under debtor relationship) if the liability representing the debtor relationship was owed before a date which is usually in 2005. It is based on paragraph 45JA(1) and (2) of Schedule 26 to FA 2002.
Contracts which became derivative contracts on 16 March 2005
3549. This paragraph brings into account as a chargeable gain or allowable loss, when a company ceases to be a party to the contract, the gain or loss latent in a contract that became a derivative contract from 3.00pm on 16 March 2005 (the time at which the 2005 Budget announced proposed changes to the definition of what is a derivative contract). It is based on paragraph 4A(1), (2) and (3) of Schedule 26 to FA 2002.
3550. A contract that was not a derivative contract before that time but became one after that time is commonly one that formerly met the conditions for its underlying subject matter to be “excluded property” (see the commentary on clause 589 (contracts excluded because of underlying subject matter: general)). The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (SI 2005/646) amended the conditions for that purpose from that time to cut down the range of excluded property (see the conditions in clause 591 (conditions A to E mentioned in section 589(5))). Rather than covering most cases where the underlying subject matter of the contract is shares, either by themselves or in conjunction with holdings in shares, the excluded property rule now focuses on contracts used to hedge assets which are shares on which chargeable gains arise.
3551. The paragraph only applies if the contract was a “chargeable asset” immediately before it became a derivative contract (see the definition of that term in clause 703).
3552. Sub-paragraph (5) requires a chargeable gain or allowable loss to be brought into account on the assumption the company disposed of the contract immediately before it became a derivative contract and did so for consideration equal to the book value of the contract (if any) at the end of the last accounting period of the company before that to which the changes made by SI 2005/646 apply.
3553. Paragraph (b) of sub-paragraph (6) defines that period. In the source legislation, the words used are “the company’s accounting period immediately before its first new period”. The term “new period” is not otherwise used in SI 2005/646. But a “new period” cannot predate the first period to which the amendments made by those regulations apply (as set out in article 1 of SI 2005/646). The paragraph has therefore been aligned with the commencement terms of SI 2005/646. See Change 106 in Annex 1.
Contracts which became derivative contracts on 28 July 2005
3554. This paragraph treats a relevant contract to which it applies as a derivative contract entered into by a company on 28 July 2005 and determines the value of the consideration given for the contract. It also brings into account as a chargeable gain or allowable loss when the company ceases to be a party to the contract the gain or loss latent in the contract at 28 July 2005. It is based on paragraph 4B(1), (2), (3) and (4) of Schedule 26 to FA 2002.
3555. The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No 2) Order 2005 (SI 2005/2082) extends the scope of the amendments made by SI 2005/646 to the “excluded property” rules (see clause 589 (contracts excluded because of underlying subject matter: general)). See the comments on the amendment of the “excluded property” rules in connection with the preceding paragraph.
3556. A contract to which this paragraph applies is one that was not a derivative contract immediately before 28 July 2005 (although it was a “chargeable asset” at that point). But it would have been a derivative contract had an accounting period of the company begun on that date, that is, when the amendments made by SI 2005/2082 came into force. Because of the rule in this case, it is immaterial when the actual accounting period of the company began in which 28 July 2005 falls.
3557. The definition of “chargeable asset” in clause 703 applies.
3558. Sub-paragraph (6) brings into account the chargeable gain or allowable loss latent in the contract at the time it is treated as becoming a derivative contract. It does so in the same way as the preceding paragraph with one exception. This is that the consideration for the disposal is equal to the fair value of the contract on 28 July 2005 (that is, the same figure as is taken to be the consideration for the deemed derivative contract in the subsequent application of Part 7 to the contract).
Plain vanilla contracts which became derivative contracts before 30 December 2006
3559. This paragraph modifies the amounts otherwise allowable as acquisition costs under section 38 of TCGA on the disposal of a plain vanilla contract if the disposal occurs because the company ceases to be a party to the contract. It is based on paragraph 4D of Schedule 26 to FA 2002.
3560. There are two conditions to be met. The first is that the plain vanilla contract was previously not a derivative contract but became one at a date before 30 December 2006. Although the paragraph does not specify in what circumstances the contract became a derivative contract, it is likely to be the case that it had ceased to satisfy the conditions in clause 589 (contracts excluded because of underlying subject matter: general) under which the underlying subject matter of the contract was “excluded property”.
3561. The second condition is that neither of the two preceding paragraphs applies on the company ceasing to be a party to the contract.
3562. 30 December 2006 is the date by reference to which the amendments made by the Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (SI 2006/3269) have effect.
3563. Sub-paragraph (2) disapplies clause 699 (priority of Part 7 for corporation tax purposes) in respect of a disposal to which this paragraph applies (that is, the provisions of this paragraph do not exhaust the application of the Corporation Tax Acts to this disposal).
3564. The adjustments made by this paragraph to the acquisition costs allowable under section 38 of TCGA are similar to those made by a number of provisions in Chapter 8 of Part 7. As with those clauses, this paragraph in effect reverses the treatment of credits and debits in respect of the derivative contract so that double counting is avoided when the contract is disposed of.
3565. And similarly again to those clauses, if the adjustment to be made under sub-paragraph (3) is a reduction that exceeds the amounts otherwise allowable under section 38 of TCGA, the excess is added to the consideration for the disposal.
3566. “Plain vanilla contract” is defined in clause 708.
Issuers of securities with embedded derivatives: deemed options
3567. This paragraph disapplies clauses 653 and 655 and varies the application of clause 654 in a case where the company was a party to the debtor relationship in question immediately before its first accounting period to begin on or after 1 January 2005. It is based on paragraph 45J(4) of Schedule 26 to FA 2002.
3568. The paragraph preserves the commencement rules that apply on the insertion of paragraph 45J of Schedule 26 to FA 2002.
Contract becoming derivative contract on 12 March 2008
3569. This paragraph determines the consideration treated as given for a relevant contract that became a derivative contract on 12 March 2008 by virtue of certain provisions of FA 2008. It is based on paragraph 20 of Schedule 22 to FA 2008.
3570. Paragraph 20 of Schedule 22 to FA 2008 amends the source legislation for clauses 579(1) and 589(5) with effect from 12 March 2008, the effect of which is that a number of relevant contracts became derivative contracts. This paragraph determines the consideration treated as given for such a derivative contract so that the provisions setting out the credits and debits to be brought into account under Part 7 may be applied.
Avoidance relying on continuity of treatment provisions: transactions before 16 May 2008
3571. This paragraph preserves the commencement rules applying on the introduction of the source legislation for clause 629. It is based on paragraph 5(3) of Schedule 22 to FA 2008.
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