Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 14 — European cross-border mergers
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“successor creditor company” means a company in relation to which the
loan relationship constituting or included in the original shares is a
creditor relationship immediately after the reorganisation, and
“original holder” and “original shares” have the same meaning as in
section 435.
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(6)
This section is subject to section 438 (disapplication of Chapter where
transparent entities involved).
Exception for tax avoidance cases
437
Tax avoidance etc
(1)
This Chapter does not apply in relation to the merger if—
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(a)
the merger is not effected for genuine commercial reasons, or
(b)
the merger forms part of a scheme or arrangements of which the main
purpose, or one of the main purposes, is avoiding liability to
corporation tax, capital gains tax or income tax.
(2)
But subsection (1) does not prevent this Chapter from applying if before the
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merger—
(a)
any of the merging companies has applied to the Commissioners for
Her Majesty’s Revenue and Customs, and
(b)
the Commissioners have notified the merging companies that they are
satisfied that subsection will not have that effect.
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(3)
Sections 427 and 428 have effect in relation to subsection (2) as in relation to
section 426(2), taking the references in section 428 to section 426(2)(b) as
references to subsection (2)(b) of this section.
Transparent entities
438
Disapplication of Chapter where transparent entities involved
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(1)
This section applies if one or more of the merging companies is a transparent
entity.
(2)
If as a result of the merger the assets and liabilities of a transparent entity are
transferred to another company, this Chapter does not apply in relation to the
transfer.
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(3)
If as a result of the merger the assets and liabilities of one or more other
companies are transferred to a transparent entity, sections 435 and 436 do not
apply to the new holding.
(4)
In this section—
“new holding” has the meaning given by section 126(1) of TCGA 1992
35
(application of sections 126 to 131 of that Act), and
“transparent entity” means a company which is resident in a member
State other than the United Kingdom and does not have an ordinary
share capital.

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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Interpretation
439
Interpretation
(1)
In this Chapter—
“company” means any entity listed as a company in the Annex to the
Mergers Directive, and
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“co-operative society” means a society registered under the Industrial and
Provident Societies Act 1965 (c. 12) or a similar society governed by the
law of a member State other than the United Kingdom.
(2)
For the purposes of this Chapter, a company is resident in a member State if—
(a)
it is within a charge to tax under the law of the State as being resident
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for that purpose, and
(b)
it is not regarded, for the purpose of any double taxation relief
arrangements to which the State is a party, as resident in a territory not
within a member State.
Chapter 15
15
Tax avoidance
Introduction
440
Overview of Chapter
(1)
This Chapter contains rules connected with tax avoidance.
(2)
In particular—
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(a)
for rules about unallowable purposes and tax relief schemes and
arrangements, see sections 441 to 443,
(b)
for rules relating to credits and debits where transactions are not at
arm’s length (other than credits and debits relating to exchange gains
and losses), see sections 444 to 446,
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(c)
for rules relating to credits and debits relating to exchange gains and
losses where transactions are not at arm’s length, see sections 447 to
452,
(d)
for rules about connected parties deriving benefit from creditor
relationships, see section 453,
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(e)
for rules dealing with tax advantages from resetting interest rates, see
section 454, and
(f)
for rules dealing with disposals of rights under creditor relationships
for consideration not fully recognised for accounting purposes, see
section 455.
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Unallowable purposes and tax relief schemes
441
Loan relationships for unallowable purposes
(1)
This section applies if in any accounting period a loan relationship of a
company has an unallowable purpose.

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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(2)
The company may not bring into account for that period for the purposes of
this Part so much of any credit in respect of exchange gains from that
relationship as on a just and reasonable apportionment is attributable to the
unallowable purpose.
(3)
The company may not bring into account for that period for the purposes of
5
this Part so much of any debit in respect of that relationship as on a just and
reasonable apportionment is attributable to the unallowable purpose.
(4)
An amount which would be brought into account for the purposes of this Part
as respects any matter apart from this section is treated for the purposes of
section 464(1) (amounts brought into account under this Part excluded from
10
being otherwise brought into account) as if it were so brought into account.
(5)
Accordingly, that amount is not to be brought into account for corporation tax
purposes as respects that matter either under this Part or otherwise.
(6)
For the meaning of “has an unallowable purpose” and “the unallowable
purpose” in this section, see section 442.
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442
Meaning of “unallowable purpose”
(1)
For the purposes of section 441 a loan relationship of a company has an
unallowable purpose in an accounting period if, at times during that period,
the purposes for which the company—
(a)
is a party to the relationship, or
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(b)
enters into transactions which are related transactions by reference to it,

include a purpose (“the unallowable purpose”) which is not amongst the
business or other commercial purposes of the company.
(2)
If a company is not within the charge to corporation tax in respect of a part of
its activities, for the purposes of this section the business and other commercial
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purposes of the company do not include the purposes of that part.
(3)
Subsection (4) applies if a tax avoidance purpose is one of the purposes for
which a company—
(a)
is a party to a loan relationship at any time, or
(b)
enters into a transaction which is a related transaction by reference to a
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loan relationship of the company.
(4)
For the purposes of subsection (1) the tax avoidance purpose is only regarded
as a business or other commercial purpose of the company if it is not—
(a)
the main purpose for which the company is a party to the loan
relationship or, as the case may be, enters into the related transaction,
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or
(b)
one of the main purposes for which it is or does so.
(5)
The references in subsections (3) and (4) to a tax avoidance purpose are
references to any purpose which consists of securing a tax advantage for the
company or any other person.
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443
Restriction of relief for interest where tax relief schemes involved
(1)
A company may not bring a debit into account for the purposes of this Part in
respect of interest if a tax relief scheme has been effected or tax relief

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Chapter 15 — Tax avoidance
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arrangements have been made in relation to the transaction as a result of which
the interest would be taken into account.
(2)
Subsection (1) applies whether the tax relief scheme is effected or the tax relief
arrangements are made before or after the transaction.
(3)
A scheme is a tax relief scheme in relation to a transaction for the purposes of
5
subsection (1) if it is such that the sole or main benefit that might be expected
to accrue to the company from the transaction is the obtaining of a reduction in
tax liability by bringing the debit into account.
(4)
Arrangements are tax relief arrangements in relation to a transaction for the
purposes of subsection (1) if they are such that the sole or main benefit which
10
might be expected to accrue to the company from the transaction is the
obtaining of a reduction in tax liability by bringing the debit into account.
(5)
Subsection (6) applies if relief is claimed as a result of section 403 of ICTA
(amounts which may be surrendered by way of group relief)—
(a)
in respect of trading losses in a case where, in calculating those losses,
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debits in respect of loan relationships are treated under section 297(3)
as expenses of the trade, or
(b)
in respect of a deficit to which Chapter 16 (non-trading deficits) applies.
(6)
Any question arising under this section as to what benefit might be expected to
accrue from a transaction is to be determined by reference to the claimant
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company and the surrendering company taken together.
(7)
In this section “the claimant company” and “the surrendering company” have
the same meaning as in section 402 of ICTA (see subsection (1) of that section).
Transactions not at arm’s length: general
444
Transactions not at arm’s length: general
25
(1)
If—
(a)
credits or debits in respect of a loan relationship of a company are to be
brought into account for the purposes of this Part in respect of a related
transaction, and
(b)
that transaction is not a transaction at arm’s length,
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those credits or debits are to be determined for the purposes of this Part in
accordance with the independent terms assumption.
(2)
The independent terms assumption is that the transaction was entered into on
the terms on which it would have been entered into between knowledgeable
and willing parties dealing at arm’s length.
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(3)
This section is subject to section 445 (disapplication of this section where
Schedule 28AA to ICTA applies).
(4)
Subsection (1) does not apply to debits arising from the acquisition of rights
under a loan relationship if those rights are acquired for less than market value.
(5)
In a case where the related transaction is a transaction within section 336(2) or
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part of a series of transactions within 336(3) (group transactions), subsection (1)
does not apply if—

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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(a)
section 340 (group transfers and transfers of insurance business:
transfer at notional carrying value) applies as a result of that
transaction or, as the case may be, that series of transactions, or
(b)
section 340 would so apply apart from section 341 (transferor using fair
value accounting).
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(6)
Subsection (1) does not apply to exchange gains or losses (but see sections 447
to 452).
445
Disapplication of section 444 where Schedule 28AA to ICTA applies
(1)
Section 444 does not apply, and Schedule 28AA to ICTA (provision not at arm’s
length) applies instead, to credits or debits in respect of amounts which—
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(a)
fall to be adjusted for tax purposes under that Schedule, or
(b)
are within that Schedule without falling to be so adjusted (see
subsection (3)).
(2)
Subsection (1) applies despite section 464 (amounts brought into account
under this Part excluded from being otherwise brought into account), but is
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subject to—
(a)
section 340(7) (disapplication of Schedule 28AA to ICTA where group
member replaces another as party to loan), and
(b)
section 447(5) (disapplication of that Schedule for exchange gains and
losses).
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(3)
For the purposes of subsection (1), an amount is within Schedule 28AA to ICTA
without falling to be adjusted under it in a case where—
(a)
the conditions in paragraph 1(1) of that Schedule are met, and
(b)
the actual provision does not differ from the arm’s length provision.
(4)
For the way in which this Part applies where adjustments are made under
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Schedule 28AA to ICTA, see section 446.
(5)
In this section “the actual provision” and “the arm’s length provision” have the
same meaning as in Schedule 28AA to ICTA (see paragraph 1 of that Schedule).
446
Bringing into account adjustments made under Schedule 28AA to ICTA
(1)
This section deals with the credits and debits which are to be brought into
30
account for the purposes of this Part as a result of Schedule 28AA to ICTA
(provision not at arm’s length) applying in relation to a company’s loan
relationships or related transactions.
(2)
Subsection (3) applies if under Schedule 28AA to ICTA an amount (“the
imputed amount”) is treated as an amount of profits or losses arising to a
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company from any of its loan relationships or related transactions.
(3)
Credits or debits relating to the imputed amount are to be brought into account
for the purposes of this Part to the same extent as they would be in the case of
an actual amount of such profits or losses.
(4)
Subsection (5) applies if under Schedule 28AA to ICTA an amount is treated as
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interest payable under any of a company’s loan relationships.
(5)
Credits or debits relating to that amount are to be brought into account for the
purposes of this Part to the same extent as they would be in the case of an actual
amount of such interest.

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Chapter 15 — Tax avoidance
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(6)
Subsection (7) applies if under Schedule 28AA to ICTA an amount is treated as
expenses incurred by a company under or for the purposes of any of its loan
relationships or related transactions.
(7)
Debits relating to the amount are to be brought into account for the purposes
of this Part to the same extent as they would be in the case of an actual amount
5
of such expenses.
Transactions not at arm’s length: exchange gains and losses
447
Exchange gains and losses on debtor relationships: loans disregarded under
Schedule 28AA to ICTA
(1)
Subsections (2) and (3) apply if—
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(a)
a company has a debtor relationship in an accounting period,
(b)
an exchange gain or loss arises in the period in respect of a liability
representing the relationship, and
(c)
as a result of paragraph 1 of Schedule 28AA to ICTA (provision not at
arm’s length) the profits and losses of the company are calculated for
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tax purposes for the period as if—
(i)
the loan had not been made, or
(ii)
part of the loan had not been made.
(2)
In a case where subsection (1)(c)(i) applies, the exchange gain or loss must be
be left out of account in determining the credits or debits to be brought into
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account for the purposes of this Part.
(3)
In a case where subsection (1)(c)(ii) applies, a proportion of the exchange gain
or loss must be left out of account in determining those credits or debits.
(4)
That proportion is the proportion that the part of the loan that is treated as if it
had not been made bears to the whole of the loan.
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(5)
Nothing in Schedule 28AA to ICTA requires the amounts brought into account
under this Part in respect of exchange gains or losses from loan relationships
to be calculated on the assumption that the arm’s length provision had been
made instead of the actual provision.
(6)
But subsection (5) does not affect the application of subsections (2) and (3)
30
under subsection (1).
(7)
In this section “the arm’s length provision” and “the actual provision” have the
same meaning as in Schedule 28AA to ICTA (see paragraph 1 of that Schedule).
448
Exchange gains and losses on debtor relationships: equity notes where holder
associated with issuer
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(1)
This section applies if—
(a)
a company has a debtor relationship in an accounting period,
(b)
an exchange gain or loss arises in the period in respect of a liability
representing the relationship, and
(c)
the whole of any interest or other distribution out of the assets of the
40
company in respect of securities of the company which represent the
relationship is regarded as a distribution because of section

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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209(2)(e)(vii) of ICTA (equity notes held by company associated with
issuer or by a funded company).
(2)
The exchange gain or loss must be left out of account in determining the credits
or debits to be brought into account for the purposes of this Part.
449
Exchange gains and losses on creditor relationships: no corresponding debtor
5
relationship
(1)
This section applies if—
(a)
a company has a creditor relationship in an accounting period, and
(b)
an exchange gain or loss arises in the period in respect of an asset
representing the relationship.
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(2)
The exchange gain or loss must be left out of account in determining the credits
or debits to be brought into account for the purposes of this Part if conditions
A and B are met.
(3)
Condition A is that the transaction giving rise to the loan is such that it would
not have been entered into at all if the parties had been dealing at arm’s length.
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(4)
Condition B is that there is no corresponding debtor relationship.
(5)
For the meaning of “corresponding debtor relationship”, see section 450.
(6)
This section is subject to section 451 (exception to this section where loan
exceeds arm’s length amount).
450
Meaning of “corresponding debtor relationship”
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(1)
In section 449 “corresponding debtor relationship” means a debtor relationship
which—
(a)
corresponds to the creditor relationship mentioned in section 449(1),
and
(b)
is of such a kind that conditions A and B are met.
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(2)
Condition A is that such credits as are mentioned in subsection (3) would fall
to be brought into account for the purposes of this Part in respect of exchange
gains from that debtor relationship.
(3)
Those credits are credits corresponding to, and of the same amount as, the
debits that would fall to be so brought into account in respect of exchange
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losses from the creditor relationship apart from section 449.
(4)
Condition B is that such debits as are mentioned in subsection (5) would fall to
be so brought into account in respect of exchange losses from that debtor
relationship.
(5)
Those debits are debits corresponding to, and of the same amount as, the
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credits that would fall to be so brought into account in respect of exchange
gains from the creditor relationship apart from section 449.
(6)
In determining for the purposes of this section whether credits or debits would
fall to be so brought into account, section 328(2) to (7) (as a result of which some
exchange gains and losses are excluded from this Part) is ignored.
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