Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 2 — Relevant non-lending relationships
229

Application of Part 5 to relevant non-lending relationships
481
Application of Part 5 to relevant non-lending relationships
(1)
If a company has a relevant non-lending relationship—
(a)
Part 5 (loan relationships) applies in relation to the relevant matters (see
subsections (3) and (5)) as it applies in relation to such matters arising
5
under or in relation to a loan relationship, but
(b)
the only credits or debits to be brought into account for the purposes of
that Part in respect of the relationship are those relating to those
matters.
(2)
Accordingly, subject to subsection (1)(b), references in the Corporation Tax
10
Acts to a loan relationship include a reference to a relevant non-lending
relationship.
(3)
The relevant matters in the case of a relevant non-lending relationship within
section 479 are—
(a)
interest payable to or by the company in respect of the relevant non-
15
lending relationship,
(b)
exchange gains or losses arising to the company as a result of the
relationship,
(c)
in the case of a debt on which interest is payable to the company, profits
(but not losses) arising to the company from any related transaction in
20
respect of the right to receive interest,
(d)
in the case of a debt in relation to which an impairment loss arises to the
company in respect of an unpaid business payment, the impairment,
and
(e)
in the case of a debt in relation to which a credit in respect of the
25
reversal of an impairment loss arises to the company in respect of a
previously unpaid business payment, the reversal.
(4)
In subsection (3) “business payment” has the meaning given in section 479(3).
(5)
The relevant matters in the case of a relevant non-lending relationship within
section 480 are—
30
(a)
the matters referred to in subsection (3),
(b)
the discount arising to the company from the money debt,
(c)
profits (but not losses) arising to the company from any related
transaction,
(d)
any impairment arising to the company in respect of the discount, and
35
(e)
any reversal of any such impairment.
(6)
Subsection (7) applies if a company—
(a)
has a relevant non-lending relationship within section 479 because of a
debt on which interest is payable to the company, but
(b)
enters into a related transaction in respect of the right to receive interest
40
as a result of which interest is not so payable.
(7)
Even though the interest is not payable to the company, for the purpose of
bringing credits into account in respect of that or any other related transaction
as a result of the application of subsection (3)(c), the company is still treated as
having a relevant non-lending relationship within section 479.
45

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 2 — Relevant non-lending relationships
230

(8)
Section 480(5) (when discount arises) applies for the purpose of this section as
it applies for the purposes of section 480.
482
Miscellaneous rules about amounts to be brought into account because of this
Chapter
(1)
Any credits or debits which—
5
(a)
relate to interest payable under the Tax Acts, and
(b)
fall to be brought into account because of this Chapter,

are treated for the purposes of Part 5 as non-trading credits or debits.
(2)
The credits to be brought into account for the purposes of that Part in respect
of a discount arising from a money debt under a relevant non-lending
10
relationship are to be determined using an amortised cost basis of accounting.
Meaning of “money debt” and “interest” in this Chapter
483
Exchange gains and losses: amounts treated as money debts
(1)
This section applies for the purposes of this Chapter so far as relating to
exchange gains and losses.
15
(2)
Any currency held by a company is treated as a money debt owed to the
company.
(3)
A provision made by a company for the purposes of its statutory accounts in
respect of a liability to which the company may become subject is treated as a
money debt owed by the company if it meets conditions A and B.
20
(4)
Condition A is that if the company became subject to the liability, the duty to
settle it would be owed for the purposes of—
(a)
a trade,
(b)
a UK property business, or
(c)
an overseas property business.
25
(5)
Condition B is that the provision falls to be taken into taken into account (apart
from Part 5) in calculating the profits or losses of the trade, UK property
business or overseas property business for corporation tax purposes.
(6)
In the case of a company carrying on insurance business—
(a)
any deferred acquisition costs are treated as a money debt owed to the
30
company, and
(b)
any provision made by the company for unearned premiums or for
unexpired risks is treated as a money debt owed by the company.
(7)
In subsection (6)—
(a)
“deferred acquisition costs” has the meaning given in Assets item G.II
35
in the Balance Sheet Format set out after paragraph 10 of Schedule 3 to
the Large and Medium-sized Companies and Groups (Accounts and
Reports) Regulations 2008 (S.I. 2008/410), as read with note (17) of the
Notes on the Balance Sheet Format (which immediately follow that
Format),
40
(b)
“provision made by the company for unearned premiums” has the
meaning given in Liabilities item C.1 in that Balance Sheet Format, as
read with notes (12) and (20) of those Notes, and

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 2 — Relevant non-lending relationships
231

(c)
“provision for unexpired risks” has the meaning given in paragraph 91
of that Schedule.
(8)
This section is subject to section 486 (exclusion of exchange gains and losses in
respect of tax debts etc).
484
Provision not at arm’s length: meaning of “interest” and “money debt”
5
(1)
References in this Chapter to interest payable on a money debt include a
reference to any amount which because of Schedule 28AA to ICTA (provision
not at arm’s length) falls to be treated as—
(a)
interest on a money debt, or
(b)
interest on an amount (“the notional debt”) which is treated as a money
10
debt.
(2)
Accordingly, references in this Chapter to a money debt include references to
the notional debt.
Exclusions
485
Exclusion of debts where profits or losses within Part 7 or 8
15
This Chapter does not apply to a debt in respect of which profits or losses (if
any) fall to be brought into account under—
(a)
Part 7 (derivative contracts), or
(b)
Part 8 (intangible fixed assets).
486
Exclusion of exchange gains and losses in respect of tax debts etc
20
(1)
No exchange gains or losses arise for the purposes of this Chapter if the money
debt by reference to which the relevant non-lending relationship exists (“the
relevant money debt”) is an amount of tax payable under the law of the United
Kingdom.
(2)
If the relevant money debt is an amount of tax payable under the law of a
25
territory outside the United Kingdom, exchange gains or losses arise for the
purposes of this Chapter only so far as a deduction in respect of the tax falls to
be made under section 811 of ICTA (double taxation relief: deduction for
foreign tax where no credit allowable).
(3)
No exchange gains or losses arise for the purposes of this Chapter if the
30
relevant money debt is an amount which would be deductible apart from—
(a)
a statutory provision other than section 53 (capital expenditure), or
(b)
a rule of law.
(4)
The reference in subsection (3) to an amount being deductible is a reference to
its being deductible—
35
(a)
as an expense in calculating trading profits,
(b)
as expenses of management within section 1219 (expenses of
management of a company’s investment business), or
(c)
as expenses falling to be brought into account at Step 1 of section 76(7)
of ICTA (expenses of insurance companies).
40

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 3 — OEICs, unit trusts and offshore funds
232

Chapter 3
OEICs, unit trusts and offshore funds
Introduction
487
Overview of Chapter
(1)
This Chapter provides for the Corporation Tax Acts to apply in some
5
circumstances to holdings in open-ended investment companies, unit trust
schemes and offshore funds as if they were rights under a creditor relationship
(see section 490).
(2)
That treatment depends on the company, scheme or fund failing the qualifying
investments test.
10
(3)
Sections 493 to 496 deal with when that test is met.
(4)
For the meaning of “open-ended investment company” and “offshore fund” in
this Chapter, see sections 488 and 489 respectively.
488
Meaning of “open-ended investment company” etc
(1)
Section 468A(2) and (3) of ICTA (meaning of “open-ended investment
15
company” and “company” and application to parts of umbrella companies)
apply for the purposes of this Chapter as they apply for the purposes of section
468A of that Act.
(2)
In this Chapter “umbrella company” has the meaning given by section 468A(4)
of ICTA.
20
489
Meaning of “offshore fund” etc
(1)
Sections 756A to 756C of ICTA (meaning of “offshore fund” and application to
parts of umbrella funds and classes of interests in offshore funds) apply for the
purposes of this Chapter as they apply for the purposes of Chapter 5 of Part 17
of that Act, except as provided in subsection (2).
25
(2)
For the purposes of this Chapter “offshore fund” includes anything which
would be an offshore fund for the purposes of Chapter 5 of Part 17 of ICTA if
the unit trust schemes and arrangements referred to in section 756A(1)(b) and
(c) of that Act were not limited to collective investment schemes (and sections
756B and 756C of that Act apply for the purposes of this Chapter accordingly).
30
(3)
For the purposes of this Chapter an interest in an offshore fund is a material
interest in such a fund if it is such an interest for the purposes of section 759 of
ICTA or would be if those schemes and arrangements were not so limited.
Holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights
490
Holdings in OEICs, unit trusts and offshore funds treated as creditor
35
relationship rights
(1)
This section applies if—
(a)
at any time in an accounting period of a company it holds—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 3 — OEICs, unit trusts and offshore funds
233

(i)
any shares in an open-ended investment company,
(ii)
any rights under a unit trust scheme, or
(iii)
a material interest in an offshore fund, and
(b)
there is a time in the period when that company, scheme or fund fails
to meet the qualifying investments test (see section 493).
5
(2)
The Corporation Tax Acts have effect for the accounting period in accordance
with subsections (3) and (4) as if the relevant holding were rights under a
creditor relationship of the company.
(3)
The credits and debits to be brought into account for the purposes of Part 5 in
respect of the company’s relevant holdings are to be determined on the basis
10
of fair value accounting.
(4)
But a credit relating to distributions of an open-ended investment company or
authorised unit trust which become due and payable in an accounting period
is only to be brought into account for that period if they are interest
distributions.
15
(5)
In subsection (4) “interest distributions” has the meaning given by regulations
made under section 17(3) of F(No.2)A 2005.
(6)
In this section and sections 491 and 492 “relevant holding” means a holding
within subsection (1)(a).
(7)
But arrangements that are investment bond arrangements for the purposes of
20
Chapter 6 of this Part or are within section 48A of FA 2005 (alternative finance
arrangements: alternative finance investment bond: introduction) are not
treated as such a holding.
(8)
See section 18(2)(c)(i) of F(No.2)A 2005 (section 17(3): specific powers) for the
power to modify “relevant holding” for the purposes of this section and section
25
492 by regulations under section 17(3) of that Act (regulations about authorised
unit trusts and OEICS).
491
Holding coming within section 490: opening valuations
(1)
This section applies if—
(a)
a relevant holding is held by a company both—
30
(i)
at the end of one accounting period (“the first period”), and
(ii)
at the beginning of the next (“the second period”), and
(b)
section 490 applies to the holding for the second period but not the first
period.
(2)
For the purposes of section 490(3), the opening value of the holding as at the
35
beginning of the second period is taken to be equal to its market value for the
purposes of TCGA 1992 immediately before the end of the first period (see
section 272 of that Act).
492
Disregard of investments made and liabilities incurred with avoidance
intention etc
40
(1)
In determining the credits and debits in respect of a company’s relevant
holdings under section 490(3), amounts relating to any investment or liability
of the open-ended investment company, unit trust scheme or offshore fund
must be left out of account if—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 3 — OEICs, unit trusts and offshore funds
234

(a)
the investment was made, or the liability was incurred, with the
relevant avoidance intention, or
(b)
any transaction or series of transactions was entered into in relation to
the investment or liability with that intention.
(2)
The relevant avoidance intention is the intention of—
5
(a)
eliminating or reducing the credits to be brought into account for the
purposes of Part 5 or this Part as respects the company’s relevant
holdings, or
(b)
creating or increasing the debits to be so brought into account.
The qualifying investments test
10
493
The qualifying investments test
(1)
An open-ended investment company, a unit trust scheme or an offshore fund
meets the qualifying investments test for the purposes of this Chapter if the
market value of the qualifying investments of the company, scheme or fund
does not exceed 60% of the market value of all its investments.
15
(2)
References in this section and sections 494 and 495 to investments of an open-
ended investment company are references—
(a)
except where paragraph (b) applies, to the property subject to the
collective investment scheme constituted by the company, and
(b)
in a case where under section 468A(3) of ICTA part of an umbrella
20
company is regarded as an open-ended investment company, to such
of the property subject to the collective investment scheme constituted
by the umbrella company as forms part of the separate pool in question,

other than cash awaiting investment.
(3)
References in this section and sections 494 and 495 to investments of a unit trust
25
scheme are references to investments subject to the trusts of the scheme, other
than cash awaiting investment.
(4)
References in this section and sections 494 and 495 to investments of an
offshore fund are references to assets of the fund, other than cash awaiting
investment.
30
(5)
In this section “collective investment scheme” has the meaning given by
section 235 of FISMA 2000.
(6)
A person with rights in a part of an umbrella company which is regarded
under section 468A(3) of ICTA as an open-ended investment company is
treated for the purposes of this section as not owning shares in the umbrella
35
company.
(7)
For the meaning of references to investments subject to the trusts of the scheme
in the case of certain authorised unit trusts, see section 468(9) of ICTA
(umbrella schemes).
494
Meaning of “qualifying investments”
40
(1)
In section 493 “qualifying investments”, in relation to an open-ended
investment company, a unit trust scheme or an offshore fund, means
investments of the company, scheme or fund of any of the following
descriptions—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 3 — OEICs, unit trusts and offshore funds
235

(a)
money placed at interest,
(b)
securities,
(c)
shares in a building society,
(d)
qualifying holdings in an open-ended investment company, a unit trust
scheme or an offshore fund,
5
(e)
alternative finance arrangements,
(f)
derivative contracts whose underlying subject matter consists wholly
of any one or more of—
(i)
the matters referred to in paragraphs (a) to (e) (other than
diminishing shared ownership arrangements), and
10
(ii)
currency,
(g)
contracts for differences whose underlying subject matter consists
wholly of any one or more of—
(i)
interest rates,
(ii)
creditworthiness, and
15
(iii)
currency, and
(h)
derivative contracts not within paragraph (f) or (g) where there is a
hedging relationship between the contract and an asset within
paragraphs (a) to (d).
(2)
In this section—
20
“contract for differences” has the same meaning as in Part 7 (derivative
contracts) (see section 582),
“diminishing shared ownership arrangements” means arrangements to
which section 504 applies,
“hedging relationship” has the meaning given by section 496,
25
“qualifying holding” has the meaning given by section 495(1),
“security” does not include shares in a company, and
“underlying subject matter” has the same meaning as in Part 7 (derivative
contracts) (see section 583).
495
Qualifying holdings
30
(1)
For the purposes of section 494(1)(d) a holding in an open-ended investment
company, a unit trust scheme or an offshore fund is a qualifying holding at any
time if—
(a)
at that time, or
(b)
at any other time in the relevant accounting period,
35

the company, scheme or fund would itself fail to meet the qualifying
investments test, even on the assumption in subsection (2).
(2)
The assumption is that investments of the company, scheme or fund are
qualifying investments in relation to the company, scheme or fund only if they
are within section 494(1)(a), (b), (c), (e), (f), (g) or (h).
40
(3)
In this section “holding”—
(a)
in relation to an open-ended investment company, means—
(i)
except where sub-paragraph (ii) applies, shares in the company,
and
(ii)
in a case where under section 468A(3) of ICTA part of an
45
umbrella company is regarded as an open-ended investment
company, rights in the separate pool in question,