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 8 — Returns from partnerships
257

(a)
a firm of which it is a member is or may become entitled to receive a
capital contribution from any person (whether directly or indirectly),
and
(b)
that person, or a person connected with that person, receives a sum of
money or other asset from the company (whether directly or
5
indirectly).
(2)
In subsection (1) “relevant arrangements” means arrangements—
(a)
which are designed to produce for the company a return which
equates, in substance, to a return on the investment of the money or
other asset at a commercial rate of interest, and
10
(b)
of which the purpose, or one of the main purposes, is to secure a tax
advantage.
(3)
The return is treated for the purposes of Part 5 as a profit from a loan
relationship of the company.
(4)
The credits to be brought into account in respect of the loan relationship are to
15
be determined on the amortised cost basis of accounting.
(5)
Subsection (6) applies if the return to any extent represents profits of the firm
in respect of which the company is chargeable to corporation tax (whether for
the same or any earlier accounting period).
(6)
The charge to corporation tax is to be reduced to such extent as is just and
20
reasonable.
538
Change of partnership shares
(1)
This section applies if a company is a party to relevant arrangements under
which—
(a)
it makes a capital contribution to a firm of which it is a member,
25
(b)
profits of the firm fall to be shared in such a way that the company is
not allocated the whole of its due share of the profits (see subsection
(7)), and
(c)
the capital of the firm falls to be shared in such a way that the company
or a person connected with the company is entitled to more than the
30
whole of the company’s due share of the capital (see subsection (7)).
(2)
In subsection (1) “relevant arrangements” means arrangements—
(a)
which are designed to produce for the company a return which
equates, in substance, to a return on the investment of the capital
contribution at a commercial rate of interest, and
35
(b)
of which the purpose, or one of the main purposes, is to secure a tax
advantage.
(3)
The return is treated for the purposes of Part 5 as a profit from a loan
relationship of the company.
(4)
The credits to be brought into account in respect of the loan relationship are to
40
be determined on the amortised cost basis of accounting.
(5)
Subsection (6) applies if the return to any extent represents profits of the firm
in respect of which the company is chargeable to corporation tax (whether for
the same or any earlier accounting period).

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 9 — Manufactured interest etc
258

(6)
The charge to corporation tax is to be reduced to such extent as is just and
reasonable.
(7)
For the purposes of subsection (1) a company’s “due share” of any profits or
capital is the share which the company would have been allocated or entitled
to if allocation or entitlement were determined by reference to the proportion
5
of the total capital contributed to the firm which was contributed by the
company.
Chapter 9
Manufactured interest etc
539
Introduction to Chapter
10
(1)
This Chapter deals with the application of Part 5 to manufactured interest
relationships and payments representative of interest.
(2)
For the purposes of the Corporation Tax Acts a company has a manufactured
interest relationship if conditions A and B are met.
(3)
Condition A is that—
15
(a)
an amount is payable by or on behalf of the company or to the company
under any arrangements, and
(b)
the arrangements relate to the transfer of an asset representing a loan
relationship.
(4)
Condition B is that the amount—
20
(a)
is representative of interest under the loan relationship, or
(b)
will fall to be treated as representative of such interest when it is paid.
(5)
In this Chapter—
“manufactured interest”, in relation to a manufactured interest
relationship, means an amount within subsection (3)(a), and
25
“the real interest” means the interest mentioned in subsection (4)(a).
(6)
References in the Corporation Tax Acts to a company being a party to a
manufactured interest relationship are to be read in accordance with this
section.
(7)
For cases where a payment representative of interest is treated as having been
30
made for the purposes of this Chapter, see section 736B(2) of ICTA (deemed
manufactured payments in the case of stock lending arrangements).
540
Manufactured interest treated as interest under loan relationship
(1)
If a company has a manufactured interest relationship under which
manufactured interest is payable by it, Part 5 applies to the company and the
35
manufactured interest as it would if the manufactured interest were interest
payable on a loan to the company (and so were interest under a loan
relationship to which the company is a party).
(2)
If a company has a manufactured interest relationship under which
manufactured interest is payable to it, Part 5 applies to the company and the
40
manufactured interest as it would if—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos
259

(a)
the manufactured interest were interest payable on a loan by the
company (and so were interest under a loan relationship to which the
company is a party), and
(b)
the manufactured interest relationship were the loan relationship
under which the real interest is payable.
5
(3)
Accordingly, subject to subsection (2)(b), references in the Corporation Tax
Acts to a loan relationship include a reference to a manufactured interest
relationship.
(4)
Subsection (5) applies if a company—
(a)
has a manufactured interest relationship, but
10
(b)
enters into a related transaction in respect of the right to receive
manufactured interest as a result of which the manufactured interest is
not payable to the company.
(5)
Even though the manufactured interest is not payable to the company, for the
purpose of bringing credits into account in respect of that or any other related
15
transaction because of the application of subsection (2), the company is still
treated as having a manufactured interest relationship.
(6)
This section is subject to Chapter 10 (repos).
541
Debits for deemed interest under stock lending arrangements disallowed
(1)
This section applies if a company is the borrower under a stock lending
20
arrangement for the purposes of section 736B(2) of ICTA (which treats such a
borrower as having made a payment representative of interest for the purposes
of this Chapter).
(2)
In accordance with section 736B(2A) of that Act (which prevents deductions or
group relief for the borrower in stock lending cases), the company may not
25
bring debits into account for the purposes of Part 5 in respect of the
representative payment which is treated as having been made under section
736B(2) of that Act.
Chapter 10
Repos
30
Introduction
542
Introduction to Chapter
(1)
The purpose of this Chapter is to secure that in the case of an arrangement—
(a)
which involves the sale of securities and the subsequent purchase of
those or similar securities, and
35
(b)
which equates, in substance, to a transaction for the lending of money
at interest from or to a company, with the securities which were sold as
collateral for the loan,

the charge to corporation tax reflects the fact that the arrangement equates, in
substance, to such a transaction.
40
(2)
Sections 543 to 547 make provision about arrangements which are creditor
repos or creditor quasi-repos.

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos
260

(3)
Sections 548 to 551 make provision about arrangements which are debtor repos
or debtor quasi-repos.
Creditor repos and creditor quasi-repos
543
Meaning of creditor repo
(1)
For the purposes of this Chapter a company (“the lender”) has a creditor repo
5
if each of conditions A to E is met.
(2)
Condition A is that under an arrangement another person (“the borrower”)
receives from the lender any money or other asset (“the advance”).
(3)
Condition B is that, in accordance with generally accepted accounting practice,
the accounts of the lender for the period in which the advance is made record
10
a financial asset in respect of the advance.
(4)
Condition C is that under the arrangement the borrower sells any securities at
any time to the lender.
(5)
Condition D is that the arrangement makes provision conferring a right or
imposing an obligation on the lender to sell those or similar securities at any
15
subsequent time.
(6)
Condition E is that, in accordance with generally accepted accounting practice,
the subsequent sale of those or similar securities would extinguish the financial
asset in respect of the advance recorded in the accounts of the lender.
(7)
For the purposes of conditions A to E references to the lender include a firm of
20
which the lender is a member.
544
Meaning of creditor quasi-repo
(1)
For the purposes of this Chapter a company (“the lender”) has a creditor quasi-
repo in any case if—
(a)
the lender does not have a creditor repo in that case, and
25
(b)
each of conditions A to E is met in that case.
(2)
Condition A is that under an arrangement a person receives from the lender
any money or other asset (“the advance”).
(3)
Condition B is that, in accordance with generally accepted accounting practice,
the accounts of the lender for the period in which the advance is made record
30
a financial asset in respect of the advance.
(4)
Condition C is that under that or any other arrangement a person sells any
securities at any time to the lender or any other person.
(5)
Condition D is that the arrangement or other arrangement—
(a)
makes provision conferring a right or imposing an obligation on the
35
lender to sell the securities or any other securities at any subsequent
time, or
(b)
makes provision conferring such a right or imposing such an obligation
on any other person and makes other relevant provision.
(6)
For this purpose an arrangement makes other relevant provision if it makes
40
provision—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos
261

(a)
for the receipt of any money, securities or other asset from the lender
under that arrangement for the purpose of enabling the other person to
make that subsequent sale, or
(b)
for the discharge of any liability to the lender under that arrangement
for that purpose (whether by way of set off or otherwise).
5
(7)
Condition E is that, in accordance with generally accepted accounting
practice—
(a)
the subsequent sale of the securities or the other securities by the
lender, or
(b)
the receipt of the asset from the lender, or the discharge of the liability
10
to the lender, under the arrangement or other arrangement,

would extinguish the financial asset in respect of the advance recorded in the
accounts of the lender.
(8)
For the purposes of conditions A to E references to the lender include a firm of
which the lender is a member.
15
545
Ignoring effect on lender etc of sale of securities
(1)
This section applies if a company (“the lender”) has a creditor repo or a creditor
quasi-repo.
(2)
For the purposes of the charge to corporation tax in respect of income of the
lender arising while the arrangement is in force, the Corporation Tax Acts have
20
effect as if—
(a)
the lender did not hold the securities that are initially sold for any
period for which the arrangement is in force, and
(b)
the lender did not make in that period any payment representative of
income payable in respect of the securities.
25
(3)
But subsection (2) is subject to subsections (4) and (5).
(4)
An amount is not to be ignored for the purposes of that charge as a result of
subsection (2)(a) if—
(a)
it is, in accordance with generally accepted accounting practice,
recognised in determining the lender’s profit or loss for that or any
30
other period, or
(b)
it is taken into account in calculating the amounts which are so
recognised.
(5)
A payment is not to be ignored for the purposes of that charge as a result of
subsection (2)(b) if it is, in accordance with that practice, so recognised.
35
(6)
Nothing in subsection (5) affects the question whether (apart from that
provision) the payment (or any part of it) may be deducted in calculating
income for corporation tax purposes or against total profits.
546
Charge on lender for finance return in respect of the advance
(1)
This section applies if a company (“the lender”) has a creditor repo or creditor
40
quasi-repo.
(2)
The advance under the creditor repo or creditor quasi-repo is, in the case of the
lender, to be treated for the purposes of Part 5 and this Part as a money debt
which—

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos
262

(a)
is owed to the lender or, if the lender is a member of a firm which makes
the advance, to the firm, and
(b)
is owed by the person who initially sold the securities.
(3)
The arrangement is, in the case of the lender, to be treated for the purposes of
those rules as a transaction for the lending of money from which that debt is
5
treated as arising for those purposes.
(4)
Any amount which, in accordance with generally accepted accounting
practice, is recorded in—
(a)
the accounts of the lender, or
(b)
if the lender is a member of a firm which makes the advance, the
10
accounts of the firm,

as a finance return in respect of the advance is treated for those purposes as
interest receivable under that debt.
(5)
That interest is treated for those purposes as received at the earlier of—
(a)
the time when the relevant repurchase takes place, and
15
(b)
the time when it becomes apparent that that repurchase will not take
place.
(6)
For this purpose “the relevant repurchase” means—
(a)
if the lender has a creditor repo, the subsequent sale of the securities or
similar securities, and
20
(b)
if the lender has a creditor quasi repo—
(i)
the subsequent sale of the securities or other securities by the
lender,
(ii)
the receipt of the asset from the lender, or
(iii)
the discharge of the liability to the lender,
25

as the case may be.
547
Repo under arrangement designed to produce quasi-interest: tax avoidance
(1)
This section applies if—
(a)
under an arrangement a person receives any money or other asset (“the
advance”) from a company or a firm of which the company is a
30
member,
(b)
the company does not have a creditor repo or creditor quasi-repo by
reference to the arrangement, but would have one on the applicable
accounting assumption (reading condition E in sections 543 and 544 in
the light of that assumption),
35
(c)
the arrangement is designed to produce a return (“the quasi-interest”)
to the company or firm which equates, in substance, to the return on an
investment of money at interest, and
(d)
the main purpose, or one of the main purposes, of the arrangement is
the obtaining of a tax advantage.
40
(2)
Section 546 applies as if—
(a)
the company had a creditor repo by reference to the arrangement, and
(b)
the quasi-interest were an amount recorded as mentioned in section
546(4).
(3)
In this section “the applicable accounting assumption” is the assumption that,
45
in accordance with generally accepted accounting practice, the accounts of the

Corporation Tax Bill
Part 6 — Relationships treated as loan relationships etc
Chapter 10 — Repos
263

company (or the firm of which it is a member) for the period in which the
advance is made record a financial asset in respect of the advance.
Debtor repos and debtor quasi-repos
548
Meaning of debtor repo
(1)
For the purposes of this Chapter a company (“the borrower”) has a debtor repo
5
if each of conditions A to E is met.
(2)
Condition A is that under an arrangement the borrower receives from another
person (“the lender”) any money or other asset (“the advance”).
(3)
Condition B is that, in accordance with generally accepted accounting practice,
the accounts of the borrower for the period in which the advance is received
10
record a financial liability in respect of the advance.
(4)
Condition C is that under the arrangement the borrower sells any securities at
any time to the lender.
(5)
Condition D is that the arrangement makes provision conferring a right or
imposing an obligation on the borrower to buy those or similar securities at
15
any subsequent time.
(6)
Condition E is that, in accordance with generally accepted accounting practice,
the subsequent buying of those or similar securities would extinguish the
financial liability in respect of the advance recorded in the accounts of the
borrower.
20
(7)
For the purposes of conditions A to E references to the borrower include a firm
of which the borrower is a member.
549
Meaning of debtor quasi-repo
(1)
For the purposes of this Chapter a company (“the borrower”) has a debtor
quasi-repo in any case if—
25
(a)
the borrower does not have a debtor repo, and
(b)
each of conditions A to E is met.
(2)
Condition A is that under an arrangement the borrower receives any money or
other asset (“the advance”).
(3)
Condition B is that, in accordance with generally accepted accounting practice,
30
the accounts of the borrower for the period in which the advance is received
record a financial liability in respect of the advance.
(4)
Condition C is that under that or any other arrangement the borrower sells any
securities at any time.
(5)
Condition D is that the arrangement or other arrangement—
35
(a)
makes provision conferring a right or imposing an obligation on the
borrower to buy the securities or any other securities at any subsequent
time, or
(b)
makes provision conferring such a right or imposing such an obligation
on any other person and makes other relevant provision.
40