Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 11 — Tax avoidance
332

(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.
(3)
Sections 678 and 679 have effect in relation to subsection (2) as in relation to
5
section 677(2), taking the references in section 679 to section 677(2)(b) as
references to subsection (2)(b) of this section.
Transparent entities
687
Disapplication of Chapter where transparent entities involved
(1)
This section applies if one or more of the merging companies is a transparent
10
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.
(3)
In this section “transparent entity” means a company which is resident in a
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member State other than the United Kingdom and which does not have an
ordinary share capital.
Interpretation
688
Interpretation
(1)
In this Chapter—
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“company” means any entity listed as a company in the Annex to the
Mergers Directive, and
“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.
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(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
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
30
within a member State.
Chapter 11
Tax avoidance
Introduction
689
Overview of Chapter
35
(1)
This Chapter contains rules connected with tax avoidance.
(2)
In particular—

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Part 7 — Derivative contracts
Chapter 11 — Tax avoidance
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(a)
for rules about unallowable purposes, see sections 690 to 692,
(b)
for rules relating to credits and debits where transactions are not at
arm’s length, see sections 693 to 695,
(c)
for rules relating to credits and debits in the case of transactions with
non-UK residents, see sections 696 and 697, and
5
(d)
for rules relating to disposals for consideration not fully recognised by
accounting practice, see section 698.
Unallowable purposes
690
Derivative contracts for unallowable purposes
(1)
This section applies if in any accounting period a derivative contract of a
10
company has an unallowable purpose.
(2)
The company may not bring into account for that period for the purposes of
this Part so much of any exchange credit in respect of that contract as is
referable to the unallowable purpose on a just and reasonable apportionment.
(3)
The company may not bring into account for that period for the purposes of
15
this Part so much of any debit in respect of that contract as is referable to the
unallowable purpose on a just and reasonable apportionment.
(4)
Subsections (2) and (3) are subject to section 692 (allowance of accumulated net
losses).
(5)
An amount which would be brought into account in accordance with this Part
20
as respects any matter apart from this section and section 692—
(a)
is treated for the purposes of section 699(1) (priority of this Part for
corporation tax purposes) as if it were so brought into account, and
(b)
accordingly may not be brought into account for any other corporation
tax purposes as respects that matter.
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(6)
For the purposes of this section and section 692, a credit is an exchange credit,
in the case of any company, so far as it is attributable to any exchange gains
arising to the company which are included in the reference to profits of the
company in section 595(3) (see section 606 (exchange gains and losses from
derivative contracts)).
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(7)
For the meaning of “has an unallowable purpose” and “the unallowable
purpose” in this section and section 692, see section 691.
691
Meaning of “unallowable purpose”
(1)
For the purposes of sections 690 and 692, a derivative contract of a company
has an unallowable purpose in an accounting period if the purposes for which,
35
at times during that period, the company—
(a)
is a party to the contract, or
(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.
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(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
purposes of the company do not include the purposes of that part.

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Chapter 11 — Tax avoidance
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(3)
Subsection (4) applies if a tax avoidance purpose is one of the purposes for
which a company—
(a)
is a party to a derivative contract at any time, or
(b)
enters into a transaction which is a related transaction by reference to a
derivative contract of the company.
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(4)
For the purpose 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 derivative
contract or, as the case may be, enters into the related transaction, or
(b)
one of the main purposes for which it is or does so.
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(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.
(6)
In this section “tax advantage” has the meaning given by section 840ZA of
ICTA (meaning of “tax advantage”).
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692
Allowance of accumulated net losses
(1)
This section applies if—
(a)
in any accounting period a derivative contract of a company has an
unallowable purpose, and
(b)
there is a net loss in respect of that contract for that period.
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(2)
For the purposes of this section, there is such a net loss if—
(a)
the sum of the debits in respect of that contract which are excluded
from being brought into account for that period by section 690(3),
exceeds
(b)
the sum of the exchange credits in respect of that contract which are so
25
excluded by section 690(2).
(3)
The amount of that excess is the amount of the net loss in respect of the contract
for the period.
(4)
The amount of the excess accumulated net losses in respect of the contract for
an accounting period is to be brought into account as a debit for that period.
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(5)
The amount of the excess accumulated net losses in respect of a contract for an
accounting period is found as follows.
Step 1

Add together the amount of any net loss arising in respect of the contract for
that accounting period and earlier accounting periods.
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Step 2

Deduct from the result of Step 1 any amount which was brought into account
in accordance with this section in any earlier accounting period.
Step 3

Add together the amount of any credits (other than exchange credits) arising
40
in respect of the contract for that accounting period or any earlier accounting
period.

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Step 4

Deduct from the result of Step 3 (but not so as to reduce it below nil)—
(a)
so much of any debits arising in respect of the contract for that
accounting period or any earlier accounting period as is not excluded
from being brought into account by section 690(3), and
5
(b)
any amount which was brought into account in accordance with this
section in any earlier accounting period.
Step 5

Compare the result of Step 2 and the result of Step 4.

The amount of the excess accumulated net losses for the period is the lower of
10
those results.
Transactions not at arm’s length
693
Bringing into account adjustments under Schedule 28AA to ICTA
(1)
This section deals with the credits and debits which are to be brought into
account in accordance with this Part as a result of Schedule 28AA to ICTA
15
(provision not at arm’s length) applying in relation to a company’s derivative
contracts 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
company from any of its derivative contracts or related transactions.
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(3)
Credits or debits relating to the imputed amount are to be brought into account
in accordance with 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
expenses incurred by a company under or for the purposes of any of its
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derivative contracts or related transactions.
(5)
Debits relating to the amount are to be brought into account in accordance with
this Part to the same extent as they would be in the case of an actual amount of
such expenses.
694
Exchange gains and losses
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(1)
Subsections (2) to (7) apply if—
(a)
a company is a party to a derivative contract in an accounting period,
and
(b)
an exchange gain or exchange loss arises to the company for the
accounting period from the contract.
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(2)
Subsection (3) applies if as a result of Schedule 28AA to ICTA (provision not at
arm’s length) the company’s profits and losses are calculated for tax purposes
as if it were not a party to the contract.
(3)
Any exchange gains or losses which arise to the company from the contract for
the accounting period are left out of account in determining the credits and
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debits to be brought into account in accordance with this Part.

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(4)
Subsection (5) applies if as a result of Schedule 28AA to ICTA the company’s
profits and losses are calculated for tax purposes as if the terms of the contract
were those which would have been agreed by the company and the other party
to the contract had they been dealing at arm’s length (“the arm’s length
terms”).
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(5)
The credits and debits which are to be brought into account in accordance with
this Part in the case of the company are to be determined on the assumption
that the amount of any exchange gain or loss arising to the company from the
contract in the accounting period is the adjusted amount.
(6)
In subsection (5), the “adjusted amount” means the amount of an exchange
10
gain or loss which would have arisen from the contract if its terms were the
arm’s length terms.
(7)
That amount may be nil.
(8)
Nothing in Schedule 28AA to ICTA requires the amounts brought into account
in accordance with this Part in respect of exchange gains and losses from
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derivative contracts to be calculated on the assumption that the arm’s length
provision had been made instead of the actual provision.
(9)
But subsection (8) does not affect the application of—
(a)
subsection (3) under subsection (2), or
(b)
subsection (5) under subsection (4).
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(10)
In subsection (8) “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).
695
Transfers of value to connected companies
(1)
This section applies if—
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(a)
a company (“A”) paid an amount (“amount X”) to a company (“B”) for
the grant of an option,
(b)
there is a failure to exercise in full all the rights under the option,
(c)
until the failure the option was a derivative contract of A,
(d)
as a result of the failure there is a transfer of value by A to B,
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(e)
B is a connected company in relation to A, and
(f)
B is not chargeable to corporation tax in accordance with this Part in
respect of the derivative contract.
(2)
A must bring into account a credit of the appropriate amount in respect of the
derivative contract for the accounting period in which the option expired or
35
would have expired if none of the rights under it had been exercised.
(3)
If the option expired, “the appropriate amount” means amount X.
(4)
If any rights under the option were exercised (in whole or in part), “the
appropriate amount” means amount X less so much of it as is referable, on a
just and reasonable basis, to the rights which have been so exercised.
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(5)
In determining for the purposes of subsection (1)(d) whether there is a transfer
of value, the assumption in subsection (6) is made.
(6)
That assumption is that if there had not been a connection between A and B—
(a)
all the rights under the option would have been exercised in full, and

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(b)
all of those rights would have been exercised on the latest date on
which they were exercisable.
(7)
In this section “option” is to be construed as if section 580(2) and (3) (meaning
of “option”) were omitted.
(8)
For the purposes of this section, B is a connected company in relation to A in
5
an accounting period if there is a time in the period when—
(a)
A controls B,
(b)
B controls A, or
(c)
A and B are both controlled by the same person.
(9)
But A and B are not taken to be controlled by the same person just because they
10
have been under the control of—
(a)
a Minister of the Crown,
(b)
a government department,
(c)
a Northern Ireland department,
(d)
a foreign sovereign power, or
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(e)
an international organisation.
(10)
Section 472 (meaning of “control”) applies for the purposes of this section.
Transactions with non-UK residents
696
Derivative contracts with non-UK residents
(1)
This section applies in relation to a company (“A”) if, as a result of any
20
transaction—
(a)
A becomes a party to a derivative contract to which a non-UK resident
(“NR”) is a party,
(b)
NR becomes a party to a derivative contract to which A is a party, or
(c)
A and NR both become a party to a derivative contract.
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(2)
For each accounting period for any part of which A and NR are both a party to
a derivative contract which makes provision for notional interest payments,
the credits and debits which fall to be brought into account in accordance with
this Part in respect of the contract in the case of A do not include the amount of
any excluded debit in relation to that contract.
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(3)
The amount of an excluded debit is calculated by determining for the
accounting period the amount (if any) by which—
(a)
the sum of any notional interest payments made by A to NR while A
and NR are both a party to the contract,

exceeds
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(b)
the sum of any notional interest payments made by NR to A during that
time.
(4)
For the purposes of this section, a payment is a notional interest payment if—
(a)
a derivative contract specifies—
(i)
a notional principal amount,
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(ii)
a period, and
(iii)
a rate of interest,

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(b)
the amount of the payment is determined (wholly or mainly) by
applying a rate to the specified notional principal amount for the
specified period, and
(c)
the value of the rate is the same at all times as that of the specified rate
of interest.
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(5)
This section is subject to section 697.
697
Exceptions to section 696
(1)
Section 696 does not apply if A—
(a)
is a bank, building society, financial trader or recognised clearing
house,
10
(b)
is a party to the derivative contract solely for the purposes of a trade or
part of a trade it carries on in the United Kingdom, and
(c)
is a party to it otherwise than as agent or nominee of another person.
(2)
Section 696 does not apply if NR—
(a)
is a party to the derivative contract solely for the purposes of a trade or
15
part of a trade which NR carries on in the United Kingdom through a
relevant entity, and
(b)
is a party to it otherwise than as agent or nominee of another person.
(3)
Section 696 does not apply if arrangements made in relation to the territory in
which NR is resident—
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(a)
have effect because of section 788 of ICTA (double taxation relief), and
(b)
make provision in relation to interest (as defined in the arrangements).
(4)
It does not matter whether the provision mentioned in subsection (3)(b) is for
relief or otherwise.
(5)
If NR is a party to the contract as agent or nominee of another person,
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subsection (3) applies as if the reference to the territory in which NR is resident
were a reference to the territory in which that other person is resident.
(6)
In this section—
“recognised clearing house” has the meaning given by section 285 of
FISMA 2000 (exemption for recognised investment exchanges and
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clearing houses), and
“relevant entity” means—
(a)
if NR is a company, a permanent establishment, and
(b)
if that is not the case, a branch or agency.
Disposals for consideration not fully recognised by accounting practice
35
698
Disposals for consideration not fully recognised by accounting practice
(1)
This section applies if in any accounting period (“the relevant accounting
period”) a company with the relevant avoidance intention disposes of rights or
liabilities under a derivative contract wholly or partly for consideration
which—
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(a)
is not wholly in the form of money or a debt which falls to be settled by
the payment of money, and
(b)
is not fully recognised.