Finance Bill

House of Commons

Session 2008 - 09
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Finance Bill

Finance Bill
Schedule 24 — Disguised interest
236

(b)
there is an increase in the fair value of shares even if the
increase is realised by the payment of a distribution in respect
of the shares.
(5)
In this section “relevant shares” means shares which, throughout the
relevant period, are—
5
(a)
fully paid-up shares of a relevant company, or
(b)
shares of a company, other than a relevant company, which
would be accounted for as a liability by the company in
which they are shares in accordance with generally accepted
accounting practice and which produce for the holding
10
company a return in relation to any amount which is
economically equivalent to interest (as to which see Chapter
6A).
(6)
For the purposes of subsection (5)(a) shares are fully paid-up if there
are no actual or contingent obligations—
15
(a)
to meet unpaid calls on the shares, or
(b)
to make a contribution to the capital of the company in which
they are shares that could affect the value of the shares.
(7)
For the purposes of subsection (5)(b) a company is “a relevant
company” if—
20
(a)
it and the holding company are connected companies,
(b)
it is a relevant joint venture company, or
(c)
it is a relevant controlled foreign company.
(8)
Section 466 (companies connected for an accounting period) applies
for the purposes of subsection (7)(a).
25
(9)
For the purposes of subsection (7)(b) a company is a joint venture
company if—
(a)
the holding company is one of two persons who, taken
together, control it,
(b)
the holding company is a person in whose case the 40% test
30
in section 755D(3) of ICTA is satisfied, and
(c)
the other is a person in whose case the 40% test in section
755D(4) of ICTA is satisfied.
(10)
Section 755D of ICTA (meaning of “control” etc) applies for the
purposes of subsection (9)(a) as for those of Chapter 4 of Part 17 of
35
that Act (controlled foreign companies), except that no rights and
powers are attributed to a person by subsection (6)(c) or (d) of that
section.
(11)
For the purposes of subsection (7)(c) a company is a relevant
controlled foreign company if any of its chargeable profits (within
40
the meaning of Chapter 4 of Part 17 of ICTA)—
(a)
are apportioned to the holding company for the relevant
accounting period in accordance with section 752 of ICTA by
virtue of section 747(3) of that Act, or
(b)
are not so apportioned because of section 748(1) or (3) of that
45
Act.
(12)
Section 550(3) (repos: ignoring effect on borrower of sale of
securities) does not apply for the purposes of this section.”

Finance Bill
Schedule 24 — Disguised interest
237

4
After Chapter 6 insert—
“Chapter 6A
Shares accounted for as liabilities
521A
Introduction to Chapter
(1)
This Chapter contains rules for Part 5 (and the other provisions of the
5
Corporation Tax Acts) to apply in some cases as if at some times in
the accounting period of a company (“A”) which holds shares of a
certain kind in another company (“B”) the shares were rights under
a creditor relationship of A.
(2)
See, in particular—
10
(a)
section 521B (application of Part 5 to some shares as rights
under creditor relationship), and
(b)
section 521C (which describes the shares to which the rules
apply).
(3)
In this Chapter references to the investing company are to A and
15
references to the issuing company are to B.
(4)
For the purposes of this Chapter, the definition of “share” in section
476(1) only applies so far as it provides that “share” does not include
a share in a building society.
(5)
Section 550(3) (repos: ignoring effect on borrower of sale of
20
securities) does not apply for the purposes of this Chapter.
(6)
See section 116B of TCGA 1992 for the effect for chargeable gains
purposes of shares beginning or ceasing to be shares to which section
521C applies.
521B
Application of Part 5 to certain shares as rights under creditor
25
relationship
(1)
This section applies in relation to the times in a company’s
accounting period when—
(a)
the company holds a share in another company, and
(b)
section 521C (shares accounted for as liabilities) applies to the
30
share.
(2)
Part 5 (and the other provisions of the Corporation Tax Acts) apply
as if at those times—
(a)
the share were rights under a creditor relationship of the
investing company, and
35
(b)
any distribution in respect of the share were not a
distribution (and accordingly is within Part 5).
(3)
Where Part 5 applies in relation to the investing company in
accordance with subsection (2) it so applies as if the issuing company
stood in the position of debtor as respects the debt in question.
40
(4)
No debits are to be brought into account by the investing company
as respects the share but this does not affect debits to be brought into
account in respect of exchange gains or losses.

Finance Bill
Schedule 24 — Disguised interest
238

(5)
Subsection (2)(b) does not affect the operation of Part 1 of Schedule
25 of ICTA (controlled foreign companies: acceptable distribution
policy) (including as it continues to have effect in accordance with
paragraph 8(1) of Schedule 36 to FA 2009).
(6)
In this Chapter references to “the share” are to the share mentioned
5
in subsection (1).
521C
Shares accounted for as liabilities
(1)
This section applies to the share if—
(a)
the share would be accounted for by the issuing company as
a liability in accordance with generally accepted accounting
10
practice,
(b)
the share produces for the investing company a return in
relation to any amount which is economically equivalent to
interest,
(c)
the issuing company and the investing company are not
15
connected companies,
(d)
the condition in subsection (4) is met,
(e)
the share is not an excepted share (see section 521D), and
(f)
the investing company holds the share for an unallowable
purpose (see section 521E).
20
(2)
For the purposes of this section a return produced for a company by
an arrangement in relation to any amount is “economically
equivalent to interest” if (and only if)—
(a)
it is reasonable to assume that it is a return by reference to the
time value of that amount of money,
25
(b)
it is at a rate reasonably comparable to what is (in all the
circumstances) a commercial rate of interest, and
(c)
at the relevant time there is no practical likelihood that it will
cease to be produced in accordance with the arrangement
unless the person by whom it falls to be produced is
30
prevented (by reason of insolvency or otherwise) from
producing it.
(3)
In subsection (2)(c) “the relevant time” means the time when the
investing company first holds the share or, if later, when the share
begins to produce a return for the investing company.
35
(4)
The condition mentioned in subsection (1)(d) is that the share does
not fall to be treated for the accounting period in question as if it were
rights under a creditor relationship of the investing company
because of section 490 (holdings in OEICs, unit trusts and offshore
funds treated as creditor relationship rights).
40
(5)
Section 466 (companies connected for an accounting period) applies
for the purposes of this section.
521D
Excepted shares
(1)
A share is an excepted share for the purposes of section 521C if it is—
(a)
a qualifying publicly-issued share (see subsection (2)), or
45
(b)
a share which mirrors a public issue (see subsections (3) and
(4)).

Finance Bill
Schedule 24 — Disguised interest
239

(2)
A share is a “qualifying publicly-issued share” if—
(a)
it was issued by a company as part of an issue of shares to
persons not connected with the company, and
(b)
less than 10% of the shares in that issue are held by the
investing company or persons connected with it.
5
(3)
The first case where shares (“the mirroring shares”) mirror a public
issue is where—
(a)
a company (“company A”) issues shares (“the public issue”)
to persons not connected with the company,
(b)
within 7 days of that issue, one or more other companies
10
(“companies BB”) issue the mirroring shares to company A
on the same terms as the public issue or substantially the
same terms,
(c)
company A and companies BB are associated companies (see
subsection (5)), and
15
(d)
the total nominal value of the mirroring shares does not
exceed the nominal value of the public issue.
(4)
The second case where shares (“the second level mirroring shares”)
mirror a public issue is where, in the circumstances of the first case—
(a)
within 7 days of the public issue, one or more other
20
companies (“companies CC”) issue the second level
mirroring shares to one or more of companies BB on the same
terms as the public issue or substantially the same terms,
(b)
company A, companies BB and companies CC are associated
companies (see subsection (5)), and
25
(c)
the total nominal value of the second-level mirroring shares
does not exceed the nominal value of the public issue.
(5)
For the purposes of subsections (3) and (4) companies are associated
companies if they are members of the same group of companies for
the purposes of Chapter 4 of Part 10 of ICTA (group relief) (see
30
section 413(3)(a) of that Act).
521E
Unallowable purpose
(1)
For the purposes of section 521C, the investing company holds the
share for an unallowable purpose if the main purpose, or one of the
main purposes for which the company holds the share is to obtain a
35
relevant tax advantage.
(2)
But the investing company may elect that this Chapter is to apply in
relation to the share even though it would otherwise be prevented
from applying by subsection (1)(f) of that section.
(3)
An election under subsection (2)—
40
(a)
must be made no later than the time when the investing
company first holds the share or, if later, when the share
begins to produce a return for the investing company, and
(b)
is irrevocable.
(4)
In this section “obtain a relevant tax advantage” means secure that
45
the return produced by the share (or any part of it) is received in a
way that means that its treatment for corporation tax purpose is

Finance Bill
Schedule 24 — Disguised interest
240

more advantageous to the investing company than it would be if it
were—
(a)
charged to corporation tax as income of the investing
company, or
(b)
brought into account as income of the investing company for
5
corporation tax purposes,

at the time when amounts would be brought into account in relation
to the return in accordance with section 521B.
(5)
Nothing in this section applies in relation to the investing company
for an accounting period if it is an excluded controlled foreign
10
company.
(6)
For this purpose the investing company is an excluded controlled
foreign company if any of its chargeable profits (within the meaning
of Chapter 4 of Part 17 of ICTA)—
(a)
are apportioned for the accounting period in accordance with
15
section 752 of ICTA by virtue of section 747(3) of that Act, or
(b)
are not so apportioned because of section 748(1) of that Act.
521F
Shares becoming or ceasing to be shares to which section 521B applies
(1)
This section applies if at any time section 521B begins or ceases to
apply in the case of a share held by the investing company.
20
(2)
The investing company is treated for the purposes of Part 5—
(a)
as having disposed of the share immediately before that time
for consideration of an amount equal to the notional carrying
value of the share at that time, and
(b)
as having immediately reacquired it for consideration of the
25
same amount.
(3)
In subsection (2) “notional carrying value”, in relation to the share,
means the amount which would have been its carrying value in the
accounts of the investing company if a period of account had ended
immediately before section 521B began or ceased to apply in the case
30
of the share and the investing company.
(4)
For the purposes of subsection (3) “carrying value” has the same
meaning as it has for the purposes of section 316 (see section 317).”
Amendments and repeals
5     (1)
Section 116B of TCGA 1992 (shares beginning or ceasing to be shares to
35
which section 523 of CTA 2009 applies) is amended as follows.
      (2)
In subsection (1) and the heading, for “522” substitute “521B”.
      (3)
In subsection (1)(b), for “its fair value” substitute “the notional carrying
value of the share”.
      (4)
In subsection (2), for the definition of “fair value” substitute—
40
““notional carrying value” has the same meaning as in
subsection (2) of section 521F of CTA 2009 (see subsection (3)
of that section),”.
      (5)
In that subsection, in the definition of “investing company”—

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Schedule 24 — Disguised interest
241

(a)
for “7” substitute “6A”, and
(b)
for “with guaranteed returns) (see section 522(3)” substitute
“accounted for as liabilities) (see section 521A(3)”.
6
In section 26 of F(No.2)A 2005 (tax arbitrage), for subsection (10) substitute—
“(10)
This subsection applies to an amount that is brought into account by
5
virtue of Chapter 2A or 6A of Part 6 of CTA 2009 (shares treated as
loan relationships).”
7     (1)
Schedule 4 to CTA 2009 (index of expressions) is amended as follows.
      (2)
After the entry relating to “approved, approval (in relation to a share
incentive plan) (in Chapter 1 of Part 11)” insert—
10

“arrangement (in Chapter 2A of
section 486B(9)”.

Part 6)

      (3)
Omit the entry relating to “the associated transactions condition (in Chapter
7 of Part 6)”.
      (4)
After the entry relating to “effective 51% subsidiary (in Part 8)” insert—
15

“economically equivalent to
section 486B(2)”.

interest (in Chapter 2A of Part 6)

      (5)
For the entry relating to “the investing company (in Chapter 7 of Part 5)”
substitute—

“the investing company (in
section 521A(3)”.

20

Chapter 6A of Part 6)

      (6)
For the entry relating to “the investing company (in Chapter 7 of Part 5)”
substitute—

“the issuing company (in Chapter
section 521A(3)”.

6A of Part 6)

25
      (7)
Omit the entries relating to “the increasing value condition (in Chapter 7 of
Part 6)” and “the redemption return condition (in Chapter 7 of Part 6)”.
      (8)
In the entry relating to “share (in Part 5 and in Part 6 except for Chapter 7 of
that Part)”, for “7” substitute “6A”.
      (9)
For the entries relating to “share (in Chapter 7 of Part 6)” and “the share (in
30
Chapter 7 of Part 6) substitute—

“share (in Chapter 6A of Part 6)
section 521A(4)

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Schedule 24 — Disguised interest
242

the share (in Chapter 6A of Part 6)
section 521B(5)”.

Repeals
8
In consequence of the amendments made by this Schedule, omit—
(a)
in ICTA—
(i)
section 736C (deemed interest: cash collateral under stock
5
lending arrangement), and
(ii)
section 736D (quasi-stock lending arrangements and quasi-
cash collateral)
(b)
in FA 2004, sections 131 to 133 (companies in partnership),
(c)
in CTA 2009—
10
(i)
Chapter 7 of Part 6 (shares with guaranteed returns etc),
(ii)
Chapter 8 of that Part (returns from partnerships), and
(iii)
section 547 (repo under arrangement designed to produce
quasi-interest: tax avoidance).
9
Omit the following provisions (which relate to the provisions repealed by
15
paragraph 8)—
(a)
in ICTA, sections 736B(4) and 807A(2B),
(b)
in TCGA 1992, section 171(3A),
(c)
in F(No.2)A 2005, in Schedule 7, paragraphs 5 and 9,
(d)
in FA 2006, in Schedule 6, paragraphs 3 and 4,
20
(e)
in ITA 2007, in Schedule 1, paragraphs 172 and 373, and
(f)
in CTA 2009, in Schedule 1, paragraphs 215 and 571 of Schedule 1.
10
In section 542(2) of CTA 2007 (introduction to Chapter 10 of Part 6), for “547”
substitute “546”.
Commencement
25
11
The amendments made by paragraphs 2(2) and 3 have effect in relation to
any arrangement which produces for a company a return which is
economically equivalent to interest if the company becomes a party to the
arrangement on or after 22 April 2009.
12
The amendments (and repeals) made by paragraphs 2(3) and 4 to 10 come
30
into force on 22 April 2009.
13    (1)
This paragraph applies where any of the provisions repealed by paragraph
8 applies in relation to anything done by a company before 22 April 2009
which amounts to becoming party to an arrangement (within the meaning
given by section 486B(7) of CTA 2009).
35
      (2)
The company is to be treated for the purposes of Chapter 2A of CTA 2009 as
having become a party to the arrangement on that date.
      (3)
But this paragraph does not apply in circumstances in which paragraph 14
does.
14    (1)
This paragraph applies where Chapter 7 of Part 6 of CTA 2009 applies in
40
relation to a share held by a company immediately before 22 April 2009.
      (2)
Section 116B(1) of TCGA 1992 is to be treated as applying as if section 523 of
CTA 2009 ceased to apply in relation to the share on that date.