Finance Bill

House of Commons

Session 2008 - 09
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Finance Bill

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 1 — Insertion of new Part 9A of CTA 2009
139

931L
Schemes involving manipulation of portfolio holdings rule
(1)
This section applies to a dividend or other distribution that would,
apart from this section, fall into an exempt class by virtue of section
931G.
(2)
The distribution does not fall into an exempt class by virtue of that
5
section if—
(a)
the distribution is made as part of a scheme the main
purpose, or one of the main purposes, of which is to secure
that distributions of the payer received by the recipient fall
into an exempt class by virtue of that section, and
10
(b)
the following condition is met.
(3)
The condition is that the distribution would not fall into an exempt
class by virtue of section 931G if the reference in subsection (1) of that
section to the recipient were to all relevant persons taken together.
931M
Schemes in the nature of loan relationships
15
(1)
This section applies to a dividend or other distribution that does not
fall into an exempt class by virtue of section 931E but would, apart
from this section, fall into an exempt class otherwise than by virtue
of that section.
(2)
The distribution does not fall into an exempt class if—
20
(a)
the distribution is made as part of a tax advantage scheme,
and
(b)
conditions A to C are met.
(3)
Condition A is that the distribution constitutes part of a return in
relation to an amount that is produced by the scheme for a relevant
25
person, or two or more relevant persons taken together.
(4)
Condition B is that the return is economically equivalent to interest.
(5)
For this purpose a return produced for a person or persons by a
scheme in relation to an amount is “economically equivalent to
interest” if (and only if)—
30
(a)
it is reasonable to assume that it is a return by reference to the
time value of that amount of money,
(b)
it is at a rate reasonably comparable to a commercial rate of
interest, and
(c)
at the time the scheme is entered into by the person or any of
35
the persons, there is no practical likelihood that it will cease
to be produced in accordance with the scheme.
(6)
Condition C is that there is a connection between the payer and the
recipient for the accounting period of the payer in which the
distribution is made.
40
(7)
Section 466 (companies connected for an accounting period) applies
for the purposes of subsection (6) as if that subsection were a
provision of Part 5 to which that section is applied (but this does not
affect the application of section 1316(1) (meaning of connected
persons) for the purposes of any other provision of this Part).
45

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 1 — Insertion of new Part 9A of CTA 2009
140

931N
  Schemes involving distributions for which deductions are given
(1)
This section applies to a dividend or other distribution that would,
apart from this section, fall into an exempt class.
(2)
The distribution does not fall into an exempt class if—
(a)
the distribution is made as part of a tax advantage scheme,
5
and
(b)
the following condition is met.
(3)
The condition is that a deduction is allowed to a resident of any
territory outside the United Kingdom under the law of that territory
in respect of an amount determined by reference to the distribution.
10
931O
Schemes involving payments for distributions
(1)
This section applies to a dividend or other distribution that would,
apart from this section, fall into an exempt class.
(2)
The distribution does not fall into an exempt class if—
(a)
the distribution is made as part of a tax advantage scheme,
15
and
(b)
the following condition is met.
(3)
The condition is that the scheme includes a payment, or the giving
up of a right to income, by a relevant person where—
(a)
the payment is made, or the right to income is given up,
20
under a liability incurred for consideration in money or
money’s worth all or any of which consists of, or of the right
to receive, the distribution, and
(b)
in the case of a payment, the conditions in subsections (2) and
(4) to (7) of section 1301 (restriction of deductions for annual
25
payments) apply to the payment.
931P
Schemes involving payments not on arm’s length terms
(1)
This section applies to a dividend or other distribution that would,
apart from this section, fall into an exempt class.
(2)
The distribution does not fall into an exempt class if—
30
(a)
the distribution is made as part of a tax advantage scheme,
and
(b)
the following condition is met.
(3)
The condition is that—
(a)
the scheme includes a payment or receipt, or the giving up of
35
a right to income, by a relevant person in respect of goods or
services, and
(b)
the amount of the payment or receipt, or the amount of
income given up, differs from the amount the relevant person
would have paid, received or given up in respect of those
40
goods or services had the distribution not been made.
(4)
This section does not apply to a scheme that consists of a transaction
or series of transactions in relation to which Schedule 28AA to ICTA
(provision not at arms length between parties under common
control) applies.
45

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 1 — Insertion of new Part 9A of CTA 2009
141

931Q
Schemes involving diversion of trade income
(1)
This section applies to a dividend or other distribution that would,
apart from this section, fall into an exempt class.
(2)
The distribution does not fall into an exempt class if—
(a)
the distribution is made as part of a scheme entered into by
5
the recipient and another relevant person (“C”),
(b)
if C had received the distribution, it would be reasonable to
assume that the distribution would be dealt with under Part
3 (trading income), and
(c)
the main purpose, or one of the main purposes, of the scheme
10
is to produce the result that the distribution is dealt with
under this Part because it is received by the recipient.
(3)
For the purposes of subsection (2)(b) it is to be assumed that, in the
case of any relevant transaction to which a relevant person other than
C is a party, C were that party to that transaction.
15
(4)
In this section “relevant transaction” means any of the transactions
giving rise to the distribution.
Chapter 4
Supplementary
Election that distribution should not be exempt
20
931R
Election that distribution should not be exempt
(1)
This section applies where, apart from this section, a distribution
(“the distribution”) would be exempt.
(2)
If the recipient so elects, the distribution is not exempt.
(3)
An election under this section must be made on or before the second
25
anniversary of the end of the accounting period in which the
distribution is received.
(4)
Subsection (5) applies where the distribution is a dividend that is
treated for certain purposes of Part 18 of ICTA (double taxation
relief) as two separate dividends by virtue of section 801C of that Act
30
(separate streaming of dividend so far as representing an ADP
dividend of a CFC).
(5)
If the recipient so elects—
(a)
the distribution is to be treated for the purposes of this Part as
if it were an ADP dividend and a separate residual dividend
35
as provided for in that section of that Act, and
(b)
the ADP dividend is not exempt.
(6)
The reference in subsection (4) to section 801C of ICTA is to that
section as it continues to have effect in accordance with paragraph
8(1) of Schedule 16 to FA 2009 in relation to dividends paid on or
40
after 1 July 2009 for accounting periods beginning before that day.

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 1 — Insertion of new Part 9A of CTA 2009
142

Interpretation
931S
Meaning of “small company”
(1)
For the purposes of this Part a company is a “small company” in an
accounting period if it is in that period a micro or small enterprise, as
defined in the Annex to Commission Recommendation 2003/361/
5
EC of 6 May 2003.
(2)
But a company is not a “small company” in an accounting period if it
is at any time in that period—
(a)
an open-ended investment company,
(b)
an authorised unit trust scheme,
10
(c)
an insurance company, or
(d)
a friendly society.
(3)
In subsection (2)—
“open-ended investment company” has the meaning given by
section 236 of FISMA 2000;
15
“authorised unit trust scheme” means a unit trust scheme
(within the meaning given by section 237 of FISMA 2000) in
relation to which a order under section 243 of that Act
(authorisation orders) is in force;
“insurance company” has the meaning given by section 431 of
20
ICTA;
“friendly society” has the meaning given by section 466(2) of
ICTA.
931T
Meaning of “payer”, “recipient” and “relevant person”

In this Part—
25
“the payer”, in relation to a distribution, means the company
that makes the distribution;
“the recipient”, in relation to a distribution, means the company
that receives the distribution;
“a relevant person”, in relation to a distribution, means—
30
(a)
the company that receives the distribution, or
(b)
any person connected with that company.
931U
Meaning of “ordinary share” and “redeemable”
(1)
In this Part “ordinary share” means a share that does not carry any
present or future preferential right to dividends or to a company’s
35
assets on its winding up.
(2)
A share is regarded as “redeemable” for the purposes of this Part
only if it is redeemable as a result of its terms of issue (or any
collateral arrangements)—
(a)
requiring redemption,
40
(b)
entitling the holder to require redemption, or
(c)
entitling the issuing company to redeem.
931V
Meaning of “scheme” and “tax advantage scheme”
“(1)
For the purposes of this Part—

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 2 — Other amendments
143

“scheme” includes any scheme, arrangements or understanding
of any kind whatever, whether or not legally enforceable,
involving a single transaction or two or more transactions;
“tax advantage scheme” means a scheme the main purpose, or
one of the main purposes, of which is to obtain a tax
5
advantage (other than a negligible tax advantage).
(2)
In this section “tax advantage” has the meaning given by section
840ZA of ICTA.
Boundary provisions
931W
Provisions which must be given priority over this Part
10
(1)
Any income so far as it falls within—
(a)
this Part, and
(b)
Chapter 2 of Part 3 (income taxed as trade profits),

is dealt with under Part 3.
(2)
Any income so far as it falls within—
15
(a)
this Part, and
(b)
Chapter 3 of Part 4 (profits of property businesses) so far as
the Chapter relates to a UK property business,

is dealt with under Part 4.
(3)
Any income so far as it falls within—
20
(a)
this Part, and
(b)
Chapter 1 of Part 12 of ICTA (insurance companies),

is dealt with under that Chapter.”
Part 2
Other amendments
25
ICTA
2
ICTA is amended as follows.
3
In section 13(7) (small companies’ relief), omit “resident in the United
Kingdom”.
4     (1)
Section 505(1)(c) (charitable companies: general) is amended as follows.
30
      (2)
After sub-paragraph (ii) insert—
“(iizza)
from tax under Part 9A of CTA 2009 (company
distributions),”.
      (3)
Omit sub-paragraph (iib).
5     (1)
Section 95ZA (taxation of UK distributions received by insurance
35
companies) is amended as follows.
      (2)
In subsection (1), for “section 1285” substitute “section 130(2)”.
      (3)
In subsection (2)(a), omit “resident in the United Kingdom”.
6     (1)
Section 231 (tax credits for certain recipients of qualifying distributions) is
amended as follows.
40

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 2 — Other amendments
144

      (2)
In subsection (1)—
(a)
omit “and section 219(4B) of the Finance Act 1994”,
(b)
for “resident in the United Kingdom makes a” substitute “(whether
resident in the United Kingdom or outside the United Kingdom)
makes an exempt”, and
5
(c)
for “another such company” substitute “a company resident in the
United Kingdom”.
      (3)
After subsection (1A) insert—
“(1B)
For the purposes of subsection (1) a qualifying distribution is
“exempt” if it is exempt for the purposes of Part 9A of CTA 2009
10
(company distributions).”
7
In section 795 (double taxation relief: computation of income subject to
foreign tax), omit subsection (3A).
8     (1)
Section 799 (double taxation relief: computation of underlying tax in respect
of a dividend) is amended as follows.
15
      (2)
In subsection (3) (as it has effect as amended by paragraph 8 of Schedule 30
to FA 2000)—
(a)
before paragraph (a), insert—
“(za)
if the dividend is received in an accounting period of
the recipient in which the recipient is not a small
20
company, and the dividend is a relevant dividend,
the profits in respect of which the dividend is paid;’,
(b)
in paragraph (a), at the beginning, insert “in a case not falling under
paragraph (za),”, and
(c)
in paragraph (c), at the beginning, insert “in a case not falling under
25
paragraph (za),”.
      (3)
After subsection (3) insert—
“(3A)
For the purposes of subsection (3)—
(a)
“small company” has the same meaning as in Part 9A of CTA
2009 (company distributions),
30
(b)
“relevant dividend” means a dividend that, for the purposes
of section 931H of that Act (dividends derived from
transactions not designed to reduce tax), is treated as paid in
respect of profits other than relevant profits (see subsection
(4) of that section), and
35
(c)
the profits in respect of which a dividend is paid are the
profits in respect of which the dividend is treated as paid for
the purposes of that section.”
9
Omit sections 806A to 806K (double taxation relief in relation to foreign
dividends: onshore pooling and utilisation of eligible unrelieved foreign
40
tax).
10
In section 826 (interest on tax overpaid), omit subsection (7BC).
11    (1)
Paragraph 2 of Schedule 23A (manufactured dividends on UK equities:
general) is amended as follows.

Finance Bill
Schedule 14 — Corporation tax treatment of company distributions
Part 2 — Other amendments
145

      (2)
After sub-paragraph (1) insert—
   “(1A)
Sub-paragraphs (1C) to (1E) apply where—
(a)
a manufactured dividend is paid by a dividend
manufacturer, and
(b)
the dividend of which the manufactured dividend is
5
representative is taxable.
     (1B)
For this purpose a dividend is “taxable” if—
(a)
it is received by the dividend manufacturer and the charge
to corporation tax on income applies to it, or
(b)
it is received by a person other than the dividend
10
manufacturer and the charge to corporation tax on income
would have applied to it if it had been received by the
dividend manufacturer.
     (1C)
Where the dividend manufacturer carries on a trade to which the
manufactured dividend relates, and neither sub-paragraph (1D)
15
nor (1E) applies, the manufactured dividend is to be treated as an
expense of the trade.
     (1D)
Where the dividend manufacturer has investment business to
which the manufactured dividend relates, the manufactured
dividend is to be treated as expenses of management of the
20
business for the purposes of Part 16 of CTA 2009.
     (1E)
Where the dividend manufacturer carries on life assurance
business to which the manufactured dividend relates, the
manufactured dividend is to be treated as if, to the extent that it is
referable to basic life assurance and general annuity business, it
25
were an expense payable falling to be brought into account at step
3 of section 76(7).
     (1F)
For the purposes of sub-paragraph (1E), the manufactured
dividend is to be treated as referable to basic life assurance and
general annuity business to the extent that the dividend of which
30
it is representative—
(a)
is received by the dividend manufacturer and is so
referable by virtue of section 432A, or
(b)
is received by a person other than the dividend
manufacturer, and would have been so referable by virtue
35
of section 432A if it had it been received by the dividend
manufacturer.”
      (3)
In sub-paragraph (2), omit paragraph (b) (and the “and” before it).
      (4)
After sub-paragraph (3) insert—
   “(3A)
In its application in relation to a manufactured dividend by virtue
40
of sub-paragraph (2) or (3), Part 9A of the Corporation Tax Act
2009 (company distributions) has effect subject to the following
modification.
     (3B)
The modification is that—
(a)
the definition of “the payer” in section 931T is to be treated
45
as omitted, and