Finance Bill

House of Commons

Session 2008 - 09
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Finance Bill

Finance Bill
Schedule 21 — Foreign exchange: anti-avoidance
229

(6)
In this section “relevant foreign currency” means—
(a)
the currency in which the loan relationships or relevant
contracts in respect of which the exchange gains or losses
arise are denominated, or
(b)
where the exchange gains or losses arise in respect of loan
5
relationships or relevant contracts denominated in more than
one currency, any of them.
(7)
References in this section to the “operating currency” of a company,
in relation to an accounting period, are (subject to subsection (8)) to
the currency in which profits or losses of the company arising in that
10
accounting period that fall to be computed in accordance with
generally accepted accounting practice for corporation tax purposes
are required to be computed by virtue of section 92(1), 92A(2),
92B(2)(a) or 92C(3)(a) of FA 1993 (foreign currency accounting).
(8)
In relation to a loan relationship or relevant contract to which a
15
company is deemed to be a party under—
(a)
section 381(2) and (3) (loan relationships involving firms), or
(b)
section 620(2) (relevant contracts involving firms),

references in this section to the “operating currency” of the company,
in relation to an accounting period, are to the currency that would be
20
the operating currency of that firm in that accounting period if that
firm were a company.
606E
Counterfactual currency movement assumptions: treatment of options
(1)
This section applies in relation to the calculation for the purposes of
section 606A(5) of exchange gains and losses of a company arising in
25
an accounting period of that company where—
(a)
the calculation is made on the assumption specified in
subsection (2) or (3) of section 606D (“the relevant
assumption”), and
(b)
an option is part of the arrangements.
30
(2)
Subsection (3) applies if the option is exercised on the test day.
(3)
The option is to be treated as not having been exercised on the test
day if, on the relevant assumption, it is in all the circumstances more
likely than not that it would not have been exercised on that day.
(4)
Subsection (5) applies if the option is not exercised on the test day but
35
was exercisable on that day.
(5)
The option is to be treated as having been exercised on the test day
if, on the relevant assumption, it is in all the circumstances more
likely than not that it would have been exercised on that day.
606F
Meaning of “option”
40
(1)
In the Part 7 one-way exchange effect provisions “option” is to be
construed as if section 580(2) and (3) (meaning of option) were
omitted.
(2)
For the purposes of the Part 7 one-way exchange effect provisions—
(a)
section 584 (hybrid derivatives with embedded derivatives)
45
is to be construed as if in subsection (1)(b) for the words “in

Finance Bill
Schedule 21 — Foreign exchange: anti-avoidance
230

accordance with generally accepted accounting practice, the
company treats” there were substituted “it is possible to
regard”,
(b)
section 585 (loan relationships with embedded derivatives) is
to be construed as if in subsection (1) for the words “in
5
accordance with generally accepted accounting practice a
company treats” there were substituted “it is possible to
regard”, and
(c)
section 586 (other contracts with embedded derivatives) is to
be construed as if in subsection (1)(b) for the words “in
10
accordance with generally accepted accounting practice,
treats” there were substituted “it is possible to regard”.
606G
Meaning of “relevant contingent contract” and “operative condition”
(1)
In the Part 7 one-way exchange effect provisions “relevant
contingent contract” means a contract that meets the following two
15
conditions.
(2)
The first condition is that company A, or a company connected with
company A (“the relevant company”), is a party to the contract.
(3)
The second condition is that the contract includes a condition—
(a)
on the meeting of which a right or liability under the contract
20
is altered, and
(b)
that operates (directly or indirectly) by reference to the
exchange rate between the operating currency of the relevant
company and another currency.
(4)
In this section “operating currency” has the same meaning as in
25
section 606D.
(5)
In the Part 7 one-way exchange effect provisions, “operative
condition” means a condition of the kind mentioned in subsection
(3).
606H
Other interpretative provisions
30
(1)
In this Act “the Part 7 one-way exchange effect provisions” means
sections 606A to 606G and this section.
(2)
The following provisions of this section have effect for the purposes
of the Part 7 one-way exchange effect provisions.
(3)
References to arrangements include any agreements,
35
understandings, schemes, transactions or series of transactions
(whether or not legally enforceable).
(4)
The circumstances to be taken into account in determining whether
a loan relationship or relevant contract is “part of” any arrangements
include (in particular)—
40
(a)
the circumstances in which it was entered into, acquired or
issued,
(b)
the currency in which it is denominated, and
(c)
its likely effect.

Finance Bill
Schedule 21 — Foreign exchange: anti-avoidance
231

(5)
References to the currency in which a relevant contract is
denominated are to the currency in which its underlying subject
matter is denominated.
(6)
A currency (“currency A”) appreciates relative to another currency
(“currency B”) over a period if—
5
(a)
the value expressed in currency B of one unit of currency A at
the end of the period, exceeds
(b)
the value expressed in currency B of one unit of currency A at
the beginning of the period,

and the percentage of the appreciation is the amount determined
10
under subsection (7).
(7)
The percentage of the appreciation is—
(a)
the difference between the amounts mentioned in
paragraphs (a) and (b) of subsection (6), expressed as a
percentage of the amount mentioned in that paragraph (b), or
15
(b)
if lower, 100%.
(8)
A currency (“currency A”) depreciates relative to another currency
(“currency B”) over a period if—
(a)
the value expressed in currency B of one unit of currency A at
the end of the period, is less than
20
(b)
the value expressed in currency B of one unit of currency A at
the beginning of the period,

and the percentage of the depreciation is the difference, expressed as
a percentage of the amount mentioned in paragraph (b).
(9)
References in this section to a company connected with company A
25
are to a company connected with company A for the relevant
accounting period.
(10)
Section 466 (companies connected for an accounting period) applies
for the purposes of subsection (9).
(11)
“Tax advantage” has the meaning given by section 840ZA of ICTA.
30
(12)
See section 606A for the meaning of the following expressions—
“the arrangements”;
“company A”;
“the relevant accounting period”;
“the test day”.”
35
8
Immediately before section 607 (pre-contract or abortive expenses) insert—
“Miscellaneous”.
Interpretation
9
In Schedule 4 to CTA 2009 (index of defined expressions), insert at the
appropriate places—
40

“the Part 5 one-way exchange effect provisions
section 328H(1)”;

Finance Bill
Schedule 22 — Offshore funds
Part 1 — Meaning of “offshore fund”
232

“the Part 7 one-way exchange effect provisions
section 606H(1)”.

Consequential revocation
10
The Loan Relationships and Derivative Contracts (Disregard and Bringing
into Account of Profits and Losses) Regulations 2006 (S.I. 2006/843) are
revoked.
5
Commencement
11    (1)
The amendments made by this Schedule have effect—
(a)
in relation to exchange gains and losses arising in accounting periods
beginning on or after 22 April 2009, and
(b)
subject to the following provisions of this paragraph, in relation to
10
exchange gains and losses arising in straddling accounting periods.
      (2)
In this paragraph “straddling accounting period” means an accounting
period that—
(a)
begins before 22 April 2009, and
(b)
ends on or after that date.
15
      (3)
An exchange gain or loss that arises in a straddling accounting period in
relation to—
(a)
an asset or liability representing a loan relationship, or
(b)
a derivative contract,

is to be treated for the purposes of this paragraph as if it were made up of
20
two amounts.
      (4)
Those two amounts are the exchange gains or losses that would arise in
relation to the loan relationship or derivative contract in—
(a)
that part of the period that falls before 22 April, and
(b)
that part of the period that falls on or after that date,
25

if those parts were separate accounting periods.
      (5)
The amendments made by this Schedule have effect, in relation to an
exchange gain or loss of the kind mentioned in sub-paragraph (3), as if the
gain or loss were the amount determined in relation to it under sub-
paragraph (4)(b).
30
Schedule 22
Section 44

Offshore funds
Part 1
Meaning of “offshore fund”
35
FA 2008
1
FA 2008 is amended as follows.

Finance Bill
Schedule 22 — Offshore funds
Part 1 — Meaning of “offshore fund”
233

2
Before section 41 (tax treatment of participants in offshore funds) insert—
“40A
Meaning of “offshore fund”
(1)
This section and sections 40B to 40G have effect for this group of
sections.
(2)
“Offshore fund” means—
5
(a)
a mutual fund constituted by a body corporate resident
outside the United Kingdom,
(b)
a mutual fund under which property is held on trust for the
participants where the trustees of the property are not
resident in the United Kingdom, or
10
(c)
a mutual fund constituted by other arrangements that create
rights in the nature of co-ownership where the arrangements
take effect by virtue of the law of a territory outside the
United Kingdom (but see subsection (3)).
(3)
Subsection (2)(c) does not include a mutual fund constituted by two
15
or more persons carrying on a trade or business in partnership.
(4)
“This group of sections” means this section and sections 40B to 42A.
(5)
References to participants in arrangements (or a fund) are to persons
taking part in the arrangements (or the arrangements constituting
the fund), whether by becoming the owner of, or of any part of, the
20
property that is the subject of the arrangements or otherwise (and
references to participation in arrangements or a fund, however
expressed, are to be read accordingly).
(6)
In this section—
“body corporate” does not include a limited liability
25
partnership;
“co-ownership” is not restricted to the meaning of that term in
the law of any part of the United Kingdom.
40B
Meaning of “mutual fund” etc
(1)
“Mutual fund” means arrangements with respect to property of any
30
description, including money, that meet conditions A to C, subject
to—
(a)
sections 40C and 40D, and
(b)
the exceptions made by or under sections 40E to 40G.
(2)
Condition A is that the purpose or effect of the arrangements is to
35
enable the participants—
(a)
to participate in the acquisition, holding, management or
disposal of the property, or
(b)
to receive profits or income arising from the acquisition,
holding, management or disposal of the property or sums
40
paid out of such profits or income.
(3)
Condition B is that the participants do not have day-to-day control of
the management of the property.
(4)
For the purpose of condition B a participant does not have day-to-
day control of the management of property by virtue of having a
45
right to be consulted or to give directions.

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Schedule 22 — Offshore funds
Part 1 — Meaning of “offshore fund”
234

(5)
Condition C is that, under the terms of the arrangements, a
reasonable investor participating in the arrangements would expect
to be able to realise all or part of an investment in the arrangements
on a basis calculated entirely, or almost entirely, by reference to—
(a)
the net asset value of the property that is the subject of the
5
arrangements, or
(b)
an index of any description.
(6)
The Treasury may by regulations amend condition C.
40C
Umbrella arrangements
(1)
In the case of umbrella arrangements—
10
(a)
each part of the umbrella arrangements is to be treated as
separate arrangements (subject to section 40D), and
(b)
the umbrella arrangements are to be disregarded.
(2)
“Umbrella arrangements” means arrangements which provide for
separate pooling of the contributions of the participants and the
15
profits or income out of which payments are made to them.
(3)
References to a part of umbrella arrangements are to the
arrangements relating to a separate pool.
40D
Arrangements comprising more than one class of interest
(1)
Where there is more than one class of interest in arrangements (the
20
“main arrangements”)—
(a)
the arrangements relating to each class of interest are to be
treated as separate arrangements, and
(b)
the main arrangements are to be disregarded.
(2)
In relation to umbrella arrangements, “class of interest” does not
25
include a part of the umbrella arrangements (but there may be more
than one class of interest in a part of umbrella arrangements).
40E
Meaning of “mutual fund”: exceptions
(1)
Arrangements are not a mutual fund if—
(a)
under the terms of the arrangements, a reasonable investor
30
participating in the arrangements would expect to be able to
realise all or part of an investment in the arrangements on a
basis mentioned in condition C in section 40B only in the
event of the winding up, dissolution or termination of the
arrangements, and
35
(b)
condition X or Y is met.
(2)
Condition X is that the arrangements are not designed to wind up,
dissolve or terminate on a date stated in or determinable under the
arrangements.
(3)
Condition Y is that—
40
(a)
the arrangements are designed to wind up, dissolve or
terminate on a date stated in or determinable under the
arrangements, and
(b)
condition Y1, Y2 or Y3 is met.

Finance Bill
Schedule 22 — Offshore funds
Part 1 — Meaning of “offshore fund”
235

(4)
Condition Y1 is that none of the assets that are the subject of the
arrangements are relevant income-producing assets.
(5)
Condition Y2 is that, under the terms of the arrangements, the
participants in the arrangements are not entitled to the income from
the assets that are the subject of the arrangements or any benefit
5
arising from such income.
(6)
Condition Y3 is that—
(a)
under the terms of the arrangements, after deductions for
reasonable expenses, any income produced by the assets that
are the subject of the arrangements is required to be paid or
10
credited to the participants, and
(b)
a participant who is an individual resident in the United
Kingdom would be charged to income tax on the amounts
paid or credited.
(7)
Condition Y is not met if the arrangements are designed to produce
15
a return for participants that equates, in substance, to the return on
an investment of money at interest.
(8)
For the purposes of this section, the fact that arrangements provide
for a vote or other action that may lead to the winding up, dissolution
or termination of the arrangements does not, by itself, mean that the
20
arrangements are designed to wind up, dissolve or terminate on a
date stated in or determinable under the arrangements.
40F
Meaning of “relevant income-producing assets”
(1)
“Relevant income-producing assets” means assets that produce
income on which, if they were held directly by an individual resident
25
in the United Kingdom, the individual would be charged to income
tax (subject to the following provisions of this section).
(2)
An asset is not a relevant income-producing asset if the asset is
hedged, provided that no income is expected to arise from—
(a)
the asset (taking account of the hedging), or
30
(b)
any product of the hedging arrangements.
(3)
Cash awaiting investment is not a relevant income-producing asset,
provided that the cash, and any income that it produces while
awaiting investment, is invested as soon as reasonably practicable in
assets that are not relevant income-producing assets.
35
40G
Meaning of “mutual fund”: powers to vary exceptions
(1)
The Treasury may by regulations amend or repeal any provision of
section 40E or 40F.
(2)
The Treasury may by regulations provide that arrangements are not
a mutual fund—
40
(a)
in specified circumstances, or
(b)
if they are of a specified description.
(3)
Regulations under this section may include provision having effect
in relation to the tax year and accounting periods current on the day
on which the regulations are made.”
45