Taxation (International And Other Provisions) Bill - continued          House of Commons

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Clause 232: Deduction notices

456.     This clause says when an officer of Revenue and Customs may give a company a deduction notice. It is based on section 24(1) and (2) of F(No 2)A 2005.

457.     Briefly, the officer may give a company a deduction notice if the officer considers, on reasonable grounds, that the “deduction scheme conditions” are or may be met in relation to a transaction to which the company is party.

458.     Section 24(1) of F(No 2)A 2005 gives this function to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsection (1) reflects this. See Change 2 in Annex 1.

459.     Because Change 2 is made in clause 232, it is also made in clause 235.

460.     Section 24(2) of F(No 2)A 2005 provides that the company has to be within the charge to corporation tax. This condition is rewritten more succinctly in subsection (1).

461.     Subsection (2) defines the expressions “deduction notice” and “the deduction scheme conditions”.

462.     Subsection (3) signposts the consequences of a deduction notice.

Clause 233: The deduction scheme conditions

463.     This clause specifies the “deduction scheme conditions”. It is based on section 24(3) to (6) of, and paragraph 1 of Schedule 3 to, F(No 2)A 2005.

464.     The source legislation labels these conditions “conditions A to D”. These labels have been retained.

Clause 234: Schemes achieving UK tax advantage for a company

465.     This clause defines when a scheme achieves a UK tax advantage for a company. It is based on section 30(2) to (4) of F(No 2)A 2005.

466.     The references in the source legislation to income tax are redundant and are not rewritten.

467.     Section 30(3) of F(No 2)A 2005 refers to “a tax credit”. By virtue of section 832(1) of ICTA, this has the meaning given by section 231 of that Act. Subsection (2) accordingly refers to the provision of CTB2 which is based on section 231 of ICTA.

Clause 235: Further provisions about deduction notices

468.     This clause makes further provisions about deduction notices. It is based on section 24(7) and (8) of F(No 2)A 2005.

469.     Subsections (1) and (2) refer to an officer of Revenue and Customs. See the commentary on clause 232 and Change 2 in Annex 1.

Clause 236: Schemes involving hybrid entities

470.     This clause is the first of a group of seven clauses defining types of “deduction scheme” (see condition A in clause 233(2)). It is based on paragraphs 2 and 3 of Schedule 3 to F(No 2)A 2005.

Clause 237: Instruments of alterable character

471.     This clause is the second in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 4 and 5 of Schedule 3 to F(No 2)A 2005.

Clause 238: Shares subject to conversion

472.     This clause is the third in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 4 and 6 of Schedule 3 to F(No 2)A 2005.

473.     Paragraph 6(1)(a) and (b) of Schedule 3 to F(No 2)A 2005 define a scheme, in two alternative ways, by reference to “shares subject to conversion”. This two-part definition is rewritten in subsection (1).

474.     Paragraph 6(2) of Schedule 3 to F(No 2)A 2005 defines “shares subject to conversion”, using the expression “the relevant time”. This definition is rewritten in subsections (2) to (4).

475.     Paragraph 6(3) of Schedule 3 to F(No 2)A 2005 defines “the relevant time” for the purposes of paragraph 6(2) of that Schedule.

476.     The definition of “the relevant time” in paragraph 6(3)(a) of Schedule 3 to F(No 2)A 2005 only applies to cases within paragraph 6(1)(a) of that Schedule, and the definition of “the relevant time” in paragraph 6(3)(b) of that Schedule only applies to cases within paragraph 6(1)(b) of that Schedule. But the source legislation does not make this distinction immediately obvious. Accordingly, subsections (5) and (6) rewrite paragraph 6(3)(a) and (b) as two separate propositions applying, respectively, for the purposes of the two alternative cases in subsection (1).

Clause 239: Securities subject to conversion

477.     This clause is the fourth in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 4 and 7 of Schedule 3 to F(No 2)A 2005.

478.     Subsections (5) and (6) rewrite paragraph 7(3)(a) and (b) of Schedule 3 to F(No 2)A 2005 as two separate propositions. See the commentary on clause 238 concerning the rewrite of paragraph 6(3) of that Schedule.

Clause 240: Debt instruments treated as equity

479.     This clause is the fifth in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 4 and 8 of Schedule 3 to F(No 2)A 2005.

Clause 241: Scheme including issue of shares not conferring qualifying beneficial entitlement

480.     This clause is the sixth in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 9 and 10 of Schedule 3 to F(No 2)A 2005.

Clause 242: Scheme including transfer of rights under a security

481.     This clause is the last in a group of seven clauses defining types of “deduction scheme”. It is based on paragraphs 9 and 11 of Schedule 3 to F(No 2)A 2005.

482.     Paragraph 11(6)(a) of Schedule 3 to F(No 2)A 2005 is rewritten in the Chapter-wide definition of “security” in clause 259 (see the commentary on that clause). Paragraph 11(6)(b) of that Schedule is rewritten in subsection (8), to which the Chapter-wide definition of “security” in clause 259 is subject.

Clause 243: Consequences of deduction notices

483.     This clause sets out the consequences of a deduction notice being given. It is based on section 25(1), (2) and (14) to (16) of F(No 2)A 2005.

484.     Subsection (1) says when this clause applies.

485.     Subsection (2) obliges the company to calculate (or recalculate) its income or chargeable gains for the purposes of corporation tax or its liability to corporation tax.

486.     Subsection (3) stipulates that the calculation (or recalculation) must be done in accordance with the rule against double deduction (clause 244) and, if appropriate, the rule against deduction for untaxable payments (clause 248).

487.     If the company considers that the deduction scheme conditions are in fact not met in relation to the transaction specified in the deduction notice, the company can make (or decide not to amend) its company tax return on the basis that the deduction notice is invalid. It is then up to HMRC to open an enquiry into the return if it considers the notice still to be valid.

488.     If, however, the company concedes that the deduction notice is valid, it can adjust its company tax return. Subsection (4) provides that (so far as the scheme specified in the deduction notice is concerned) the company is treated as having complied with subsections (2) and (3) if it incorporates “the necessary relevant adjustments” in its company tax return for the accounting period specified in the notice.

489.     Subsection (5) defines when adjustments are “relevant”.

490.     Subsection (6) defines when relevant adjustments are “necessary”.

Clause 244: The rule against double deduction

491.     This clause sets out the rule against double deduction referred to in clause 243(3)(a). It is based on section 25(3) to (5) and (17) of F(No 2)A 2005.

492.     To the extent to which an amount in relation to an expense is “otherwise deductible or allowable”, subsection (1) restricts the amount allowable as a deduction.

493.     Subsection (2) defines “otherwise deductible or allowable”, by reference to the purposes of any tax to which this subsection applies.

494.     Subsection (3) provides that subsection (2) applies to any tax (including any “non-UK tax”), with two exceptions. The two exceptions relate to oil taxation because, in that area, the United Kingdom tax system envisages relief being obtained for the same amount twice.

495.     Subsection (4) extends the scope of subsection (2) to cover amounts for which relief (a) is not available but (b) would be available but for a “tax rule” that has the same effect as the rule in subsection (1).

496.     The definition of “tax rule” is given in subsection (5).

Clause 245: Application of the rule against deduction for untaxable payments

497.     This clause sets out the conditions for the rule against deduction for untaxable payments to apply. It is based on section 25(6) and (17) of F(No 2)A 2005.

498.     Under subsection (1), the rule applies if three conditions are all met. These conditions are set out in subsections (2) to (4).

499.     In section 25(6)(c) of F(No 2)A 2005, the phrase “as a result of provision made or imposed by the scheme” appears to qualify “is not liable to tax” as well as “his liability to tax is reduced”. But it does so by implication rather than explicitly. Subsection (4) makes this explicit. This is a minor change in the law, in the taxpayer’s favour: see Change 9 in Annex 1.

Clause 246: Cases where payee’s non-liability treated as not a result of scheme

500.     This clause makes further provision about condition C in clause 245. It is based on section 25(7) to (10) of F(No 2)A 2005.

Clause 247: Cases where payee treated as having reduced liability as a result of scheme

501.     This clause makes further provision about condition C in clause 245. It is based on section 25(7) of F(No 2)A 2005.

Clause 248: The rule against deduction for untaxable payments

502.     This clause sets out the rule against deduction for untaxable payments laid down in clause 243. It is based on section 25(11) to (13) of F(No 2)A 2005.

503.     Subsection (1) states that the rule is that “the total deduction amount” must be reduced.

504.     Subsection (2) defines “the total deduction amount”.

505.     If the payee is not liable to tax at all in respect of the payment or payments under review, subsection (3) reduces the total deduction amount to nil.

506.     Subsections (4) and (5) deal with the case in which the payee is liable to tax in respect of part, but not all, of the payment or payments under review.

Clause 249: Receipt notices

507.     This clause says when an officer of Revenue and Customs may give a company a receipt notice. It is based on section 26(1) of F(No 2)A 2005.

508.     Briefly, the officer may give a UK resident company a receipt notice if the officer considers, on reasonable grounds, that the “receipt scheme conditions” are or may be met in relation to the company.

509.     Section 26(1) of F(No 2)A 2005 gives this function to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsections (1) and (2) reflect this. See Change 2 in Annex 1.

510.     Because Change 2 is made in clause 249, it is also made in clauses 252, 255 and 256.

511.     Subsection (2) defines a “receipt notice” and “the receipt scheme conditions”.

Clause 250: The receipt scheme conditions

512.     This clause specifies the “receipt scheme conditions”. It is based on section 832(3) of ICTA and sections 26 and 27(4) of F(No 2)A 2005.

513.     Section 26(5) of F(No 2)A 2005 uses the expression “tax purposes”, and by virtue of section 832(3) of ICTA “tax” in that context means “income tax or corporation tax”. Elsewhere in the Chapter, however, “tax purposes” is used with a different meaning. Accordingly, to prevent possible confusion, subsection (6) expands “tax purposes” to “income tax purposes or corporation tax purposes”.

514.     Section 26(4) of F(No 2)A 2005 provides: “Condition C is that, as regards the qualifying payment made by the paying party, there is an amount that .. may be deducted or otherwise allowed in respect of the payment under the tax law of any territory outside the United Kingdom.” The definition of “deductible amount” in subsection (7) omits as otiose the italicised words.

Clause 251: Amounts within corporation tax

515.     This clause supplements clause 250(3) and (5). It is based on section 26(8), (9), (10) and (14) of F(No 2)A 2005.

516.     Section 26(9)(a) of F(No 2)A 2005 refers to “the accounting period in which the qualifying payment was made in relation to the company”. Subsection (2)(a) omits as otiose the italicised words.

Clause 252: Further provisions about receipt notices

517.     This clause makes further provisions about receipt notices. It is based on section 26(12) of F(No 2)A 2005.

518.     Subsections (1) and (2), refer to an officer of Revenue and Customs. This is a minor change in the law: see the commentary on clause 249 and Change 2 in Annex 1.

Clause 253: Exception for dealers

519.     This clause provides an exception for some dealers who would otherwise meet condition D of the receipt scheme conditions. It is based on section 26(6) and (7) of F(No 2)A 2005.

Clause 254: Rule for calculation or recalculation of income etc following receipt notice

520.     This clause gives the rule for calculating or recalculating income, chargeable gains or liability to corporation tax following a receipt notice. It is based on section 27 of F(No 2)A 2005.

Clause 255: Notices given before tax return made

521.     This clause meshes the tax arbitrage legislation in with the machinery of Self Assessment in cases in which a deduction notice or a receipt notice is given before the company’s company tax return is made for the accounting period specified in the notice. It is based on section 28(1), (2) and (11) of F(No 2)A 2005.

522.     Under subsection (1), deduction notices and receipt notices are given by officers of Revenue and Customs. This is a minor change in the law: see the commentary on clauses 232 and 249 and Change 2 in Annex 1.

Clause 256: Notices given after tax return made

523.     This clause meshes the tax arbitrage legislation in with the machinery of Self Assessment in cases in which a deduction notice or a receipt notice is given after the company’s company tax return has been made for the accounting period specified in the notice. It is based on section 28(3) to (7) and (12) of F(No 2)A 2005.

524.     Under subsections (1), (2) and (6), deduction notices and receipt notices are given by officers of Revenue and Customs. This is a minor change in the law: see the commentary on clauses 232 and 249 and Change 2 in Annex 1

525.     Section 28(7) of F(No 2)A 2005 refers to the company being requested “to produce or provide information”. It is, however, not possible for a company to provide information without producing it. Subsection (6)(a) therefore omits “produce or” as superfluous.

Clause 257: Amendments, closure notices and discovery assessments where section 256 applies

526.     This clause concerns amendments to company tax returns, closure notices and discovery assessments in cases in which clause 256 applies. It is based on section 28(8) to (11) of F(No 2)A 2005.

Clause 258: Schemes and series of transactions

527.     This interpretative clause is based on section 30(1) of F(No 2)A 2005.

Clause 259: Minor definitions

528.     This interpretative clause is based on sections 25(18) and 28(12) of F(No 2)A 2005 and paragraphs 6(4), 7(4), 11(6) and 12 of Schedule 3 to that Act.

529.     For the purposes of paragraphs 6, 7 and 11(6)(a) of Schedule 3 to F(No 2)A 2005, “security” has the same meaning as in Part 6 of ICTA. Section 254(1) of that Act defines “security” for the purposes of that Part of that Act. Section 254(1) of that Act is rewritten in clause 1117(1) of CTB2, to which subsection (1) accordingly refers.

Part 7: Tax treatment of financing costs and income

Overview

530.     This Part rewrites Schedule 15 to FA 2009, the rules on debt capping.

531.     The Part provides for the restriction of the tax deduction available for finance expenses of group companies. The aggregate tax deduction for United Kingdom group members is limited to the consolidated gross finance expense of the group.

532.     The restricted net expense is then allocated to one or more group companies. If other group members have net finance income from the group that finance income may be reduced in computing their profits.

Chapter 1: Introduction

Clause 260: Introduction

533.     This clause gives an overview of the Part by setting out what each subsequent Chapter does and is based on paragraph 1 of Schedule 15 to FA 2009.

Chapter 2: Application of Part

Overview

534.     This Chapter sets out the “gateway” conditions to be applied by reference to a comparison of the consolidated gross debt of the worldwide group with the aggregate figure of net debt of the UK group companies. If this condition is met for any given period of account of the worldwide group then the United Kingdom members of the group are not subject to the remaining Chapters of this Part.

Clause 261: Application of Part

535.     This clause sets the condition for application of the Part based on the amount of the worldwide group’s debt. The Part applies if the United Kingdom net debt of the group exceeds 75% of the worldwide gross debt of the group. The clause is based on paragraph 2 of Schedule 15 to FA 2009.

Clause 262: UK net debt of worldwide group for period of account of worldwide group

536.     This clause defines “UK net debt” for the purposes of clause 261 and is based on paragraph 3 of Schedule 15 to FA 2009.

Clause 263: Net debt of a company

537.     This clause defines the “net debt” of a relevant group company at any particular time as the company’s debt liabilities less its liquid assets taken from the company’s balance sheet. It is based on paragraph 4 of Schedule 15 to FA 2009.

Clause 264: Worldwide gross debt of worldwide group for period of account of the group

538.     This clause defines “worldwide gross debt” and is based on paragraph 5 of Schedule 15 to FA 2009.

Clause 265: References to amounts disclosed in balance sheet of relevant group company

539.     This clause explains what is meant by references to amounts disclosed in the balance sheet of a relevant group company and is based on paragraph 6 of Schedule 15 to FA 2009.

Clause 266: Qualifying financial services groups

540.     This clause gives the meaning of “qualifying financial services group” and is based on paragraph 7 of Schedule 15 to FA 2009.

Clause 267: Qualifying activities

541.     This clause provides the list of activities that are to be regarded as “qualifying activities” and is based on paragraph 8 of Schedule 15 to FA 2009.

Clause 268: Lending activities and activities ancillary to lending activities

542.     This clause defines “lending activities” and “activities that are ancillary to lending activities” and is based on paragraph 9 of Schedule 15 to FA 2009.

Clause 269: Insurance activities and insurance-related activities

543.     This clause defines “insurance activities” and “insurance-related activities” and is based on paragraph 10 of Schedule 15 to FA 2009.

Clause 270: Relevant dealing in financial instruments

544.     This clause gives the meaning of the phrase “relevant dealing in financial instruments” in clause 267 and is based on paragraph 11 of Schedule 15 to FA 2009.

Clause 271: UK trading income of the worldwide group

545.     This clause explains how UK trading income of the worldwide group is calculated for the purposes of clause 266 and is based on paragraph 12 of Schedule 15 to FA 2009.

Clause 272: Worldwide trading income of the worldwide group

546.     This clause explains how the worldwide trading income of the worldwide group is calculated for the purposes of clause 266 and is based on paragraph 13 of Schedule 15 to FA 2009.

Clause 273: Foreign currency accounting

547.     This clause provides that if an amount disclosed in balance sheets at any given date is expressed in a currency other than sterling, then the amount must be translated into sterling by reference to the spot rate at that date. It is based on paragraph 14 of Schedule 15 to FA 2009.

548.     Paragraphs 14(3)(b) and (4) of Schedule 15 to FA 2009 refer to the £3 million minimum limit in paragraph 3(3) of that Schedule. The figure in paragraph 3(3) of Schedule 15 to FA 2009 may be amended by Treasury order under paragraph 3(5) of that Schedule. The order does not allow an amendment to paragraph 14(3)(b) and (4) but subsections (3)(b) and (4) of this clause, which rewrite those sub-paragraphs, have been rewritten to allow the amount specified in clause 263(3), which rewrites paragraph 3(3) of Schedule 15 to FA 2009, to apply to subsections (3) and (4) of this clause whether or not amended by Treasury order.

Chapter 3: Disallowance of deductions

Overview

549.     This Chapter applies if the “tested expense amount” exceeds the “available amount”. In broad terms, the “tested expense amount” is the aggregate of the net amount of financing expense payable by each of the relevant group companies that have net financing expense, while the “available amount” is the external gross finance expense of the worldwide group of companies. The excess is the amount of financing expense that must be disallowed in computing the corporation tax profits of the relevant group companies. This Chapter also sets out how the group should notify HMRC of the allocation of the disallowance between the relevant group companies by submitting an allocation statement, and provides for an alternative procedure if the group fails to do so.

 
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Prepared: 19 November 2009