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

back to previous text

Section 225A: Meaning of “oil extraction activities”

697.     This section sets out the definition of “oil extraction activities” for the purposes of the Chapter. It is based on section 502(1) and (2) of ICTA.

698.     Certain definitions are taken from the PRT legislation in section 12 of OTA 1975.

Section 225B: Meaning of “oil rights”

699.     This section sets out the meaning of “oil rights” for the purposes of the Chapter. It is based on section 502(1) of ICTA.

Section 225C: Meaning of “ring fence income”

700.     This section sets out the meaning of “ring fence income” for the purposes of the Chapter. It is based on section 502(1) of ICTA.

Section 225D: Meaning of “ring fence trade”

701.     This section sets out the meaning of “ring fence trade” for the purposes of the Chapter. It is based on section 502(1) of ICTA.

Section 225E: Other definitions

702.     This section sets out further definitions necessary for the Chapter. It is based on sections 493(1A) and 502(1) and (2) of ICTA.

Section 225F: Valuation where market value taken into account under section 2 of OTA 1975

703.     This section specifies that where the market value of oil is included in the calculation of profits for PRT purposes by OTA 1975 in place of the actual sale price, the same price applies for income tax. It is based on section 493(1) of ICTA.

704.     The market value is derived by way of a comprehensive scheme put in place for PRT purposes - see in particular section 2 of and Schedule 3 to OTA 1975.

Section 225G: Valuation where disposal not at arm’s length

705.     This section applies a market value price where oil is disposed of otherwise than at arm’s length, but where the disposal is not covered by the PRT rules. It is based on section 493(3), (5) and (6) of ICTA.

706.     A common application of this rule is where oil is extracted from an oil field that is not within the scope of PRT following the reforms in FA 1993, which took fields given development consent on or after 16 March 1993 out of the scope of PRT.

Section 225H: Valuation where excess of nominated proceeds

707.     This section ensures that where the “nomination scheme” adds an amount to the disposal value of oil for PRT purposes, that amount is also added for income tax purposes. It is based on section 493(1A) of ICTA.

708.     The “nomination scheme” is part of the mechanism to ensure that the full value of oil extracted from the UK sector is reflected in the profits calculated for PRT and for the ring fence trade. A full description of the scheme can be found in HMRC guidance at OTM 5199.

Section 225I: Valuation where relevant appropriation but no disposal

709.     This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining. It is based on section 493(2) of ICTA.

710.     Where a market value is applied for PRT purposes by OTA 1975, that market value is used in the calculation of profits for income tax purposes - see subsections (4) and (5). The market value also applies to the non-ring fence business.

Section 225J: Valuation where appropriation to refining etc

711.     This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining, and where the PRT rules do not apply. It is based on section 493(4), (5) and (6) of ICTA.

712.     In such a case the same calculation of market value is made using the PRT rules as if the PRT rules had applied to the appropriation.

Section 225K: Reduction of expenditure by reference to regional development grant

713.     This section restricts a deduction for expenditure incurred to the extent that the expenditure has been met by a regional development grant. It is based on section 495(1), (2) and (7) of ICTA.

714.     The main restriction in respect of a grant is applied by section 534 of CAA. This section applies essentially the same restriction to the purchaser of an asset who buys the asset from a connected party, where that connected party received a regional development grant on the original acquisition or construction of the asset.

715.     The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for income tax purposes with respect to expenditure incurred on or after 6 April 2011. The clause therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 9.

Section 225L: Adjustment as a result of regional development grant

716.     This section supplements section 225K of ITTOIA and section 534 of CAA where the amount of expenditure involved is redetermined at a later date. It is based on section 495(3) to (7) of ICTA.

717.     The most likely application of regional development grants in the oil context is for onshore assets such as initial treatment plants to stabilise the crude oil arriving by pipeline. The eligibility of such assets for PRT relief, or the proportion that is eligible, can take some time to agree. As a result, the PRT position (which determines the amount eligible for capital allowances) may not be finalised for some time.

718.     Accordingly, capital allowances could be given on the full amount in the “initial period”, disregarding the grant, as section 534(2) of CAA or its predecessors would not have applied at that stage. Subsection (5) ensures that the position can be adjusted in a later period if a change in circumstances occurs.

719.     If the change increases the expenditure eligible for capital allowances, subsection (7) treats the person as having incurred additional expenditure.

720.     If the change reduces the eligible expenditure subsection (8) treats the person as receiving a trading receipt.

721.     In both cases the adjustment is treated as made in the relevant later period (referred to as the “adjustment period”).

722.     Section 137 of FA 1982, referred to in the source legislation, was rewritten in section 534 of CAA.

723.     The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for income tax purposes with respect to expenditure incurred on or after 6 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 9.

Section 225M: Tariff receipts etc

724.     This section brings certain tariff receipts into the calculation of ring fence income if those receipts would not otherwise be included. It is based on section 496 of ICTA.

725.     Tariff receipts arise where assets used in the ring fence trade are not used wholly for oil extraction by the owner but are used by other businesses in return for payment of a fee or “tariff”. Typical examples include the use of pipelines and treatment plants.

726.     Tax-exempt tariffing receipts arise where the oil field to which the assets are attached for PRT purposes is not within the charge to PRT and therefore the tariffs are not chargeable to PRT.

727.     Definitions of “tariff receipt” and “tax-exempt tariffing receipts” have been included to aid users of the legislation.

Section 225N: Expenditure on and under abandonment guarantees

728.     This section provides relief against income tax where an oil field participator incurs expenditure in obtaining an abandonment guarantee. It is based on sections 62 and 63(8) of FA 1991.

729.     The cost of decommissioning oil fields is eligible for relief under the capital allowances code. But as the majority of oil fields are shared between two or more participators there is a risk that one or more of the participators may not meet their share of the cost when the time comes. As a result participators have taken out guarantees with financial institutions to cover their share. This section provides relief for the cost of obtaining the guarantee.

Section 225O: Relief for reimbursement expenditure under abandonment guarantees

730.     This section provides relief for a participator against ring fence profits where some or all of a participator’s share of decommissioning costs is met by a guarantee and the participator subsequently reimburses the guarantor. It is based on section 63 of FA 1991.

731.     Section 63(5) of FA 1991 uses the term “accounting period” and therefore appears to confine the section to corporation tax. A similar point arises in section 65(4) of FA 1991. But sections 62 and 64 of FA 1991 and the remainder of sections 63 and 65 do not suggest that they should be limited to corporation tax. They have, therefore, been rewritten in full for income tax with necessary adaptation (such as “tax year” for “accounting period”) - see Change 10 in Annex 1.

Section 225P: Payment under abandonment guarantee not immediately applied

732.     This section applies where a guarantor makes payments into a fund and the assets of the fund are subsequently used to cover decommissioning costs. It is based on section 62(4) of FA 1991.

733.     In such a case the rules for relief under section 225N or section 225O apply to the expenditure when it is eventually met out of the assets of the fund.

Section 225Q: Amounts excluded from section 225O(1)

734.     This section restricts relief where amounts are repaid to a guarantor instead of being applied to meet decommissioning costs. It is based on section 63(2) of FA 1991.

735.     This provision is rewritten in full for income tax with necessary adaptation (such as “tax year” for “accounting period”). See the commentary on section 225O and Change 10 in Annex 1.

Section 225R: Introduction to sections 225S and 225T

736.     This section sets out the circumstances in which sections 225S and 225T apply, and provides some related definitions. It is based on section 64(1), (2) and (3) and section 65(1) of FA 1991.

Section 225S: Relief for expenditure incurred by a participator in meeting defaulter’s abandonment expenditure

737.     This section provides for relief to a participator who meets the decommissioning expenditure that should have been met by another participator (the “defaulter”). It is based on section 64(4) and (5) of FA 1991.

Section 225T: Reimbursement by defaulter in respect of certain abandonment expenditure

738.     This section applies where a defaulting participator reimburses another participator who has met the defaulter’s liability for decommissioning expenditure. It is based on section 65 of FA 1991.

739.     Relief against ring fence income is given to the defaulter, and the other participator is treated as receiving additional ring fence income.

740.     The time limit in subsection (5) was amended from six years to four years by paragraph 27 of Schedule 39 to FA 2008 from a date to be determined by order. This change takes effect from 1 April 2010 by virtue of article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provision and Savings) Order 2009 (SI 2009/403) unless article 10 of that order applies. In such circumstances the transitional provision in Schedule 9 provides that the change takes effect from 1 April 2012.

741.     This provision is rewritten in full for income tax. See the commentary on section 225O and Change 10 in Annex 1.

Section 225U: Interest on repayment of APRT

742.     This section provides that interest paid to a participator on a repayment of advance PRT is disregarded in calculating profits for income tax purposes. It is based on paragraph 10(7) of Schedule 19 to FA 1982.

Schedule 2: Alternative finance arrangements

Overview

743.     This Schedule, introduced by clause 365, rewrites the income tax and capital gains tax provisions in Chapter 5 of Part 2 of FA 2005 dealing with alternative finance arrangements. These provisions tax and relieve alternative finance return under certain types of financial arrangement in the same way as interest. This includes financial arrangements that comply with Shari’a law, which prohibits transactions that involve interest. The rules are not limited to Shari’a compliant products but also apply to any finance arrangement that falls within their terms.

744.     The overall approach is in line with that used for the corresponding corporation tax provisions in Chapter 6 of Part 6 of CTA 2009. As far as possible the provisions have been kept together so that users can see the overall scheme of the legislation. Signposts have been inserted into appropriate places in other parts of the tax code that are affected by these provisions.

745.     The regulatory power in section 98 of FA 2006, rewritten for corporation tax in section 521 of CTA 2009, has proved difficult to rewrite separately in a way that ensures that it continues to operate satisfactorily and in an unchanged way. This Bill therefore rewrites the regulatory power as clause 366 and repeals section 521 of CTA 2009.

746.     Part 1 of the Schedule inserts a new Part 10A into ITA to deal with the income tax aspects of the legislation. Part 2 of the Schedule inserts a new Chapter 4 into Part 4 of TCGA to deal with the capital gains tax aspects.

747.     Part 3 of the Schedule makes a number of amendments to other enactments, including inserting new sections in Chapter 7 of Part 7 of ITA dealing with the interaction between alternative finance arrangements and Community Investment Tax Relief.

Part 1: New Part 10A of ITA 2007

748.     Part 1 inserts new Part 10A into ITA containing sections 564A to 564Y.

Section 564A: Introduction

749.     This section sets out what is included in the Chapter and provides signposts to the location of certain definitions. It is based on sections 46(1) and 57 of FA 2005.

Section 564B: Meaning of “financial institution”

750.     This section provides the meaning of “financial institution” for the purposes of the alternative finance rules. It is based on section 46(2) and (3) of FA 2005. The corresponding rule for corporation tax is section 502 of CTA 2009.

751.     It is a requirement that at least one party to the arrangements must be a financial institution.

Section 564C: Purchase and resale arrangements

752.     This section deals with an arrangement whereby an asset is purchased by a financial institution and then sold to another person with the payment by that second person left on credit. It is based on section 47(1) to (3) of FA 2005. The corresponding rule for corporation tax is section 503 of CTA 2009.

753.     The price paid by that second person exceeds the price paid by the financial institution. The difference between the two prices equates to the return from an investment at interest and is treated as alternative finance return (see new section 564I of ITA).

Section 564D: Diminishing shared ownership arrangements

754.     This section deals with a second type of alternative finance arrangement. It is based on section 47A(1) to (4) of FA 2005. The corresponding rule for corporation tax is section 504 of CTA 2009.

755.     Two persons, at least one of them a financial institution, acquire an interest in an asset. The financial institution receives payments from the other party for that party’s use of the financial institution’s share as well as payments to acquire the financial institution’s share, with the ownership of the asset passing by degrees to the other party. The other party to the arrangement has full use of the asset being acquired and may grant rights in the asset. Payments made by the other party in excess of the payments for the beneficial interest being acquired are treated as alternative finance return.

Section 564E: Deposit arrangements

756.     This section deals with an arrangement whereby deposits are made with a financial institution and payments are made to the depositor out of profits earned by the use of the money. It is based on section 49(1) of FA 2005. The corresponding rule for corporation tax is section 505 of CTA 2009.

757.     The payments must equate to a return from an investment at interest. The return is treated as alternative finance return.

Section 564F: Profit share agency arrangements

758.     This section deals with an arrangement where the investor appoints an agent to whom a sum of money is given to be invested at a specified return. It is based on section 49A(1) of FA 2005. The corresponding rule for corporation tax is section 506 of CTA 2009.

759.     Any additional sum above the specified return is retained by the agent as an incentive fee.

Section 564G: Investment bond arrangements

760.     This section sets out the conditions that must be present for arrangements to be treated as an investment bond arrangement. It is based on section 48A(1) and (2) of FA 2005. The corresponding rule for corporation tax is section 507 of CTA 2009.

761.     An investment bond arrangement exists where the bond-issuer uses the subscription proceeds to acquire assets, which are specified in the arrangement, and are held for the benefit of the bond-holder. Income generated from the assets is distributed to the bond-holder and, on maturity of the bond, the assets are sold under pre-existing arrangements and the proceeds returned to the bond-holder.

Section 564H: Provision not at arm’s length: exclusion of arrangements from sections 564C to 564G

762.      This section excludes arrangements from sections 564C to 564G where the parties are connected persons within the transfer pricing legislation in Part 4 of this Bill, the arrangements are not at arm’s length and the recipient of the alternative finance return is not subject to income tax or corporation tax or a similar non-United Kingdom tax. It is based on section 52(1) to (3) of FA 2005. The corresponding rule for corporation tax is section 508 of CTA 2009.

Section 564I: Purchase and resale arrangements

763.     This section explains the meaning of “alternative finance return” in relation to the purchase and resale arrangements in section 564C. It is based on section 47(4), (6), (7) and (8) of FA 2005. The corresponding rule for corporation tax is section 511 of CTA 2009.

764.     It provides for circumstances where the second purchase price is paid either immediately or in instalments.

Section 564J: Purchase and resale arrangements where return in foreign currency

765.     This section sets out how to deal with purchase and resale arrangements in currencies other than sterling. It is based on section 48(1) of FA 2005. There is no explicit equivalent for corporation tax as currency matters are dealt with as an integral element of Parts 5 and 6 of CTA 2009.

Section 564K: Diminishing shared ownership arrangements

766.     This section explains the meaning of “alternative finance return” in relation to the diminishing shared ownership arrangements set out in section 564D. It is based on section 47A(5) of FA 2005. The corresponding rule for corporation tax is section 512 of CTA 2009.

767.     The phrase “costs and expenses” in section 47A(5) of FA 2005 has been reduced to “expenses” in subsection (3) as the additional words appear to be unnecessary.

Section 564L: Other arrangements

768.     This section explains the meaning of “alternative finance return” in relation to deposit arrangements, profit share agency arrangements and investment bond arrangements. It is based on sections 48B(1), 49(2), 49A(2) and 51A(1) and (2) of FA 2005. The corresponding rule for corporation tax is section 513 of CTA 2009.

Section 564M: Treatment of alternative finance return as interest for ITTOIA 2005

769.     This section directs that, for all purposes of ITTOIA, alternative finance return is to be taxed and relieved in the same way as interest. It is based on section 51(1) of and paragraph 10 to Schedule 2 to FA 2005.

Section 564N: Alternative finance return under arrangements for trade or property business purposes

770.     This section directs that, where a person is party to an alternative finance arrangement for the purposes of a trade or property business then any alternative finance return is treated as an expense of that trade or business. It is based on section 51(3) to (5) of FA 2005.

771.     Specific provision is made to permit the deductibility of the incidental costs of raising loan finance via alternative finance arrangements under section 58 of ITTOIA.

Section 564O: Relief for some alternative finance return under Chapter 1 of Part 8 etc

772.     This section ensures that alternative finance return under purchase and resale arrangements can be relieved in the same way as interest under provisions in ITA It is based on section 51(2) of FA 2005.

Section 564P: Tax relief schemes and arrangements

773.     This section ensures that relief for alternative finance return is subject to possible restriction under section 809ZG of ITA (which rewrites section 787 of ICTA). It is based on paragraph 8 of Schedule 2 to FA 2005.

Section 564Q: Deduction of income tax at source under Part 15

774.     This section ensures that the provisions requiring the deduction of income tax at source from payments of interest also apply to payments of alternative finance return in equivalent circumstances. It is based on paragraphs 1, 11, 12 and 13 of Schedule 2 to FA 2005.

Section 564R: Treatment of discount

775.     This section ensures that where part of the return equates in substance to a discount, then that part is dealt with in accordance with the rules for discounts in section 381 of ITTOIA, but not where the arrangements equate to a deeply discounted security. It is based on section 51A(1) and (3) of FA 2005.

776.     Subsection (3) ensures that where any part of the return equates to the return on a deeply discounted security, then that part of the return is dealt with under the rules in ITTOIA that deal with deeply discounted securities.

Section 564S: Treatment of bond-holder and bond-issuer

777.     This section sets out a number of consequences for bond-holders and bond-issuers under investment bond arrangements. It is based on section 48B(2) of FA 2005. The corresponding rule for corporation tax is section 517 of CTA 2009.

 
previous Section Bill Home page continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries ordering index

© Parliamentary copyright 2009
Prepared: 19 November 2009