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

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Section 564T: Treatment as securities

778.     This section ensures that investment bond arrangements are treated as securities for income tax purposes. It is based on section 48B(3) of FA 2005. The corresponding rule for corporation tax is section 518 of CTA 2009.

Section 564U: Arrangements not unit trust scheme or offshore fund

779.     This section ensures that investment bond arrangements are not treated as a unit trust scheme or an offshore fund. It is based on section 48B(5) of FA 2005.

Section 564V: Exclusion of alternative finance return from consideration for sale of assets

780.     This section ensures that where assets are sold under certain types of alternative finance arrangement the alternative finance return is excluded from the consideration for the sale and purchase. It is based on section 53 of FA 2005.

781.     The corresponding provision for corporation tax is section 514 of CTA 2009.

Section 564W: Diminishing shared ownership arrangements not partnerships

782.     This section provides that diminishing shared ownership arrangements are not treated as a partnership for income tax purposes. It is based on section 47A(6) of FA 2005. The corresponding rule for corporation tax is section 515 of CTA 2009.

Section 564X: Treatment of principal under profit share agency arrangements

783.     This section ensures that in the case of profit sharing arrangements the deposit-taker is taxable in respect of all of the profit resulting from the use of the money - both the depositor’s share of profit made under the arrangements and also the amount that the deposit-taker can retain. It is based on section 49A(3) of FA 2005. The corresponding rule for corporation tax is section 516 of CTA 2009.

784.     The deposit-taker is entitled to relief for the depositor’s share of profit.

Section 564Y: Provision not at arm’s length: relevant return

785.     This section prevents any deduction in calculating profits for income tax purposes as a result of alternative finance arrangements where the rules about arrangements not at arm’s length in section 564H applies. It is based on section 52(4) and (5) of FA 2005. The corresponding rule for corporation tax is section 520 of CTA 2009.

Part 2: New Chapter 4 of Part 4 of TCGA 1992

786.     This Part of the Schedule inserts the necessary rules for capital gains tax as Chapter 4 of Part 4 of TCGA.

Sections 151H to 151S: Meaning of alternative finance arrangements etc

787.     The inserted sections 151H to 151S of TCGA, containing the definitions of alternative finance arrangements and alternative finance return, perform the same function for the purposes of TCGA as the inserted sections 564A to 564L of ITA do for income tax.

Section 151T: Investment bond arrangements are qualifying corporate bonds

788.     This section ensures that investment bond arrangements are treated as qualifying corporate bonds for the purposes of TCGA. It is based on section 48B(4) of FA 2005.

789.     CTA 2009 inserted a reference in section 117(6D) of TCGA to add a reference to section 507 of CTA 2009 alongside the reference to section 48A of FA 2005. Part 7 of Schedule 8 rewrites section 117(6D) of TCGA to conform to the new structure.

Sections 151U to 151Y: Rules for investment bond arrangements and other rules

790.     The inserted sections 151U to 151Y of TCGA set out a number of consequences for the purposes of TCGA, equivalent to the inserted sections 564S to 564W of ITA for income tax.

Part 3: Other amendments

791.     This Part inserts new section 367A into ICTA, new section 173A into ITEPA and new sections 372A to 372D into ITA and amends section 1005 of ITA.

Section 367A of ICTA: Alternative finance arrangements

792.     This section brings alternative finance arrangements within the scope of sections 353 and 365 of ICTA, which provide for relief for interest payment in certain limited circumstances. It is based on section 51(2) of FA 2005.

793.     The section has been inserted here because the legislation only affects a defined group of people and will eventually be spent when there are no longer any eligible claimants.

Section 173A of ITEPA: Alternative finance arrangements

794.     This section brings the effect of the alternative finance provisions into the rules for the taxation of employee benefits. It is based on section 97 of FA 2006.

Sections 372A to 372D of ITA: Community investment tax relief: alternative finance arrangements

795.     These new sections modify Part 7 of ITA (community investment tax relief: income tax relief) to enable the range of permitted investments in, and by, community development finance institutions to include various Sharia’a-compliant financial products that in substance, but not in form, are equivalent to interest-bearing loans. Such products are to be treated as loans for the purposes of that Part. They correspond to clauses 256 to 259 of CTB2 which have effect for the purposes of Part 7 of that Bill (community investment tax relief: corporation tax relief).

Section 372A: Meaning of “loan” and “interest”

796.     This section extends the meaning of the term “loan” in Part 7 of ITA to include purchase and resale arrangements, deposit arrangements and profit share agency arrangements and the meaning of the term “interest” to include profit share return under those alternative finance arrangements. It is based on section 54A(1) and (2) of FA 2005.

Section 372B: Purchase and resale arrangements

797.     This section sets out how Part 7 of ITA has effect in relation to purchase and resale arrangements. It is based on section 54A(3) and (4) of FA 2005.

Section 372C: Deposit arrangements

798.     This section sets out how Part 7 of ITA has effect in relation to deposit arrangements. It is based on section 54A(5) of FA 2005.

Section 372D: Profit share agency arrangements

799.     This section sets out how Part 7 of ITA has effect in relation to profit share agency arrangements. It is based on section 54A(6) of FA 2005.

Schedule 3: Leasing arrangements: finance leases and loans

Overview

800.     This Schedule provides for the rewriting of Schedule 12 to FA 1997.

801.     Schedule 12 to FA 1997 has effect for both corporation tax purposes and income tax purposes. In accordance with the principle of splitting such provisions into separate income tax provisions in income tax rewrite Acts and corporation tax provisions in corporation tax rewrite Acts, Schedule 12 is rewritten for corporation tax purposes as Part 21 of CTB2.

802.     Part 1 of this Schedule inserts a new Part 11A of ITA to deal with the income tax aspects of the source legislation and Part 2 inserts a new section 37A of TCGA to deal with its chargeable gains aspects.

803.     Schedule 12 to FA 1997 was introduced to deal with two finance leasing arrangements. Schedule 12 achieves its aims by aligning the tax treatment of the return in respect of finance leases and loans more closely with the commercial accounting treatment.

804.     Part 1 of Schedule 12 to FA 1997 (rewritten in Chapter 2 of the new Part 11A of ITA) counters tax avoidance by finance lessors trying to turn some of their lease rental income into capital receipts (taxed later and at lower effective rates, if at all). It ensures that any part of the capital receipt which is recognised as return on investment under GAAP is brought into account for tax purposes as income.

805.     Part 2 of Schedule 12 to FA 1997 (rewritten in Chapter 3 of the new Part 11A of ITA) deals with a possible deferral of tax liability by means of leases under which rentals are concentrated towards the end of the lease term. But for the provisions of Schedule 12, rental income in the case of such a finance lease could be recognised for tax purposes later than it is recognised in accordance with GAAP.

Part 1: New Part 11A of ITA 2007

Chapter 1: Introduction

Overview

806.     This Chapter not only gives an overview of Part 11A but also brings to prominence the definitions of certain terms fundamental to its provisions.

Section 614A: Overview of Part

807.     This section describes Part 11A and the contents of each Chapter. It is new.

Section 614AA: Normal rent

808.     This section defines “normal rent”. It is based on paragraph 20 of Schedule 12 to FA 1997.

809.     Normal rent is the amount which but for Part 11A a lessor would bring into account as rent from a lease for the purposes of income tax.

Section 614AB: Accountancy rental earnings

810.     This section defines “accountancy rental earnings”. It is based on paragraph 21 of Schedule 12 to FA 1997.

811.     Part 11A provides that the accountancy rental earnings of a lessor in relation to a lease are, in certain circumstances, to be brought into account for income tax purposes instead of the normal rent from the lease.

812.     Subsections (1) and (2) provide that in relation to a lease “accountancy rental earnings” are the highest of the following three figures for a period of account:

  • the rental earnings (see section 614AC) of the lessor in relation to the lease;

  • the rental earnings of a connected person of the lessor in relation to the lease; or

  • the rental earnings in relation to the lease for the purposes of consolidated accounts of the group of which the lessor is a member.

813.     The purpose of taking the highest of the three figures is to ensure that the earnings fully reflecting the economic substance of the transaction are taxed. This is especially important when the capital sum which is an essential part of a leasing arrangement within Chapter 2 of Part 11A may be received not by the lessor but by a related party. In such a case it is only by considering the lessor’s position and that of the related party together that the true economic substance of the transaction can be appreciated. In the case of a lessor which is a company, that is likely to be in the consolidated accounts of the group as a whole, or possibly in the accounts of the related party, rather than in those of the lessor company itself.

814.     Although most company lessors will be within the charge to corporation tax and thus fall within Part 21 of CTB2, these provisions apply to companies which are within the charge to income tax, including in particular non-UK resident companies that are lessors of land and buildings. Accordingly it is necessary for Part 11A of ITA to deal with lease accounting by a non-UK resident company and any group of which it is part.

Section 614AC: Rental earnings

815.     This section defines “rental earnings”. It is based on paragraph 22 of Schedule 12 to FA 1997.

Chapter 2: Finance leases with return in capital form

Overview

816.     This Chapter is concerned with finance leases intended to turn part of the associated rental income into capital receipts.

Section 614B: Arrangements to which this Chapter applies

817.     This section describes the leasing arrangements that fall within Chapter 2. It is based on paragraphs 1(1) and 2(1) of Schedule 12 to FA 1997.

818.     The arrangements fall within the Chapter if they involve the lease of any property or rights (see subsection (1) and the definition of “asset” in section 614DG).

819.     The Chapter is only capable of applying if two conditions are met. First, the arrangements must fall to be treated under GAAP as a finance lease or loan (see subsection (2)). Second, it is necessary that some or all of the lessor’s return on investment in respect of the finance lease or loan is not in the form of rent and would not, apart from Part 11A of ITA or Part 21 of CTB2, be brought into account for tax purposes as rent (see subsection (3)).

820.     References to Part 21 of CTB2 and to tax purposes (rather than only income tax purposes) have been included in subsection (3) to ensure that the division between that Part and Part 11A of ITA works as intended.

821.     The Chapter is capable of applying to arrangements entered into before the commencement date of Schedule 12 to FA 1997 (see subsection (4)(a) and the commentary on section 614BX).

Section 614BA: Purposes of this Chapter

822.     This section sets out the main purposes of Chapter 2. It is based on paragraph 1(2) of Schedule 12 to FA 1997.

823.     The first purpose (in subsections (2) to (4)) is to substitute for the ordinary tax measure of income from the lease the amount recognised in accordance with GAAP where this is larger than the normal measure (see section 614BF).

824.     Under GAAP, part of the sum mentioned in section 614B(3) is recognised as annual income over the course of the lease and thus taken into account in computing commercial profits. Income is recognised in this way because in substance the lease is tantamount to a loan, the interest on which needs to be matched with the lessor’s own borrowing costs in order properly to reflect the lessor’s profit.

825.     The income recognised in accordance with GAAP may be that shown in consolidated accounts of the lessor’s group or in those of a company which is a “connected person” of the lessor. The reason for looking wider than the lessor (see subsection (4)) is that the full earnings from the lease may only be shown in, say, the accounts of the parent or in the consolidated group results.

826.     The second purpose of Chapter 2 (in subsections (5) and (6)) is to recover appropriately any tax reliefs for capital expenditure already given.

Section 614BB: Application of this Chapter

827.     This section, together with section 614BC, determines whether Chapter 2 applies to a particular lease. It is based on paragraph 2 of Schedule 12 to FA 1997.

828.     For the Chapter to apply, the conditions in section 614BC must have been met in relation to the lease at some time in a period of account of the current lessor (see subsection (1)(b)). But once they have been met in relation to the lessor at the time, they are treated as continuing to be met as regards any subsequent lessor unless and until the lease is assigned to a wholly unrelated person (see subsections (3) to (5)).

829.     Subsection (2) provides that the Chapter does not apply to long funding leases of plant or machinery in relation to which Part 2 of CAA gives capital allowances to the lessee instead of the lessor. Chapter 10A of Part 2 of ITTOIA sets out the basis of taxation of rental earnings under such leases.

830.     Subsection (6) is a necessary consequence of the split into separate provisions for corporation tax purposes and income tax purposes.

Section 614BC: The conditions referred to in section 614BB(1)

831.     This section sets out the five conditions, A to E, all of which must be met if Chapter 2 is to apply to a specific lease. It is based on paragraph 3(1) to (5) of Schedule 12 to FA 1997.

832.     Condition A in subsections (2) to (4) requires the lease to fall to be treated under GAAP as a finance lease or loan.

833.     Condition B in subsection (5) requires a “major lump sum” which is not rent to be payable and for part of that sum to be treated under GAAP as return on investment in respect of the finance lease or loan.

834.     Condition C in subsection (6) is that not all of that part of the major lump sum would apart from Chapter 2 be brought into account for income tax purposes as the “normal rent” (see sections 614AA and 614BD(3) and (4)) from the lease for tax years ending with “the relevant tax year” (see section 614BD(1)).

835.     Condition D in subsection (7) is that for the period of account of the lessor in which “the relevant time” (see section 614BD(1)) falls or for an earlier period of account of the lessor, the “accountancy rental earnings” (see section 614AB) in respect of the lease exceed the normal rent for the period. The point of this condition is that, if a lessor is consistently being taxed on at least as much income as the commercial accounts show, then the terms of the lease are not ones which are designed to turn rental income into a capital receipt.

836.     Condition E in subsection (8) is that at the relevant time there exist such arrangements or circumstances as are mentioned in section 614BE.

837.     The arrangements and circumstances are set out in detail in section 614BE, but essentially there must be some likelihood that the lessee or a connected person of the lessee will buy out the lessor’s interest in the leased asset for a major lump sum.

838.     Condition E is intended to ensure that a lease does not come within Chapter 2 solely because there is a possibility that the lessor may obtain a major capital sum otherwise than from the lessee or a connected person. This might happen for example on the unplanned sale of the leased asset to a third party or on a claim under an insurance policy on the destruction of the asset.

Section 614BD: Provisions supplementing section 614BC

839.     This section provides the meanings of “the relevant tax year” and “the relevant time” and sets out how the normal rent is to be determined, for the purposes of section 614BC. It is based on paragraph 3(7) and (8) of Schedule 12 to FA 1997.

Section 614BE: The arrangements and circumstances referred to in section 614BC(8)

840.     This section sets out the arrangements and circumstances which constitute Condition E in section 614BC(8). It is based on paragraph 4 of Schedule 12 to FA 1997.

841.     See the commentary on section 614BC.

Section 614BF: Current lessor taxed by reference to accountancy rental earnings

842.     This section provides for the lessor to bring into account for income tax purposes the accountancy rental earnings in respect of the lease for a period of account if they exceed the normal rent for the period. It is based on paragraph 5 of Schedule 12 to FA 1997.

Sections 614BG to 614BK: Reduction of taxable rent by cumulative rental excesses

Overview

843.     These sections ensure that the rule in section 614BF that the higher of the accountancy rental earnings and the normal rents (ordinary taxable rents) are taxed does not overall cause more rent to be taxed as income than is actually due to the lessor. They are based on paragraph 6 of Schedule 12 to FA 1997.

844.     These sections achieve their purpose by requiring running totals to be kept of aggregate differences between accountancy rental earnings and the normal rents. Any aggregate excess of accountancy rental earnings over normal rents arising in past periods can then be set against any current excess of normal rents over accountancy rental earnings. Conversely, any aggregate excess of normal rents over accountancy rental earnings arising in past periods can be set against any current excess of accountancy rental earnings over normal rents.

845.     The provisions of paragraph 6 of Schedule 12 to FA 1997 have been unpacked into five sections to provide greater clarity.

Section 614BG: Reduction of taxable rent by cumulative rental excesses: introduction

846.     This section introduces sections 614BG to 614BK. It is based on paragraph 6(5) to (9) of Schedule 12 to FA 1997.

Section 614BH: Meaning of “accountancy rental excess” and “cumulative accountancy rental excess”

847.     This section defines the terms “accountancy rental excess” and “cumulative accountancy rental excess”. It is based on paragraph 6(3), (4) and (8) of Schedule 12 to FA 1997.

Section 614BI: Reduction of taxable rent by the cumulative accountancy rental excess

848.     This section applies if in relation to a lease for a period of account the normal rent exceeds the accountancy rental earnings (so it is the normal rent that is taxed) and there is a cumulative accountancy rental excess. It is based on paragraph 6(5) and (6) of Schedule 12 to FA 1997.

849.     The rent that is brought into account for income tax purposes is found by reducing normal rent by the cumulative accountancy rental excess but not so as to bring into account an amount less than the accountancy rental earnings for the period.

Section 614BJ: Meaning of “normal rental excess” and “cumulative normal rental excess”

850.     This section defines the terms “normal rental excess” and “cumulative normal rental excess”. It is based on paragraph 6(1), (2) and (6) of Schedule 12 to FA 1997.

Section 614BK: Reduction of taxable rent by the cumulative normal rental excess

851.     This section applies if in relation to a lease for a period of account the taxable rent under section 614BF would be the amount of the accountancy rental earnings and there is a cumulative normal rental excess. It is based on paragraph 6(7) and (8) of Schedule 12 to FA 1997.

852.     Section 614BF only applies if the accountancy rental earnings exceed the normal rent. To avoid more rent being taxed as income for the period than is actually due to the lessor where there is a cumulative normal rental excess for the period, the rent that is brought into account for income tax purposes is found by reducing the accountancy rental earnings by the cumulative normal rental excess, but not so as to bring into account an amount less than the normal rent for the period.

Sections 614BL to 614BO: Relief for bad debts by reduction of cumulative rental excesses

Overview

853.     These sections are concerned with bad debts. Broadly, the aim is to ensure that any bad debts are sensibly taken into account in calculating taxable profits and accountancy rental excesses and normal rental excesses. If the lease runs its course, the net rents taxed should equal the net rents payable after allowing for any bad debts.

Section 614BL: Relief for bad debts: reduction of cumulative accountancy rental excess

854.     This section deals with a bad debt deduction in respect of rent under a lease for a period of account if there is a cumulative accountancy rental excess for the period. It is based on paragraph 9(1) to (4) and (7) of Schedule 12 to FA 1997.

855.     Subsection (2) reduces the cumulative accountancy rental excess for a period where the accountancy rental earnings exceed normal rent by an amount equal to the excess of the bad debt deduction over the accountancy rental earnings.

856.     Subsection (3) deals with the converse situation if, for a period of account, normal rent is at least equal to accountancy rental earnings (so that it is the normal rent which is taxed). In those circumstances there are two restrictions.

857.     Subsection (4) provides that relief otherwise available under section 614BI(2) in a period for any cumulative accountancy rental excess brought forward from previous periods is restricted to any excess of the normal rent over any bad debt deduction given in respect of rents from the lease. That is because only the normal rent net of bad debt relief is in effect being brought into account for tax.

858.     Subsection (5) applies if the bad debt deduction exceeds the normal rent for a period of account. In such a case any cumulative accountancy rental excess brought forward from previous periods is reduced by the amount by which the bad debt deduction exceeds the normal rent. That is because the excess of the bad debt deduction over the normal rent for the period of account already represents relief for rents taxed in previous periods.

859.     The definition of “bad debt deduction” in subsection (6) corrects a missed consequential in ITTOIA by substituting for the cross-reference to “sub-paragraph (i), (ii) or (iii) of section 74(1)(j) of the Taxes Act 1988” a cross-reference to “section 35(1)(a), (b) or (c) of ITTOIA 2005”.

 
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Prepared: 19 November 2009