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

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Section 681CB: Leased trading assets

1037.     This section states when this Chapter applies. It is based on section 782(1), (8) and (9) of ICTA.

1038.     Subsection (1) introduces the three conditions relating to the application of this Chapter and explains their logical relationship.

1039.     Subsection (2) specifies condition A, concerning the payment.

1040.     In particular, under subsection (2)(a) the payment must be made under the lease of a “relevant asset”. The expression “relevant asset” appears in subsection (2)(a) for the first time in this Chapter. It is defined in section 681CG.

1041.     Subsections (3) and (4) specify conditions B and C. These are two alternative conditions concerning the use to which the leased asset was put before it was leased.

1042.     Subsection (5) preserves the rule that, if the lease was created before the legislation was first introduced, a lease-back after that date will not activate the legislation.

Section 681CC: Tax deduction not to exceed commercial rent

1043.     This section restricts income tax relief. It is based on section 782(1) to (4) of ICTA.

1044.     Subsection (3) brings the law into line with practice. See the commentary on section 681AA and Change 11 in Annex 1.

Section 681CD: Long funding finance leases

1045.     This section makes an exception for long funding finance leases. It is based on section 782(1A) of ICTA.

Sections 681CE and 681CF: Commercial rent; lease

1046.     These interpretative sections are based on sections 782(6) and (7) and 785 of ICTA.

Section 681CG: Relevant asset

1047.     This section defines “relevant asset” for the purpose of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.

1048.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this section uses the new term “relevant asset”.

Chapter 4: Leased assets: capital sums

Overview

1049.     This Chapter is based on sections 781, 783 and 784 of ICTA.

1050.     It deals with cases such as that of a taxpayer who, having had tax relief in respect of a payment under a lease of an asset other than land or buildings, receives or has received at any time a capital sum in respect of the lessee’s interest in the lease.

1051.     If the Chapter applies, income tax is charged on (broadly speaking) the amount on which relief has been obtained or, if less, on the capital sum.

1052.     This Chapter corresponds to Chapter 4 of Part 19 of CTB2, which makes similar provision for the purposes of corporation tax. It has the following structure.

  • Section 681D summarises the Chapter.

  • Sections 681DA to 681DC state when the Chapter applies.

  • Sections 681DD to 681DF concern the charge to income tax.

  • Sections 681DG to 681DI deal with obtaining the capital sum.

  • Sections 681DJ and 681DK are about apportionment.

  • Sections 681DL to 681DP are interpretative.

Section 681D: Overview

1053.     This section summarises this Chapter. It is new.

1054.     The expressions “capital sum” and “lease” appear in this section for the first time in this Chapter. They are defined in sections 681DM and 681DN respectively.

Section 681DA: Application of the Chapter

1055.     This section introduces the five conditions relating to the application of this Chapter and explains their logical relationship. It is based on section 781(1) of ICTA.

Section 681DB: Payment under lease

1056.     This section specifies a necessary condition for the Chapter to apply, namely that a tax-deductible payment is made under a lease of a relevant asset. It is based on sections 781(1) and (3) and 782(1) of ICTA.

1057.     The expressions “relevant asset” and “relevant tax relief” appear in subsection (1)(a) and (b) respectively for the first time in this Chapter. They are defined in sections 681DO and 681DP respectively.

1058.     The person entitled to a deduction by way of tax relief under section 781(1)(a) of ICTA is not necessarily the person obtaining the capital sum and charged to tax under that subsection. It follows that, if the person obtaining the capital sum is charged to income tax, the person entitled to a deduction by way of tax relief is not necessarily an income tax payer. Subsection (1)(b) of this section therefore refers to “relevant tax relief”, rather than “relevant income tax relief”.

1059.     Subsection (2) stipulates that if Chapter 3 of this Part applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). For that reason, Chapter 3 appears in this Part before this Chapter, reversing the order of the source legislation.

1060.     Subsection (3) similarly stipulates that if Chapter 3 of Part 19 of CTB2 applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). Subsection (3) is unlikely to apply in practice, but omitting it would change the law to the taxpayer’s disadvantage.

1061.     Subsection (4) preserves the rule that, if the lease was created before the legislation was first introduced, receiving a capital sum after that date will not activate the legislation.

Section 681DC: Sum obtained

1062.     This section specifies four alternative additional conditions for the Chapter to apply. It is based on sections 781(1) and (9) and 783(3) of ICTA.

1063.     All four of the conditions concern the obtaining of a capital sum by a person of the description specified in the condition. In particular, the person obtaining the capital sum need not be the person making the tax-deductible payment.

1064.     In conditions B and C in subsections (1) and (2), the capital sum is obtained in respect of the lessee’s interest in the lease. In condition B, the capital sum is obtained by the person making the payment. In condition C, the capital sum is obtained by an associate of that person.

1065.     Subsection (1)(a) is the first provision in this Chapter which refers to obtaining a sum in respect of an interest in a lease and, specifically, to obtaining a sum in respect of the lessee’s interest in a lease. The former expression is defined in section 681DG. The latter expression is defined in section 681DH.

1066.     The word “associate” appears in subsection (2) for the first time in this Chapter. It is defined in section 681DL.

1067.     In conditions D and E in subsections (3) and (4), the capital sum is obtained in respect of the lessor’s interest in the lease, or of any other interest in the asset. In condition D, the capital sum is obtained by an associate of the person making the payment. In condition E, the interest belongs to an associate of that person and the capital sum is obtained by an associate of that associate.

1068.     Subsection (5) makes it clear that, for the purposes of this section, it is irrelevant when the payment is made.

1069.     Subsections (6) and (7) relate to hire-purchase agreements for plant or machinery. Subsection (6) makes an exception to conditions B and C. Subsection (7) makes an exception to conditions D and E.

Section 681DD: Charge to income tax

1070.     This section imposes the charge to income tax on the person obtaining the capital sum. It is based on section 781(1), (1A), (2) and (6) of ICTA.

1071.     Under subsection (1) there is a charge to income tax for the tax year in which the sum is obtained.

1072.     Subsection (2) measures the income thus charged.

1073.     Subsection (3) introduces four subsections limiting the effect of subsections (1) and (2).

1074.     Subsection (4) caps the amount charged.

1075.     To prevent double taxation, subsections (5) and (6) ensure that once a payment (or part of a payment) has been taken into account in making a charge under this Chapter it cannot be taken into account in making a further charge in respect of another sum.

1076.     Subsection (7) is a timing rule supplementing subsections (5) and (6).

Section 681DE: Hire-purchase agreements

1077.     This section concerns hire-purchase agreements. It is based on section 784 of ICTA.

1078.     This section may be in point if section 681DC(6) and (7) (sum obtained: exceptions for hire-purchase agreements) do not prevent this Chapter from applying. If this Chapter applies, subsection (1) states the conditions for this section to apply.

1079.     Subsection (2) requires the total to be found of:

  • non-tax-deductible payments under the lease; and

  • if the lessee’s interest in the lease was assigned to the person before it obtained the capital sum in respect of that interest, any capital payment made by the person as consideration for the assignment.

1080.     Under section 1008 of ITA, the references to assignment in section 681DE(2) are to be read in relation to Scotland as references to assignation, thus making explicit what is merely implicit in section 784(2)(b).

1081.     The total found in subsection (2) is then compared with the capital sum. If it is equal to or greater than the capital sum, then under subsection (3) the capital sum is treated for the purposes of section 681DD(4) as £nil. If the total found under subsection (2) is less than the capital sum, then under subsection (4) it is deducted from the capital sum in applying section 681DD(4).

1082.     Subsection (5) covers the special case in which the capital sum is the consideration for part only of the lessee’s interest in the lease.

1083.     Section 784(4) of ICTA provides that:

the amount to be deducted .. shall be such proportion of the capital expenditure which is still unallowed as is reasonable (emphasis added).

1084.     Rewriting this, subsection (5)(a) requires the unallowed amount to be reduced to a proportion which is not only reasonable but also just. This is a minor change in the law: see Change 5 in Annex 1.

1085.     To prevent double relief, subsections (6) and (7) ensure that if a payment has been taken into account under subsection (2) in respect of a capital sum it cannot be taken into account in respect of another capital sum.

1086.     Subsection (8) is a timing rule supplementing subsections (6) and (7).

Section 681DF: Adjustments where sum obtained before payment made

1087.     This section provides for adjustments to be made if a capital sum is obtained as mentioned in section 681DC and later a payment is made as mentioned in section 681DB. It is based on section 781(7) to (8A) of ICTA.

Section 681DG: Sum obtained in respect of interest

1088.     This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of an interest in an asset”. It is based on section 783(1) and (2) of ICTA.

Section 681DH: Sum obtained in respect of lessee’s interest

1089.     This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of the lessee’s interest in a lease of an asset”. It is based on section 783(1) and (2) of ICTA.

Section 681DI: Disposal of interest to associate

1090.     This section determines the amount which a company is deemed to obtain if it disposes of an interest in an asset to a person who is the company’s associate. It is based on sections 781(1) and 783(4) and (5) of ICTA.

Section 681DJ: Apportionment of payments made and of sums obtained

1091.     This section provides for apportionments to be made of payments made and sums obtained. It is based on section 783(6) to (8) of ICTA.

1092.     Subsection (3) requires apportionments to be not only just but also reasonable. This is a minor change in the law. See Change 5 in Annex 1.

1093.     Although section 783(6) and (8) of ICTA refer to vocations carried on in partnership (as well as to trades and professions carried on in partnership), it is considered that vocations cannot be carried on in partnership: see, for example, Change 4 in Annex 1 to the explanatory notes on CTB2. Accordingly, subsections (2), (4) and (5) do not refer to vocations.

Section 681DK: Manner of apportionment

1094.     This section provides for apportionments to be made by the tribunal in certain circumstances. It is based on section 783(9) of ICTA.

Section 681DL: Associates

1095.     This section defines “associates” for the purposes of this Chapter. It is based on section 783(10) and (11) of ICTA.

Section 681DM: Capital sum

1096.     This section defines “capital sum” for the purposes of this Chapter. It is based on the definition of “capital sum” in section 785 of ICTA.

Section 681DN: Lease

1097.     This section defines “lease” for the purposes of this Chapter. It is based on the definition of “lease” in section 785 of ICTA.

Section 681DO: Relevant asset

1098.     This section defines “relevant asset” for the purposes of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.

1099.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this section uses the new term “relevant asset”.

Section 681DP: Relevant tax relief

1100.     This section defines “relevant tax relief” for the purposes of this Chapter. It is based on section 781(4) of ICTA.

1101.     Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. This is a minor change in the law. See Change 13 in Annex 1.

Schedule 5: Factoring of income etc: new Chapters 5B and 5C of Part 13 of ITA 2007

Overview

1102.     This Schedule inserts new Chapters 5B and 5C of Part 13 of ITA, which rewrite sections 774A to 774G and 786 of ICTA for the purposes of income tax.

1103.     Chapter 5B of Part 13 of ITA (finance arrangements) is based on sections 774A to 774G of ICTA. Chapter 5C of that Part (loan or credit transactions) is based on section 786 of ICTA.

1104.     These Chapters are inserted into ITA by a Schedule to this Bill, because CTB2 is confined to corporation tax. There is no risk of the two tax codes diverging in this area, even temporarily, because CTB2 and this Bill are expected to proceed through Parliament in tandem. But each has its own series of Annex 1 Changes. So the Annex 1 Changes in this Part have different numbers from the corresponding Annex 1 Changes in CTB2.

1105.     Paragraph 7 of Schedule 25 to FA 2009 inserted Chapter 5A of Part 13 of ITA (transfers of income streams), which makes provision for income tax corresponding to Chapter 1 of Part 16 of CTB2. Chapters 5B and 5C of Part 13 of ITA make provision for income tax corresponding to Chapters 2 and 3 of Part 16 of CTB2.

1106.     Consequential amendments and repeals are in Part 10 of Schedule 8 and Part 10 of Schedule 10.

Chapter 5B: Finance arrangements

Overview

1107.     This Chapter is based on sections 774A to 774G to ICTA, the rules on structured finance arrangements introduced by FA 2006. It stops a number of schemes which are intended to enable taxpayers to borrow money and obtain effective tax relief for both interest and repayment of principal.

1108.     A “finance arrangement”, within this Chapter, is an arrangement where in accordance with GAAP a person (“the borrower”) records in its accounts a financial liability in respect of a sum (“advance”) paid by “the lender”, and that sum is paid to acquire assets (including an income stream), which will be used to repay the advance.

1109.     Where there is a finance arrangement which would have had the effect that either:

  • income or receipts that would have been brought into account by the borrower for tax purposes are not brought into account; or

  • the borrower would have become entitled to a deduction in computing its income or profits for tax purposes,

then

  • the finance arrangement does not have that effect, with the result that the income from the transferred asset continues to be taxed on the borrower; and

  • any disposal or reacquisition of the asset is disregarded for the purposes of TCGA.

1110.     Income tax relief is allowed for the amount of any interest or “finance charge” in respect of the finance agreement shown in the borrower’s accounts.

1111.     This Chapter corresponds to Chapter 2 of Part 16 of CTB2, which makes similar provision for corporation tax. It has the following structure.

  • Sections 809BZA to 809BZE deal with “type 1 finance arrangements”: the simple case, not necessarily involving a partnership.

  • Sections 809BZF to 809BZI deal with “type 2 finance arrangements”: the first of two complex partnership cases.

  • Sections 809BZJ to 809BZL deal with “type 3 finance arrangements”: the second of two complex partnership cases.

  • Sections 809BZM to 809BZP make exceptions to these rules.

  • Sections 809BZQ to 809BZS are interpretative.

Section 809BZA: Type 1 finance arrangement defined

1112.     This section defines a form of arrangement, labelled a “type 1 finance arrangement”, which falls within this legislation. It is based on section 774A of ICTA.

1113.     Subsection (1) provides that two conditions must be met if an arrangement is to be a type 1 finance arrangement.

1114.     The word “arrangement” appears in subsection (1) for the first time in this Chapter. See section 809BZR.

1115.     Subsection (2) specifies condition A, which concerns the terms of the arrangement. There are three tests in condition A, all of which must be passed if the condition is to be met. To summarise:

  • a borrower must “receive” an advance from a lender (see subsection (2)(a));

  • the borrower (or a person “connected” with the borrower) must “dispose” of an asset (the security) to, or for the benefit of, the lender (or a person “connected” with the lender) (see subsection (2)(b)); and

  • the lender (or a person “connected” with the lender) must be entitled to “payments in respect of” the security (see subsection (2)(c)).

1116.     An ordinary secured loan would not be a type 1 finance arrangement, because it would not satisfy subsection (2)(b) or, if it did, it would not satisfy subsection (2)(c).

1117.     The first reference in this Chapter to a person receiving an asset is in subsection (2)(a). See section 809BZS(2).

1118.     Subsection (2)(b) is the first of a number of provisions in this Chapter which refer to persons being “connected”. In the source legislation, section 774G(4) of ICTA gives that expression the meaning given by section 839 of that Act. The provisions in question are rewritten as new sections of ITA, inserted by this Bill. Section 1021(1) of ITA applies the definition of “connected” persons in section 993 of that Act. Section 774G(4) of ICTA is not being rewritten as a separate proposition.

1119.     The first reference in this Chapter to a disposal of an asset is in subsection (2)(b). See section 809BZS(3).

1120.     The first reference in this Chapter to payments in respect of an asset is in subsection (2)(c). See section 809BZS(4).

1121.     Subsection (3) specifies condition B, which is about accounting. To summarise, the payments mentioned in subsection (2)(c) must be, for accounting purposes, payments of principal rather than interest.

1122.     The first reference in this Chapter to a person’s accounts is in subsection (3)(a). See section 809BZQ(2) and (4).

1123.     The first reference in this Chapter to an amount being recorded in accounts as a financial liability is in subsection (3)(a). See section 809BZQ(3).

Section 809BZB: Certain tax consequences not to have effect

1124.     This section disapplies certain tax consequences of a type 1 finance arrangement if certain conditions are met. It is based on sections 774A(4), 774B(1), (1A) and (2) to (4) and 774G(2) of ICTA.

1125.     Under subsections (1) and (2), if - but for this section - a type 1 finance arrangement would have the “relevant effect”, then it does not.

1126.     Subsection (3) defines the “relevant effect”, and subsection (4) defines the “relevant effect” if the borrower is a partnership. Each of those subsections specifies three alternative effects.

Section 809BZC: Payments treated as borrower’s income

1127.     This section treats the payments mentioned in section 809BZA(2)(c) as income of the borrower. It is based on sections 774A(4), 774B(1) and (1B) to (3) and 774G(2) of ICTA.

1128.     Under subsection (1), this section only applies if:

  • there is a type 1 finance arrangement;

  • section 681EA(2) and the corresponding corporation tax provision do not stop this arrangement having the relevant effect; and

  • the borrower is either (a) within the charge to income tax or (b) a partnership at least one member of which is within the charge to income tax.

Section 809BZD: Deemed interest if borrower is not a partnership

1129.     This section allows income tax relief to be given if there is a type 1 finance arrangement and the borrower is not a partnership. It is based on section 774B(4) and (6) to (8) of ICTA.

1130.     As well as specifying the conditions for this section to apply, subsection (1) introduces the person (namely, the borrower) eligible for income tax relief.

1131.     Subsection (2) permits the borrower mentioned in subsection (1) to treat the amount as interest payable on a loan. If the relevant statutory conditions are met, the deemed interest qualifies for income tax relief under Chapter 1 of Part 8 of ITA.

1132.     If subsection (2) deems there to be interest payable, subsection (3) determines when it is deemed to be paid.

 
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Prepared: 19 November 2009