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Part 10: Factoring of income etc
Section 281A of ITTOIA: Sums to which sections 277 to 281 do not apply
1431. Section 774G(7) of ICTA provides, to summarise, that if section 774A or 774C of that Act applies then sections 277 to 281 of ITTOIA and sections 217 to 221 of CTA 2009 (lease premiums) do not. In consequence of the rewrite of sections 774A to 774G of ICTA for income tax purposes in this Bill, section 774G(7) of ICTA is rewritten for income tax purposes as new section 281A of ITTOIA, which disapplies sections 277 to 281 of that Act.
Part 11: UK representatives of non-UK residents
Section 817 of ITA: The independent broker conditions
1432. The words “by the broker” in subsection (3) are omitted as otiose. This amendment conforms the wording of section 817(3) with that of section 835L(3). Like section 835L (inserted in ITA by Part 1 of Schedule 6 to this Bill), section 817 is based on section 127(2) of FA 1995.
Section 824 of ITA: Application of 20% rule to collective investment schemes
1433. This amendment adds words at the end of subsection (2) to provide clarification that the amounts in subsection (1) arise or accrue from the transaction referred to in subsection (2). These are the same words as are included in section 835Q(2) of ITA inserted by Part 1 of Schedule 6 to this Bill (see the commentary on that Schedule).
Part 12: Amendments for purposes connected with other tax law rewrite Acts
Section 59(3) of ICTA: Persons chargeable: markets, fairs, fisheries, tolls etc
1434. Section 59(3) of ICTA has been repealed and not rewritten as it is unnecessary. See Change 15 in Annex 1.
Greater London Authority Act 1999
1435. This Part of this Schedule amends paragraph 7 of Schedule 33 to the Greater London Authority Act 1999 by replacing references to Case I of Schedule D with references to Part 3 of CTA 2009. Schedule D, which was set out in section 18 of ICTA, was repealed and rewritten for corporation tax purposes by CTA 2009. Paragraph 7 could have been, but was not, amended consequentially by CTA 2009. These references to provisions of Schedule D have in the meantime been translated, by paragraph 5 of Schedule 2 to CTA 2009, so as to be references to the corresponding provisions of CTA 2009.
1436. The amendments substitute references to Part 3 of CTA 2009 even though that Part applies to all trades and Case I of Schedule D did not apply to wholly-foreign trades. Wholly foreign trades were taxed under Case V of Schedule D, but profits of such trades were calculated in accordance with Case I principles. As the references to Case I of Schedule D that are contained in paragraph 7 are about what is to be deducted or brought into account in calculating profits, there is nothing to suggest that paragraph 7 is intended to produce anything but the same result in the somewhat unlikely event of the trade concerned being wholly foreign.
FA 2005
1437. Section 48B(6) to (8) of FA 2005 were rewritten for corporation tax purposes by section 519 of CTA 2009. It has subsequently been realised that they do not need to be rewritten for income tax and, accordingly, they are repealed by this Bill.
CTA 2009
1438. Sections 48A and 48B of FA 2005 apply for corporation tax purposes to alternative finance investment bond arrangements entered into on or after 1 April 2007 and apply for income tax purposes to alternative finance investment bond arrangements entered into on or after 6 April 2007; and apply to alternative finance return paid on or after those dates in respect of existing arrangements. If, however, an arrangement is disposed of after 6 April 2007, the alternative finance rules are treated as having applied throughout the life of the arrangement for the purposes of income tax and capital gains tax in relation to the disposal.
1439. This additional provision would normally have no effect on the alternative finance provisions rewritten for corporation tax in Chapter 6 of Part 6 of CTA 2009. However, section 48B(7) of FA 2005, rewritten in section 519(2) of CTA 2009, affects the close company rules, which in turn could affect an individual’s tax position. Section 519(2) of CTA 2009 does not need to be repeated for income tax or capital gains tax, but the special commencement rule in section 53(14)(a) of FA 2007 does need to be applied to it.
Schedule 9: Transitionals and savings etc
Overview
1440. This Schedule contains transitional and saving provisions.
Part 3: Double taxation relief
1441. Paragraph 9 of Schedule 14 to FA 2009 repealed sections 806A to 806K of ICTA with effect in relation to distributions paid on or after 1 July 2009. As explained in the commentary on the amendments made by Schedule 8 to those sections, they apply for corporation tax purposes to certain accounting periods for which this Bill has effect. Accordingly, this Schedule makes transitional provision ensuring that:
- those amendments do not override the repeal of those sections;
- the interpretative rules of ICTA which are repealed by this Bill are saved to the extent that they are needed for the purposes of those sections; and
- outlying references to Part 18 of ICTA which are converted into references to Part 2 of this Bill continue, if they are relevant to those sections, to refer to those sections.
Part 10: Alternative finance arrangements
1442. The legislation concerning alternative finance arrangements was introduced in FA 2005. The legislation introduced at that time covers purchase and resale arrangements and deposit arrangements. The legislation applies to arrangements entered into on or after 6 April 2005 (the date on which FA 2005 became law) and also to alternative finance return payable under existing deposit arrangements where the return is paid on or after 6 April 2005 (section 56 of FA 2005).
1443. Sections 95 and 96 of FA 2006 introduced legislation relating to profit share agency and diminishing shared ownership arrangements. The legislation for profit share agency applies for income tax to arrangements entered into on or after 6 April 2006 and to payments made under existing arrangements on or after 6 April 2006 (section 95(11) of FA 2006). The legislation for diminishing shared ownership applies for income tax only to arrangements entered into on or after 6 April 2006 (section 96(11) of FA 2006).
1444. Section 53 of FA 2007 introduced legislation relating to investment bond arrangements. The legislation applies for income tax to arrangements entered into on or after 6 April 2007 and to payments made under existing arrangements on or after 6 April 2007 (section 53(13) of FA 2007).
1445. Transitional provisions in this Schedule preserve the effect of those commencement provisions.
1446. The Alternative Finance Arrangements (Amendment) Order 2009 (SI 2009/2568) amended the definition of “financial institution” with effect for alternative finance arrangements (of all types) entered into on or after 15 October 2009. A transitional provision preserves the former definition for arrangements entered into before that date.
Part 12: Factoring of income etc
Application of section 809BZN of ITA 2007 (finance arrangements: exceptions)
1447. Section 809BZN of ITA is inserted by Schedule 5. It is based on section 774E of ICTA 1988.
1448. Sub-paragraph (1) of this paragraph is a saving for the second sentence of section 774E(1) of ICTA 1988, which was repealed by paragraph 9(3)(b) of Schedule 25 to FA 2009. This saving applies in relation to transfers before 22 April 2009 in accounting periods which begin before that date and end on or after 1 April 2010.
1449. Section 774E(4)(b) of ICTA originally read as follows:
(4) Section 774B or 774D does not apply so far as the structured finance arrangement is an arrangement in relation to which -
(b) paragraph 15 of Schedule 9 to the Finance Act 1996 (repo transactions and stock-lending) applies, or ..
1450. Paragraph 9 of Schedule 14 to FA 2007 substituted a new section 774E(4)(b) reading as follows:
(b) Schedule 13 to the Finance Act 2007 (sale and repurchase of securities) applies, ..
1451. In that substituted version, CTA 2009 inserted before “applies” the words “or Chapter 10 of Part 6 of CTA 2009 (repos).”
1452. The amendment made by paragraph 9 of Schedule 14 to FA 2007 applies with effect in relation to an arrangement that comes into force on or after 1 October 2007: see article 3 of the Finance Act 2007 (Schedules 13 and 14) Order 2007 (SI 2007/2483).
1453. Furthermore, because of article 5 of that instrument, the pre-FA 2007 version of paragraph 15 of Schedule 9 to FA 1996 is still in force in relation to arrangements which would have been within Schedule 13 to FA 2007 but for having come into force before 1 October 2007.
1454. Section 774E(4)(b) of ICTA, as amended by FA 2007 and CTA 2009, is rewritten to new section 809BZN(5)(b) of ITA and clause 771(5)(b) of CTB2. Sub-paragraph (2) of this paragraph accordingly makes transitional provision for arrangements which came into force before 1 October 2007. See also paragraph 78 of Schedule 2 to CTA 2009 for modifications with which paragraph 15 of Schedule 9 to FA 1996 (as it stood before the substitution made by paragraph 18 of Schedule 14 to FA 2007) has effect.
Application of section 809CZC of ITA 2007 (income-transfer under loan or credit transaction)
1455. This paragraph is a saving for the words in section 786 of ICTA 1988 omitted by paragraph 9(1)(d) of Schedule 25 to FA 2009. This saving applies in relation to transfers before 22 April 2009 in accounting periods which begin before that date and end on or after 1 April 2010.
Schedule 10: Repeals and revocations
Overview
1456. This Schedule contains repeals and revocations of enactments, including some spent enactments.
Part 6: Oil activities
1457. This Bill repeals provisions in Chapter 5 of Part 12 of ICTA and sections 62 to 65 of FA 1991, in so far as they apply for income tax purposes. These provisions are repealed for corporation tax purposes by CTB2, along with those oil taxation provisions that apply only for corporation tax purposes.
Schedule 11: Index of defined expressions used in Parts 2 to 8
Overview
1458. This Schedule provides indexes of defined expressions used in Parts 2 and 3 (double taxation relief), Part 4 (transfer pricing), Part 5 (advance pricing agreements), Part 6 (tax arbitrage), Part 7 (tax treatment of financing costs and income) and Part 8 (offshore funds).
FINANCIAL EFFECTS OF THE BILL
1459. The Bill will not require any additions to previously planned expenditure. Revision of guidance for users and for staff will be undertaken as part and parcel of the process of improving such material and keeping it up to date in response to new legislation and other changes. The minor changes in the law in the Bill are expected to have negligible effect on tax revenues.
EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER
1460. The Bill will not require any increase in the number of staff in HMRC or other departments.
SUMMARY OF THE IMPACT ASSESSMENT
1461. An implementation stage impact assessment of the effects of the Bill is available at or from Jon Fuller, Tax Law Rewrite Project, HMRC, 8th Floor, SW Wing, Bush House, Strand, London WC2B 4RD (Telephone 020 7438 7538).
1462. In summary, the Bill is expected to benefit companies, external tax professionals and agents as well as HMRC staff. The benefits are broadly summarised as:
- greater ease of use of the legislation with fewer disputes or errors concerning the meaning of the law; and
- less time spent navigating, understanding and applying the legislation correctly.
1463. In addition:
- tax professionals new to the legislation will find it easier to understand and learn; and
- greater ease of use of the legislation will result in lower costs.
1464. There will be some one-off costs to business: there will be retraining costs for users in familiarising themselves with the new legislation and commercial publishers and software suppliers will need to update their products.
EUROPEAN CONVENTION ON HUMAN RIGHTS
1465. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement, before second reading, about the compatibility of the provisions of the Bill with the Convention rights (as defined in section 1 of that Act).
1466. The Chancellor of the Exchequer has made the following statement:
In my view the provisions of the Taxation (International and Other Provisions) Bill are compatible with the Convention rights.
1467. The provisions of the Bill have been the subject of careful consideration in order to ensure that they are compatible with the Convention rights. The main parts of the Bill which involve human rights considerations are briefly discussed below. (Articles referred to below are Articles of the Convention.)
Part 2 Double taxation relief
Part 3 Double taxation relief for special withholding tax
1468. From the human rights aspect, these provisions are beneficial measures which prevent unfair double taxation in appropriate circumstances. There is scope for a claim of discrimination where the lines for relief are drawn. The circumstance of double taxation will, however, normally arise from a choice by the taxpayer to reside and conduct their affairs in two jurisdictions and not through any personal characteristic which they cannot change, so the scope for discrimination is diminished. It is further diminished by the process of treaty negotiation between two states which the exercise of the powers given in Parts 2 and 3 will lead to, as both will be seeking to achieve a fair allocation of taxing rights. The application of those rights within its own territory is within the margin of appreciation afforded to a state in this area.
Part 4: Transfer Pricing
Part 5: Advance Pricing Agreements
1469. Part 4 applies where provision is made between two parties by means of a transaction and, broadly, one party controls the other (or both are controlled by a third person). The actual provision made (commonly, the price) is compared to an arm’s length price and, if the actual price confers a potential UK tax advantage, the taxable profits of the party receiving such advantage are adjusted to what they would have been on an arm’s length basis. This basic rule is contained in clauses 147 and 148.
1470. The basic transfer pricing rule is anti-avoidance in nature, so the relevant human rights issues are (1) whether the means used to counter the avoidance or mitigation of tax are rational, fair and not arbitrary, and (2) whether the interference with the right of property is proportionate. Transfer pricing rules are used in many other jurisdictions and are the recognised means to counter this type of tax avoidance or mitigation. Furthermore, clause 164 specifically requires that the provisions are generally to be construed in a manner which is consistent with the principles of the OECD Model Double Tax Convention (Article 9). So, while the application of the provisions will result in a greater burden of tax and engage the right to protection of property, they address the mischief in an internationally recognised and proportionate manner, within the margin of appreciation.
1471. Advance pricing agreements are written agreements between an enterprise and HMRC which determine a method for resolving pricing issues in advance of a return being made. They are not thought to raise human rights concerns, since where the terms of the agreement are complied with they provide assurance that the treatment of those pricing issues will be accepted by both HMRC and the enterprise for the period covered by the agreement.
Part 6 Tax Arbitrage
1472. Where different tax jurisdictions treat the same transaction in different ways, multinational groups can arrange their affairs so as to take advantage of such discrepancies. The provisions apply where a scheme using a hybrid entity or instrument either leads to a double deduction for the same expense (or a deduction in the United Kingdom where there is no tax on the receipt by the other party) or where amounts are received by a company in a way that would not otherwise be taxable in the United Kingdom.
1473. The provisions empower HMRC to issue a deduction notice or a receipt notice. The effect of the notice is to oblige the company to calculate (or recalculate) its income or chargeable gains for the purposes of its liability to corporation tax. These are anti-avoidance provisions, which have a limited focus on the specific aspects of the relevant transactions in order merely to achieve the correct tax treatment. While they engage Article 1 Protocol 1, the interference with the Convention right is the minimum required to pursue the legitimate anti-avoidance aim in a proportionate manner.
Part 7: Tax Treatment of Financing Costs and Income
1474. This Part rewrites Schedule 15 to FA 2009, which introduced a new regime for restricting the tax deduction for finance expenses of group companies. The purpose of the regime is to prevent a proportion of finance expenses being relieved against tax where an international group has put a greater amount of debt into UK group companies than the group as a whole has borrowed from external sources. For example a worldwide group might borrow £10 million from outside sources but make loans to UK resident companies in the group of £100 million. The interest on that £100 million will flow from the UK to non-resident group companies with an accompanying reduction in profits for corporation tax purposes. The effect of the provisions in Part 7 is that the debit for financing costs will now be capped as for a debt of £10 million.
1475. Part 7 therefore contains anti-avoidance provisions aimed at countering schemes for converting intra-group financing costs (subject to disallowance) into external - non-group - financing costs (not subject to disallowance). For the relevant period of account, each UK group company is required to submit returns showing the group’s total intra-group UK financing costs and the total of the worldwide group’s external financing costs, and allocating among group companies amounts disallowed and income exempted. Failure to submit a return may lead to an increase in the overall amount disallowed or a reduction in the overall income exempted.
1476. Article 1 Protocol 1 and Article 14 may be engaged and there may be interference with those rights as the provisions can operate to increase the amount of a company’s income that is chargeable to corporation tax and do not treat all groups of companies in the same way, and may operate to increase chargeable income in cases of avoidance or failure to submit returns. But the provisions are within the margin of appreciation accorded to contracting states when framing and implementing policies in the area of taxation. They are justified as proportionate because they apply to all groups of a certain size except where those groups are not truly comparable by reference to the target of the regime (because of the nature of their businesses, including their subjection to regulatory requirements or to particular tax regimes). The consequences which attend engagement in avoidance schemes or failing to submit returns are justified as proportionate to their legitimate aims.
Part 8: Offshore Funds
1477. This Part rewrites sections 40A to 40G and 41 to 42A of FA 2008. An offshore fund is a mutual fund which takes one of three forms (corporate, trust or co-ownership arrangements) and is resident in a territory outside the United Kingdom. Without special provisions, an offshore fund could be used to accumulate income which, on disposal by the investor, would be subject to capital gains tax rules rather than charged to income tax or to corporation tax on income. The current regime therefore provides that, unless an offshore fund is certified by HMRC as a distributing fund, the disposal of a material interest in the fund gives rise to a charge at that time to income tax or to corporation tax on income on the amount of the consideration which represents an offshore income gain.
1478. The current regime relating to persons with an interest in offshore funds is due to be replaced. Following consultation from early 2008 onwards, legislation enabling a comprehensive set of rules to be given effect to in regulations was introduced in sections 41 to 42 of FA 2008. Sections 40A to 40G of that Act (inserted by section 44 of and Schedule 22 to FA 2009) contain a new definition of “offshore fund”, substantive effect to which is given via the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). The regulations come into force on 1 December 2009. Although regulations under section 41 of FA 2008 may make retrospective changes, it is provided in paragraph 6 of Schedule 22 to FA 2009 that regulations under section 41 of FA 2008 cannot operate on rights that exist prior to 1 December 2009. That paragraph also provides generous grandfathering of contractual arrangements existing on 30 April 2009 in cases where a taxpayer is committed to invest in an offshore fund after 1 December 2009. Part 8 of the Bill simply rewrites the power to make the regulations and the new definition of “offshore fund”.
Part 2 of Schedule 9
1479. The Bill makes minor changes to the law in the interests of simplification and to bring the legislation into line with current practice. These changes have either no practical effect or only small effects. A small number may make small increases in the amount of tax payable for a small group of taxpayers. In addition, the wording of the Bill differs from the wording of the legislation it replaces in very many detailed particulars. Although the contents of the Bill have been examined with great care, it is still possible that some of these detailed changes will operate to change the law in ways that cannot now be foreseen. Some of the changes arising in this way may have effect so as to impose a charge to tax in respect of events occurring before the respective provisions have effect.
1480. Part 2 of Schedule 9, therefore, addresses the possibility of an unfair adverse effect upon a taxpayer, and possibly upon the taxpayer’s Convention rights. A corresponding provision was included in ITA and CTA 2009. If there is an action or event prior to the coming into force of the Bill which has certain tax consequences, and the effect of the Bill is that those tax consequences change when the Bill comes into force, the taxpayer may opt that the tax consequences after the Bill comes into force are to be the same as they were under the “old” law. While Article 1 of Protocol 1 is engaged, the provision satisfies the fair balance test in that Article.
TERRITORIAL EXTENT
1481. The Bill extends to the whole of the United Kingdom.
1482. Because the Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament, if there are amendments relating to such matters which trigger the Convention, consent of the Scottish Parliament will be sought for them.
COMMENCEMENT
1483. The substantive provisions of this Bill will come into force on 1 April 2010. Clause 381 provides for this Bill to have effect:
- for corporation tax purposes, for accounting periods ending on or after that day,
- for income tax and capital gains tax purposes, for the tax year 2010-11 and subsequent tax years, and
- for petroleum revenue tax purposes, for chargeable periods beginning on or after 1 July 2010.
ANNEX 1: MINOR CHANGES IN THE LAW
Change 1: Double taxation relief: capital gains tax relief under double taxation arrangements: clause 3
This change clarifies the extension of section 788(8) of ICTA (double taxation relief: provision as to income which is not subject to double taxation) to capital gains tax by section 277(1) of TCGA.
Section 788(8) of ICTA ensures that DTAs can be given statutory effect even if they contain “provision as to income or chargeable gains which is or are not subject to double taxation”. These words, however, are in a subsection that, taken by itself, operates only in relation to income tax, corporation tax and similar taxes in territories outside the United Kingdom. Two issues arise in rewriting those words as extended in relation to capital gains tax by section 277(1) of TCGA.
The first issue is whether to give effect to the substitution provided for by section 277(1) of TCGA and as a result to refer not to income or chargeable gains but to capital gains. In this regard, it is considered that capital gains include:
- gains (referred to in this note as “non-chargeable gains”) that would be chargeable gains but for some provision of TCGA, or of another UK enactment, that provides that the gains are not chargeable gains.
The second issue is whether the purpose stated in section 277(1) of TCGA - namely, the purpose of giving relief from double taxation in relation to capital gains tax and tax on chargeable gains charged under the law of any territory outside the United Kingdom - means that section 277(1) does not extend to capital gains the power to include provision as to items which are not subject to double taxation. This interpretation would be on the basis that making provision about items not subject to double taxation could not be said to be giving relief from double taxation.
The cited words from section 788(8) of ICTA, as extended by section 277(1) of TCGA, are rewritten, in clause 3(2), so as to refer to:
(a) provision as to income that is not subject to double taxation, or
(b) provision as to chargeable gains that are not subject to double taxation.
Viewed in the light of the first issue discussed in this note, referring to chargeable gains rather than capital gains means that, if any DTAs made provision as to non-chargeable gains that are not subject to double taxation, such provision would not have statutory effect. In principle, this is a change in the law. But it has no effect in practice, since no existing arrangements rely on section 788(8) of ICTA as extended by section 277(1) of TCGA in order to make provision as to non-chargeable gains that are not subject to double taxation.
Viewed in the light of the second issue discussed in this note, extending the reference to chargeable gains so that it applies in the context of capital gains tax, and similar taxes in territories outside the United Kingdom, would give statutory effect to provision in DTAs that (a), in the context of capital gains tax and such similar taxes, is provision as to chargeable gains that are not subject to double taxation and (b) is currently inoperative. In principle, this is a change in the law. But it has no effect in practice, since no existing arrangements make such provision.
As regards possible future DTAs, changing the scope of the power given by section 788(8) of ICTA, as extended by section 277(1) of TCGA, could be adverse or favourable to taxpayers, depending on the precise details of the provision which might be made by the future arrangements.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
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