Taxation (International and Other Provisions) Bill

House of Commons

Session 2009 - 10
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Taxation (International and Other Provisions) Bill

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
207

Schedule 2
Section 365

Alternative finance arrangements
Part 1
New Part 10A of ITA 2007
1
ITA 2007 is amended as follows.
5
2
After Part 10 insert—
“Part 10A
Alternative finance arrangements
Introduction
564A
Introduction
10
(1)
This Part—
(a)
contains provisions about the treatment as interest for certain
income tax purposes of alternative finance return under
alternative finance arrangements with financial institutions
(see sections 564M to 564Q), and
15
(b)
contains some special provisions about the treatment of
investment bond arrangements (see sections 564R to 564U)
and some other rules about alternative finance arrangements
(see sections 564V to 564Y).
(2)
In this Part “alternative finance arrangements” means—
20
(a)
purchase and resale arrangements,
(b)
diminishing shared ownership arrangements,
(c)
deposit arrangements,
(d)
profit share agency arrangements, and
(e)
investment bond arrangements.
25
(3)
In this Part—
(a)
“purchase and resale arrangements” means arrangements to
which section 564C applies,
(b)
“diminishing shared ownership arrangements” means
arrangements to which section 564D applies,
30
(c)
“deposit arrangements” means arrangements to which
section 564E applies,
(d)
“profit share agency arrangements” means arrangements to
which section 564F applies, and
(e)
“investment bond arrangements” means arrangements to
35
which section 564G applies.
(4)
For the meaning of “alternative finance return”, see sections 564I to
564L.
(5)
For the meaning of “financial institution”, see section 564B.

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
208

(6)
Also, see section 366 of TIOPA 2010 (power to extend this Part and
other provisions to other arrangements by order).”
3
After section 564A insert—
“564B
Meaning of “financial institution”
(1)
In this Part “financial institution” means—
5
(a)
a bank, as defined by section 991,
(b)
a building society,
(c)
a wholly-owned subsidiary—
(i)
of a bank within paragraph (a), or
(ii)
of a building society,
10
(d)
a person authorised by a licence under Part 3 of the
Consumer Credit Act 1974 to carry on a consumer credit
business or consumer hire business within the meaning of
that Act,
(e)
a bond-issuer, within the meaning of section 564G, but only
15
in relation to any bond assets which are rights under
purchase and resale arrangements, diminishing shared
ownership arrangements or profit share agency
arrangements,
(f)
a person authorised in a jurisdiction outside the United
20
Kingdom—
(i)
to receive deposits or other repayable funds from the
public, and
(ii)
to grant credits for its own account,
(g)
an insurance company as defined in section 431(2) of ICTA,
25
or
(h)
a person who is authorised in a jurisdiction outside the
United Kingdom to carry on a business which consists of
effecting or carrying out contracts of insurance or
substantially similar business but not an insurance special
30
purpose vehicle as defined in section 431(2) of ICTA.
(2)
For the purposes of subsection (1)(c) a company is a wholly-owned
subsidiary of a bank or building society (“the parent”) if it has no
members except—
(a)
the parent or persons acting on behalf of the parent, and
35
(b)
the parent’s wholly-owned subsidiaries or persons acting on
behalf of the parent’s wholly-owned subsidiaries.”
4
After section 564B insert—
“Arrangements that are alternative finance arrangements
564C
Purchase and resale arrangements
40
(1)
This section applies to arrangements if—
(a)
they are entered into between two persons (“the first
purchaser” and “the second purchaser”), one or both of
whom are financial institutions, and
(b)
under the arrangements—
45

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
209

(i)
the first purchaser purchases an asset and sells it to
the second purchaser,
(ii)
the sale occurs immediately after the purchase or in
the circumstances mentioned in subsection (2),
(iii)
all or part of the second purchase price is not required
5
to be paid until a date later than that of the sale,
(iv)
the second purchase price exceeds the first purchase
price, and
(v)
the excess equates, in substance, to the return on an
investment of money at interest.
10
(2)
The circumstances are that—
(a)
the first purchaser is a financial institution, and
(b)
the asset referred to in subsection (1)(b)(i) was purchased by
the first purchaser for the purpose of entering into
arrangements within this section.
15
(3)
In this section—
“the first purchase price” means the amount paid by the first
purchaser in respect of the purchase, and
“the second purchase price” means the amount payable by the
second purchaser in respect of the sale.
20
(4)
This section is subject to section 564H (provision not at arm’s length:
exclusion of arrangements from this section and sections 564D to
564G).”
5
After section 564C insert—
“564D
Diminishing shared ownership arrangements
25
(1)
This section applies to arrangements if under them—
(a)
a financial institution (“the first owner”) acquires a beneficial
interest in an asset,
(b)
another person (“the eventual owner”) also acquires a
beneficial interest in it,
30
(c)
the eventual owner is to make payments to the first owner
amounting in aggregate to the consideration paid for the
acquisition of the first owner’s beneficial interest (but subject
to any adjustment required for such a reduction as is
mentioned in subsection (5)),
35
(d)
the eventual owner is to acquire the first owner’s beneficial
interest (whether or not in stages) as a result of those
payments,
(e)
the eventual owner is to make other payments to the first
owner (whether under a lease forming part of the
40
arrangements or otherwise),
(f)
the eventual owner has the exclusive right to occupy or
otherwise to use the asset, and
(g)
the eventual owner is exclusively entitled to any income,
profit or gain arising from or attributable to the asset
45
(including, in particular, an increase in its value).
(2)
For the purposes of subsection (1)(a) it does not matter if—

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
210

(a)
the first owner acquires its beneficial interest from the
eventual owner,
(b)
the eventual owner, or another person who is not the first
owner, also has a beneficial interest in the asset, or
(c)
the first owner also has a legal interest in it.
5
(3)
Subsection (1)(f) does not prevent the eventual owner from granting
an interest or right in relation to the asset if the conditions in
subsection (4) are met.
(4)
The conditions are that—
(a)
the grant is not to—
10
(i)
the first owner,
(ii)
a person controlled by the first owner, or
(iii)
a person controlled by a person who also controls the
first owner, and
(b)
the grant is not required by the first owner or arrangements
15
to which the first owner is a party.
(5)
Subsection (1)(g) does not prevent the first owner from—
(a)
having responsibility for any reduction in the asset’s value,
or
(b)
having a share in a loss arising out of any such reduction.
20
(6)
This section is subject to section 564H (provision not at arm’s length:
exclusion of arrangements from section 564C, this section and
sections 564E to 564G).”
6
After section 564D insert—
“564E
Deposit arrangements
25
(1)
This section applies to arrangements if under them—
(a)
a person (“the depositor”) deposits money with a financial
institution,
(b)
the money, together with money deposited with the
institution by other persons, is used by it with a view to
30
producing a profit,
(c)
from time to time the institution makes or credits a payment
to the depositor out of profit resulting from the use of the
money,
(d)
the payment is in proportion to the amount deposited by the
35
depositor, and
(e)
the payments so made or credited by the institution equate,
in substance, to the return on an investment of money at
interest.
(2)
This section is subject to section 564H (provision not at arm’s length:
40
exclusion of arrangements from sections 564C and 564D, this section
and sections 564F and 564G).”
7
After section 564E insert—
“564F
Profit share agency arrangements
(1)
This section applies to arrangements if under them—
45

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
211

(a)
a person (“the principal”) appoints an agent,
(b)
one or both of the principal and agent is a financial
institution,
(c)
the agent uses money provided by the principal with a view
to producing a profit,
5
(d)
the principal is entitled, to a specified extent, to profits
resulting from the use of the money,
(e)
the agent is entitled to any additional profits resulting from
its use (and may also be entitled to a fee paid by the
principal), and
10
(f)
payments made because of the principal’s entitlement to
profits equate, in substance, to the return on an investment of
money at interest.
(2)
This section is subject to section 564H (provision not at arm’s length:
exclusion of arrangements from sections 564C to 564E, this section
15
and section 564G).”
8
After section 564F insert—
“564G
Investment bond arrangements
(1)
This section applies to arrangements if—
(a)
they provide for one person (“the bond-holder”) to pay a sum
20
of money (“the capital”) to another (“the bond-issuer”),
(b)
they identify assets, or a class of assets, which the bond-issuer
will acquire for the purpose of generating income or gains
directly or indirectly (“the bond assets”),
(c)
they specify a period at the end of which they cease to have
25
effect (“the bond term”),
(d)
the bond-issuer undertakes under the arrangements—
(i)
to dispose at the end of the bond term of any bond
assets which are still in the bond-issuer’s possession,
(ii)
to make a repayment of the capital (“the redemption
30
payment”) to the bond-holder during or at the end of
the bond-term (whether or not in instalments), and
(iii)
to pay to the bond-holder other payments on one or
more occasions during or at the end of the bond term
(“additional payments”),
35
(e)
the amount of the additional payments does not exceed an
amount which would be a reasonable commercial return on
a loan of the capital,
(f)
under the arrangements the bond-issuer undertakes to
arrange for the management of the bond assets with a view to
40
generating income sufficient to pay the redemption payment
and additional payments,
(g)
the bond-holder is able to transfer the rights under the
arrangements to another person (who becomes the bond-
holder because of the transfer),
45
(h)
the arrangements are a listed security on a recognised stock
exchange, and
(i)
the arrangements are wholly or partly treated in accordance
with international accounting standards as a financial

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
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liability of the bond-issuer, or would be if the bond-issuer
applied those standards.
(2)
For the purposes of subsection (1)—
(a)
the bond-issuer may acquire bond assets before or after the
arrangements take effect,
5
(b)
the bond assets may be property of any kind, including rights
in relation to property owned by someone other than the
bond-issuer,
(c)
the identification of the bond assets mentioned in subsection
(1)(b) and the undertakings mentioned in subsection (1)(d)
10
and (f) may (but need not) be described as, or accompanied
by a document described as, a declaration of trust,
(d)
a reference to the management of assets includes a reference
to disposal,
(e)
the bond-holder may (but need not) be entitled under the
15
arrangements to terminate them, or participate in
terminating them, before the end of the bond term,
(f)
the amount of the additional payments may be—
(i)
fixed at the beginning of the bond term,
(ii)
determined wholly or partly by reference to the value
20
of or income generated by the bond assets, or
(iii)
determined in some other way,
(g)
if the amount of the additional payments is not fixed at the
beginning of the bond term, the reference in subsection (1)(e)
to the amount of the additional payments is a reference to the
25
maximum amount of the additional payments,
(h)
the amount of the redemption payment may (but need not)
be subject to reduction in the event of a fall in the value of the
bond assets or in the rate of income generated by them, and
(i)
entitlement to the redemption payment may (but need not)
30
be capable of being satisfied (whether or not at the option of
the bond-issuer or the bond-holder) by the issue or transfer of
shares or other securities.
(3)
This section is subject to section 564H (provision not at arm’s length:
exclusion of arrangements from sections 564C to 564F and this
35
section).”
9
After section 564G insert—
“564H
Provision not at arm’s length: exclusion of arrangements from
sections 564C to 564G
(1)
Arrangements to which this section applies are not—
40
(a)
purchase and resale arrangements,
(b)
diminishing shared ownership arrangements,
(c)
deposit arrangements,
(d)
profit share agency arrangements, or
(e)
investment bond arrangements.
45
(2)
This section applies to arrangements if—
(a)
apart from this section they would be alternative finance
arrangements,

Taxation (International and Other Provisions) Bill
Schedule 2 — Alternative finance arrangements
Part 1 — New Part 10A of ITA 2007
213

(b)
subsection (3) or (5) of section 147 of TIOPA 2010 (tax
calculations to be based on arm’s length, not actual,
provision) requires the profits and losses of a person who is a
party to the arrangements to be calculated for tax purposes as
if the arm’s length provision (within the meaning of that
5
section) had been made or imposed rather than in accordance
with the arrangements,
(c)
any person who is an affected person for the purposes of Part
4 of that Act (“the affected person”) is entitled to—
(i)
relevant return in relation to the arrangements, or
10
(ii)
an amount representing relevant return in relation to
them, and
(d)
the affected person is not subject—
(i)
to income tax or corporation tax, or
(ii)
to any corresponding tax under the law of a territory
15
outside the United Kingdom,

on the relevant return or the amount representing it.
(3)
In this section “relevant return”, in relation to arrangements, means
any amount which would be alternative finance return if the
arrangements were alternative finance arrangements.”
20
10
After section 564H insert—
“Meaning of “alternative finance return”
564I
Purchase and resale arrangements
(1)
In the case of purchase and resale arrangements, so much of the
second purchase price as is specified under the following provisions
25
of this section is alternative finance return for the purposes of this
Part.
(2)
If under the arrangements the whole of the second purchase price is
paid on one day, the alternative finance return equals the amount by
which the second purchase price exceeds the first purchase price.
30
(3)
If under the arrangements the second purchase price is paid by
instalments, the alternative finance return in each instalment equals
the appropriate amount.
(4)
The appropriate amount is an amount equal to the interest which
would have been included in the instalment on the assumptions in
35
subsection (5).
(5)
The assumptions are that—
(a)
interest is payable on a loan by the first purchaser to the
second purchaser of an amount equal to the first purchase
price,
40
(b)
the total interest payable on the loan is equal to the amount
by which the second purchase price exceeds the first
purchase price,
(c)
the instalment is a part repayment of the principal of the loan
with interest, and
45