Office of Public Sector Information
SCHEDULE 7 continued
(8) Case 2 is where, in the circumstances of Case 1,—
(a) within 24 hours of the public issue, one or more other companies (companies CC) issue shares (the second-level mirroring shares) to one or more of companies BB on the same, or substantially the same, terms as the public issue,
(b) company A, companies BB and companies CC are associated companies, and
(c) the total nominal value of the second-level mirroring shares does not exceed the nominal value of the public issue,
and in any such case the second-level mirroring shares are also shares that mirror a public issue.
(9) For the purposes of this section, a share is acquired by the investing company for an unallowable purpose if the purpose, or one of the main purposes, for which the company holds the share is—
(a) the purpose of circumventing section 95 of the Taxes Act 1988 (see subsection (10)), or
(b) any other purpose which is a tax avoidance purpose (see subsection (11)).
(10) The purpose, or one of the main purposes, for which the investing company holds a share shall, in particular, be taken to be the purpose of circumventing section 95 of the Taxes Act 1988 (taxation of dealers in respect of distributions etc) if the investing company was an associated company of a bank (see subsection (11)) at the time when the investing company acquired the share, unless the investing company shows that—
(a) immediately before that time, some or all of its business consisted in making and holding investments, and
(b) it acquired the share in the ordinary course of that business.
(11) In this section—
“associated company”, in relation to any other company, means a company which, within the meaning given by section 413(3)(a) of the Taxes Act 1988, is a member of the same group of companies as that other company;
“bank” has the meaning given by section 840A of the Taxes Act 1988;
“independent person”, in relation to a company, means a person who is not connected with the company;
“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;
“tax avoidance purpose”, in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).
(12) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this section.
(13) This section is to be construed as one with section 91B above.
(1) Condition 3 is that there is a scheme or arrangement under which the share and one or more associated transactions are together designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest.
(2) But Condition 3 is not satisfied if—
(a) Condition 1 in section 91C above is satisfied as respects the share or would, apart from subsection (2) of that section (income producing assets), be so satisfied, or
(b) Condition 2 in section 91D above is satisfied as respects the share or would, apart from subsection (1)(c) of that section (excepted shares), be so satisfied.
(3) In this section “associated transaction” includes entering into, or acquiring rights or liabilities under, any of the following—
(a) a derivative contract;
(b) a contract that would be a derivative contract, apart from paragraph 4(2B) of Schedule 26 to the Finance Act 2002 (trades etc: hedging relationships with shares);
(c) a contract having a similar effect to—
(i) a derivative contract, or
(ii) a contract falling within paragraph (b) above;
(d) a contract of insurance or indemnity.
(4) This section is to be construed as one with section 91B above.”.
(5) After section 91E insert—
(1) The Treasury may by regulations amend this Chapter so as to add, vary or remove Conditions for the purposes of section 91B(6)(b) above.
(2) Where the Treasury so add, vary or remove a Condition, they may also by regulations amend any of the following enactments—
(a) this Chapter,
(b) Chapters 1 to 3 of Part 6 of the Taxes Act 1988 (company distributions),
(c) Part 18 of the Taxes Act 1988 (double taxation relief),
(d) the Taxation of Chargeable Gains Act 1992,
(e) Schedule 26 to the Finance Act 2002 (derivative contracts),
so as to make provision for or in connection with taxation in the case of any asset or transaction that is or was mentioned in the Condition.
(3) The power to make regulations under this section includes power—
(a) to make different provision for different cases, and
(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment).”.
(6) After section 91F insert—
(1) Where at any time on or after 16th March 2005 the conditions in section 91A(1) or 91B(1) above become satisfied in the case of any share, otherwise than in the circumstances described in subsection (3) below, the investing company shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992—
(a) to have disposed of the share immediately before that time for a consideration of an amount equal to its fair value at that time, and
(b) to have immediately reacquired it for a consideration of the same amount.
(2) Where at any time the conditions in section 91A(1) or 91B(1) above cease to be satisfied in the case of any share, the investing company shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992 and of this Chapter—
(a) to have disposed of the share immediately before that time for a consideration of an amount equal to its fair value at that time, and
(b) to have immediately reacquired it for a consideration of the same amount.
(3) In any case where—
(a) a share is held by a company both—
(i) at the end of 15th March 2005, and
(ii) at the beginning of 16th March 2005, and
(b) the conditions in section 91A(1) or 91B(1) above are satisfied in relation to that share at the beginning of 16th March 2005,
subsection (4) below applies.
(4) In any such case, section 116 of the Taxation of Chargeable Gains Act 1992 (reorganisations etc involving qualifying corporate bonds) shall have effect in accordance with—
(a) the assumptions in subsections (5) and (6) below, and
(b) the provisions of subsections (7) and (8) below.
(5) The first of the assumptions is that the share became an asset representing a creditor relationship of the company (and, accordingly, a qualifying corporate bond) in consequence of the occurrence on 16th March 2005 of a transaction such as is mentioned in section 116(1) of the Taxation of Chargeable Gains Act 1992.
(6) The remaining assumptions are that, in relation to the transaction deemed to have occurred as mentioned in subsection (5) above,—
(a) the share immediately before 16th March 2005 shall be assumed to be the old asset for the purposes of section 116 of the Taxation of Chargeable Gains Act 1992, and
(b) the asset representing a creditor relationship immediately after the beginning of 16th March 2005 shall be assumed for those purposes to be the new asset.
(7) Where—
(a) subsection (3) above has effect in the case of any share, but
(b) the conditions in section 91A(1) or 91B(1) above cease to be satisfied in the case of the share at any time on or before 31st December 2005,
subsection (8) below applies.
(8) In any such case—
(a) the deemed disposal of the share at that time by virtue of subsection (2)(a) above shall not be regarded as a disposal for the purposes of subsection (10)(b) or (c) of section 116 of the Taxation of Chargeable Gains Act 1992, but
(b) the share shall continue to be the new asset for the purposes of that section.”.
(7) The amendments made by this paragraph have effect in relation to shares held by a company on or after 16th March 2005.
11 (1) Section 97 of FA 1996 (manufactured interest) is amended as follows.
(2) In subsection (2) (consequences of company having relationship to which the section applies)—
(a) paragraph (b) (which restricts the debits and credits to be brought into account to those relating to the manufactured interest) shall cease to have effect, and
(b) in the closing words, for “paragraphs (a)(ii) and (b)” substitute “paragraph (a)(ii)”.
(3) After subsection (2) insert—
“(2A) Where a company—
(a) has a relationship to which this section applies, but
(b) enters into a related transaction in respect of the right to receive manufactured interest,
then, for the purpose of bringing credits into account by virtue of subsection (2) above in respect of that or any other related transaction, the company shall continue to be treated as having a relationship to which this section applies even though the manufactured interest is not payable to the company.”.
(4) Omit subsections (3) and (3A) (which relate to whether debits or credits are trading or non-trading etc and which are unnecessary, in view of the application of sections 82(2) and 103(2) of FA 1996 by virtue of section 97(2) of that Act).
(5) The amendments made by this paragraph have effect in relation to related transactions on or after 16th March 2005.
12 (1) Section 100 of FA 1996 (money debts etc not arising from the lending of money) is amended as follows.
(2) In subsection (1)(c) (money debts to which the section applies) after sub-paragraph (iii) insert “or
(iv) as respects which the conditions in subsection (1A) below (discount etc) are satisfied;”.
(3) After subsection (1) insert—
“(1A) The conditions mentioned in subsection (1)(c)(iv) above are that—
(a) the company stands in the position of creditor in relation to the money debt;
(b) the money debt is one from which a discount (whether of an income or capital nature) arises to the company;
(c) the discount does not fall to be brought into account under section 50 of the Finance Act 2005 by virtue of section 47 of that Act (alternative finance return);
(d) if the money debt is some or all of the consideration payable for a disposal of property, the money debt (on the assumption that it will be paid in full) does not fall to be brought into account for the purposes of corporation tax as a trading receipt of the company;
(e) if the money debt is some or all of the consideration payable for a disposal of property, the property in question is not any of the following—
(i) an asset representing a loan relationship;
(ii) a derivative contract.”.
(4) In subsection (2), as it has effect for periods of account beginning on or after 1st January 2005, in paragraph (a), for “matters mentioned in subsection (1)(c) above” substitute “matters mentioned in subsection (1)(c)(i) to (iii) above or subsection (2ZA) below”.
(5) After subsection (2) insert—
“(2ZA) The matters are—
(a) in the case of a money debt falling within subsection (1)(c)(i) above, profits (but not losses) arising to the company from any related transaction in respect of the right to receive interest;
(b) in the case of a money debt falling within subsection (1)(c)(iv) above, each of the following—
(i) the discount arising to the company from the money debt;
(ii) profits (but not losses) arising to the company from any related transaction;
(iii) any impairment arising to the company in respect of the discount;
(iv) any reversal of any such impairment.
(2ZB) Where a company—
(a) has a relationship to which this section applies by virtue of subsection (1)(c)(i) above, but
(b) enters into a related transaction in respect of the right to receive interest,
then, for the purpose of bringing credits into account by virtue of subsection (2ZA)(a) above in respect of that or any other related transaction, the company shall continue to be treated as having a relationship to which this section so applies even though the interest is not payable to the company.”.
(6) After subsection (3) (amounts treated as interest under Schedule 28AA to ICTA) insert—
“(3A) For the purposes of this section, a discount shall, in particular, be taken to arise from a money debt in any case where—
(a) there is a disposal of property for a consideration some or all of which is money that falls to be paid after the sale;
(b) the amount or value of the whole consideration exceeds what the purchaser would have paid for the property if he had been required to pay in full at the time of the disposal; and
(c) some or all of the excess can reasonably be regarded as representing a return on an investment of money at interest (and, accordingly, as being a discount arising from the money debt).
(3B) The credits to be brought into account for the purposes of this Chapter in respect of a discount arising from a money debt must be determined using an amortised cost basis of accounting (see section 103).”.
(7) Omit subsections (4) to (6) and (8) (which relate to whether debits or credits are trading or non-trading etc and which are unnecessary, in view of the application of sections 82(2) and 103(2) of FA 1996 by virtue of section 100(2) of that Act).
(8) Omit subsection (13) (express subjection to Schedules 9 and 11 to FA 1996, which is unnecessary in view of the closing words of subsection (2) of the section).
(9) In consequence of the amendments made by this paragraph, paragraph (c) of the Case III of Schedule D substituted for the purposes of corporation tax by section 18(3A) of ICTA (tax in respect of discount arising otherwise than in respect of a loan relationship) shall not have effect in relation to any discount arising in an accounting period beginning on or after the commencement date.
(10) Subject to sub-paragraph (9), the amendments made by this paragraph have effect in relation to any money debt to which a company is party as a creditor on or after the commencement date.
(11) Where, on or after the commencement date but in a period of account beginning before 1st January 2005, a company is party to a relationship to which section 100 of FA 1996 applies, then, in the application of that section for that period of account, subsection (2) of it shall have effect as follows—
(a) paragraph (a) shall have effect in relation to—
(i) any discount arising to the company from the money debt, and
(ii) any profits, impairment of discount, or reversal of impairment of discount, arising to the company as mentioned in subsection (2ZA) of that section,
as it has effect (or would have effect) in relation to interest payable to the company under the relationship,
(b) paragraph (b) shall have effect as if the reference to interest included a reference to the matters mentioned in paragraph (a)(i) and (ii) above, and
(c) the closing words shall have effect accordingly.
(12) None of the following shall be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 by virtue of this paragraph—
(a) credits in respect of discount arising from a money debt, to the extent that the discount accrued before the commencement date;
(b) credits in respect of profits arising as mentioned in section 100(2ZA)(a) or (b)(ii) of that Act where the related transaction took place before the commencement date;
(c) debits in respect of any impairment arising in respect of discount arising from a money debt, to the extent that the discount accrued before the commencement date;
(d) credits in respect of any reversal of any such impairment, to the extent that the discount accrued before the commencement date.
(13) In this paragraph “the commencement date” means 16th March 2005.
13 (1) In section 103 of FA 1996 (interpretation) after subsection (3) insert—
“(3A) For the purposes of this Chapter, a commercial rate of interest, in the case of a company and any asset, is—
(a) a rate (“the simple commercial rate”) that is reasonably comparable to the rate that the company could obtain by placing on deposit the money it invested in the asset, or
(b) in any case where—
(i) the likely rate of increase in the value of the asset is in question, and
(ii) that likely rate is a lower rate than the simple commercial rate, and
(iii) the difference is a result of an expectation that the company would also obtain a tax advantage as a result of investing in the asset,
that lower rate.
(3B) In subsection (3A) above, “tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988.”.
(2) The amendment made by this paragraph has effect in relation to assets held on or after 16th March 2005 (whenever acquired).
14 (1) Schedule 9 to FA 1996 (loan relationships: special computational provisions) is amended as follows.
(2) In paragraph 1A(1) (credits and debits relating to life policies and capital redemption policies not to be brought into account) paragraph (b) (capital redemption policies) shall cease to have effect.
(3) This paragraph has effect in relation to a capital redemption policy on and after 10th February 2005 (whenever the capital redemption policy was effected).
(4) Where a capital redemption policy—
(a) is held by a company immediately before 10th February 2005, and
(b) on or after that date, is, for the purposes of Chapter 2 of Part 4 of FA 1996, a creditor relationship of the company,
sub-paragraphs (5) and (6) apply.
(5) In any such case, Chapter 2 of Part 13 of ICTA (life policies etc: chargeable events) shall have effect as if—
(a) immediately before 10th February 2005, the company had assigned the whole of the rights conferred by the policy for money or money’s worth, and
(b) the value of the consideration for the assignment had been equal to what the carrying value of the creditor relationship would have been had an accounting period of the company ended on that date;
and Chapter 2 of Part 4 of FA 1996 shall have effect as if, immediately after 9th February 2005, the company had acquired the creditor relationship at a cost equal to that carrying value.
(6) But if—
(a) the accounting period in which the assignment is deemed to have happened (“the assignment period”), and
(b) the accounting period in which the company ceases to be party to the creditor relationship (“the cessation period”),
are not the same accounting period, any gain which, by virtue of the deemed assignment, would have fallen to be brought into account in accordance with section 547(1)(b) of ICTA for the assignment period shall instead be brought into account for the cessation period.
(7) In this paragraph—
“assignment”, in relation to Scotland, means an assignation;
“carrying value” has the same meaning as it has for the purposes of paragraph 19A of Schedule 9 to FA 1996, as it has effect for periods of account beginning on or after 1st January 2005.
15 (1) In Schedule 9 to FA 1996 (loan relationships) paragraph 10A is amended as follows.
(2) After sub-paragraph (1) (cases where the paragraph applies) insert—
“(1A) But this paragraph does not apply if—
(a) paragraph 12A below (transferee company leaving group) applies in relation to the company, and
(b) the cessation in sub-paragraph (1)(a) or (b) above occurs at the same time as the cessation in sub-paragraph (1)(b) of that paragraph.”.
(3) In sub-paragraph (2) (Schedule to have effect as if there had been an assignment and reacquisition) for “Schedule” substitute “Chapter”.
(4) The amendments made by this paragraph have effect on and after 16th March 2005.
16 (1) In Schedule 9 to FA 1996 (loan relationships) paragraph 11 (transactions not at arm’s length) is amended as follows.
(2) For sub-paragraph (3) (exceptions relating to groups of companies) substitute—
“(3) Sub-paragraph (1) above does not apply if the related transaction—
(a) is a transaction as a result of which paragraph 12 below (groups)—
(i) applies by virtue of sub-paragraph (1)(a) of it, or
(ii) would so apply, apart from sub-paragraph (2A) of it (transferor using fair value accounting), or
(b) is part of a series of transactions as a result of which that paragraph—
(i) applies by virtue of sub-paragraph (1)(b) of it, or
(ii) would so apply, apart from sub-paragraph (2A) of it.”.
(3) In consequence, omit sub-paragraph (5) (construction of references to a member of a group).
(4) The amendments made by this paragraph have effect where the related transaction is on or after 16th March 2005.
17 (1) In Schedule 9 to FA 1996 (loan relationships) paragraph 12 (continuity of treatment of groups etc) is amended as follows.
(2) For sub-paragraph (2) (the credits and debits to be brought into account) substitute—
“(2) For the purpose of determining the credits and debits to be brought into account for the purposes of this Chapter in respect of the loan relationship—
(a) for the accounting period in which the transaction or, as the case may be, the first of the series of transactions takes place, the transferor company shall be treated as having entered into that transaction for a consideration equal to the notional carrying value of the asset or liability representing the relationship; and
(b) for any accounting period in which it is a party to the relationship, the transferee company shall be treated as if it had acquired the asset or liability representing the relationship for a consideration equal to the notional carrying value of the asset or liability.
For the purposes of this sub-paragraph, the notional carrying value is the amount that would have been the carrying value of the asset or liability in the accounts of the transferor company if a period of account had ended immediately before the date when the company ceased to be party to the loan relationship.”.
(3) In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair value accounting) for paragraph (aa) (treatment of transferee in respect of the transaction) substitute—
“(aa) paragraph (b) of sub-paragraph (2) above shall have effect in relation to the transferee company.”.
(4) For sub-paragraph (8) (which applies paragraph 11(5) for construction of references to a member of a group) substitute—
“(8) In this paragraph references to a company which is a member of a group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992.”.
(5) In sub-paragraph (9) (interpretation) insert the following definition at the appropriate place—
““carrying value” has the same meaning as it has for the purposes of paragraph 19A below;”.
(6) Where the period of account mentioned in the second sentence of the sub-paragraph (2) substituted by sub-paragraph (2) begins before 1st January 2005, “carrying value” shall be construed as if the period had begun on or after that date.
(7) The amendments made by this paragraph have effect in any case where the relevant transaction is on or after 16th March 2005.
(8) In this paragraph “the relevant transaction” means—
(a) the related transaction mentioned in sub-paragraph (1)(a) of paragraph 12 of Schedule 9 to FA 1996,
(b) the first of the series of transactions mentioned in sub-paragraph (1)(b) of that paragraph, or
(c) the transfer mentioned in sub-paragraph (1)(c) or (1)(d) of that paragraph,
by virtue of which that paragraph applies or would apply apart from sub-paragraph (2A) of it.
18 (1) In Schedule 9 to FA 1996 (loan relationships) after paragraph 12 insert—
12A (1) This paragraph applies in any case where—
(a) paragraph 12 above applies—
(i) by virtue of sub-paragraph (1)(a) of that paragraph (“case A”), or
(ii) by virtue of sub-paragraph (1)(b) of that paragraph (“case B”), but
(b) before the end of the relevant 6 year period, the transferee company ceases to be a member of the relevant group.
(2) In any such case, this Chapter shall have effect as if the transferee company had—
(a) immediately before that cessation, assigned the asset or liability representing the relevant loan relationship for a consideration of an amount equal to its fair value at that time, and
(b) immediately reacquired it for a consideration of the same amount,
but only if Condition 1 or 2 below is satisfied and sub-paragraph (5) below does not apply.
(3) Condition 1 is that if sub-paragraph (2) above has effect, a credit would in consequence of paragraph (a) of that sub-paragraph fall to be brought into account for the purposes of this Chapter by the transferee company.
(4) Condition 2 is that—
(a) Condition 1 is not satisfied,
(b) the loan relationship is a creditor relationship,
(c) the company has a hedging relationship between a derivative contract and the creditor relationship, and
(d) in consequence of paragraph 30A(2)(a) of Schedule 26 to the Finance Act 2002, a credit falls to be brought into account by the transferee company for the purposes of that Schedule in respect of the derivative contract.
(5) Where the transferee company ceases to be a member of the relevant group by reason only of an exempt distribution (see sub-paragraph (8))—
(a) sub-paragraph (2) above does not have effect, but
(b) if there is chargeable payment within 5 years after the making of the exempt distribution, sub-paragraph (6) below applies.
(6) Where this sub-paragraph applies, this Chapter shall have effect as if—
(a) the transferee company had, immediately before the making of the chargeable payment, assigned the asset or liability representing the relevant loan relationship,
(b) the assignment had been for a consideration of an amount equal to the fair value of the asset or liability immediately before the transferee company ceased to be a member of the relevant group, and
(c) the transferee company had immediately reacquired the asset or liability for a consideration of the same amount,
but only if Condition 1 or 2 above, as modified by sub-paragraph (7) below, is satisfied.
(7) The modifications are that—
(a) in Condition 1, the references to sub-paragraph (2) above, and paragraph (a) of that sub-paragraph, are to be taken respectively as references to sub-paragraph (6) above and paragraphs (a) and (b) of that sub-paragraph, and
(b) in Condition 2, the reference to paragraph 30A(2)(a) of Schedule 26 to the Finance Act 2002 is to be taken as a reference to paragraph 30A(6)(a) and (b) of that Schedule.
Finance (No. 2) Act 2005