Office of Public Sector Information
SCHEDULE 25 continued PART 1 continued
(8) Where this sub-paragraph applies, there shall be taken for the purposes of this Chapter to be a connection by virtue of section 87(3)(a) of this Act for the accounting period of the company partner mentioned in paragraph (a) of sub-paragraph (7) above, between that company partner and each company partner (including that company partner) that falls within paragraph (c) of that sub-paragraph.
(9) For the purposes of sub-paragraph (7) above, one company partner is connected with another at any time in an accounting period if at that or any other time in the accounting period one controls the other or both are under the control of the same person.
(10) The only accounting method authorised for use by a company partner in determining the debits and credits to be brought into account under this paragraph is an authorised accruals basis of accounting, but this sub-paragraph is subject to sub-paragraph (11) below.
(11) Where the company partner uses an authorised mark to market basis of accounting in relation to its interest in the partnership, the only accounting method authorised for use in determining the debits and credits to be brought into account under this paragraph by that company partner is an authorised mark to market basis of accounting, unless a provision of this Chapter requires the use of an authorised accruals basis of accounting.
(12) Subsection (3) of section 84A of this Act does not apply in relation to a company partner as respects the debits and credits to be brought into account by virtue of this paragraph except to the extent that, in the accounts of the firm, exchange gains and losses are carried to or sustained by a reserve in a manner corresponding to that described in that section in relation to a company.
(13) Where the firm holds a relevant discounted security, within the meaning of paragraph 17 above, each of the partners shall be treated for the purposes of this paragraph as beneficially entitled to that share of the security to which he would be entitled if all the partners were companies and such an apportionment as is described in sub-paragraph (6)(b) above were made.
(14) In this paragraph “control”—
(a) in relation to a company, has the same meaning as in section 87 of this Act (see section 87A); and
(b) in relation to a partnership, has the meaning given by section 840 of the Taxes Act 1988.”.
36 In Schedule 9, after paragraph 19 insert—
20 (1) For the purposes of any provision which applies this paragraph, the cases where a company (“company A”) has a major interest in another company (“company B”) at any time are those cases where at that time—
(a) company A and one other person, taken together, have control of company B;
(b) company A and the other person each have interests, rights and powers representing at least 40 per cent of the holdings, rights and powers in respect of which company A and the other person fall to be taken as having control of company B; and
(c) company A, or a company connected with it, and the other person, or, if that person is a company, a company connected with it, both satisfy the first condition, or both satisfy the second condition, in sub-paragraph (2) below.
(2) A person—
(a) satisfies the first condition if he stands in the position of a creditor in relation to a loan relationship as respects which company B stands in the position of a debtor; and
(b) satisfies the second condition if he stands in the position of a debtor in relation to a loan relationship as respects which company B stands in the position of a creditor.
(3) The reference in sub-paragraph (1)(b) above to interests, rights and powers does not include interests, rights or powers arising from shares held by a company if—
(a) a profit on a sale of the shares would be treated as a trading receipt of a trade carried on by the company; and
(b) the shares are not, within the meaning of Chapter 1 of Part 12 of the Taxes Act 1988, assets of an insurance company’s long-term insurance fund (see section 431(2) of that Act).
(4) For the purposes of sub-paragraph (1) above, any question—
(a) whether two persons taken together have control of a company at any time, or
(b) whether a person has at any time interests, rights and powers representing at least 40 per cent of the holdings, rights and powers in respect of a company,
shall be determined after attributing to any person which is a company all the interests, rights and powers of any company connected with it.
(5) Where section 114 of the Taxes Act 1988 (partnerships involving companies: special rules for computing profits and losses) applies in relation to a partnership, any property, rights or powers held or exercisable for the purposes of the partnership shall be treated for the purposes of this paragraph, as respects any time in an accounting period of the partnership, as if—
(a) the property, rights or powers had been apportioned between, and were held or exercisable by, the partners severally, and
(b) the apportionment had been in the shares in which the profit or loss of the accounting period of the partnership would be apportioned between the partners under subsection (2) of that section,
but taking the references in paragraphs (a) and (b) above to partners as not including a reference to the general partner of a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.
(6) Where a trade, profession or business is carried on by two or more persons in partnership (“the firm”) and the firm stands in the position of a creditor or debtor as respects a money debt, any question—
(a) whether a company has a major interest (within the meaning of this paragraph) in another company for an accounting period in the case of a loan relationship, or
(b) to what extent any amount is to be treated under this Chapter in any particular way as a result of a company having, or (as the case may be) not having, such a major interest in another company,
shall be determined as if to the extent of his appropriate share each of the partners separately, instead of the firm, stood in the position of a creditor or, as the case may be, debtor as respects the money debt.
The reference in the words following paragraph (b) above to partners does not include a reference to the general partner of a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.
(7) For the purposes of sub-paragraph (6) above, a partner’s “appropriate share” is the share that would be apportioned to him if an apportionment were made in the shares in which any profit or loss computed in accordance with subsection (1) of section 114 of the Taxes Act 1988 for the accounting period in question would be apportioned between the partners under subsection (2) of that section.
(8) For the purposes of this paragraph, a company is connected with another company if one controls the other or both are controlled by the same company.
(9) For the purposes of this paragraph, “control”, in relation to a company, has the same meaning as in section 87 of this Act (see section 87A).
(10) Where two or more persons taken together have the power mentioned in subsection (1) of section 87A of this Act (as read with the other provisions of that section) they shall be taken for the purposes of sub-paragraph (1)(a) above to have control of the company in question.”.
37 (1) Schedule 10 (collective investment schemes) is amended as follows.
(2) For paragraph 1 substitute—
1A (1) Where any profits, gains or losses arising to an investment trust from a creditor relationship for an accounting period are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for that accounting period, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.
(2) Where any profits, gains or losses arising to a venture capital trust from a creditor relationship for an accounting period—
(a) are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for the accounting period as if the venture capital trust were an investment trust, or
(b) would be carried to or sustained by a capital reserve if the venture capital trust were an investment trust and were using that Statement of Recommended Practice,
those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.
(3) For the purposes of this paragraph, the “Statement of Recommended Practice” used for an accounting period is—
(a) in relation to an accounting period for which it is permitted to be used, the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in December 1995, as from time to time modified, amended or revised, or
(b) in relation to any accounting period for which it is permitted to be used, any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.”.
38 (1) Schedule 10 (collective investment schemes) is amended as follows.
(2) For paragraph 2 (which makes special provision in relation to authorised unit trusts and is applied to open-ended investment companies by regulations under section 152 of the Finance Act 1995 (c. 4)) and the heading immediately preceding it substitute—
2A (1) Where any profits, gains or losses arising to an authorised unit trust from a creditor relationship in an accounting period are capital profits, gains or losses, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.
(2) For the purposes of this paragraph, capital profits, gains or losses arising from a creditor relationship in an accounting period are such profits, gains or losses arising from a creditor relationship as fall to be dealt with under—
(a) the heading “net gains/losses on investments during the period”, or
(b) the heading “other gains/losses”,
in the statement of total return for the accounting period.
(3) For the purposes of sub-paragraph (2) above, the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised unit trust which deals with the accounting period.
(4) For the purposes of sub-paragraph (3) above, “Statement of Recommended Practice” means—
(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Authorised Unit Trust Schemes issued by the Investment Management Regulatory Organisation Limited in January 1997, as from time to time modified, amended or revised; or
(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent Statement of Recommended Practice relating to authorised unit trust schemes, as from time to time modified, amended or revised.
(5) The Treasury may by order amend this paragraph so as to alter the definition of capital profits, gains or losses in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.
(6) The power to make an order under this paragraph includes power—
(a) to make different provision for different cases; and
(b) to make such consequential, supplementary, incidental or transitional provision, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under any enactment).
2B (1) Where any profits, gains or losses arising to an open-ended investment company from a creditor relationship in an accounting period are capital profits, gains or losses, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.
(2) For the purposes of this paragraph, capital profits, gains or losses arising from a creditor relationship in an accounting period are such profits, gains or losses arising from a creditor relationship as fall to be dealt with under—
(a) the heading “net gains/losses on investments during the period”, or
(b) the heading “other gains/losses”,
in the statement of total return for the accounting period.
(3) For the purposes of sub-paragraph (2) above, the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the open-ended investment company which deals with the accounting period.
(4) For the purposes of sub-paragraph (3) above, “Statement of Recommended Practice” means—
(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Open-Ended Investment Companies issued by the Financial Services Authority in November 2000, as from time to time modified, amended or revised; or
(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent Statement of Recommended Practice relating to open-ended investment companies, as from time to time modified, amended or revised.
(5) The Treasury may by order amend this paragraph so as to alter the definition of capital profits, gains or losses in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.
(6) The power to make an order under this paragraph includes power—
(a) to make different provision for different cases; and
(b) to make such consequential, supplementary, incidental or transitional provision, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under any enactment).”.
39 For paragraph 3 of that Schedule substitute—
“3 (1) For the purposes of paragraph 5(1) of Schedule 27 to the Taxes Act 1988 (computation of UK equivalent profit), the assumptions to be made in determining what, for any period, would be the total profits of an offshore fund are to include the assumptions in sub-paragraphs (2) and (3) below.
(2) The first assumption is that the provisions of this Chapter so far as they relate to the creditor relationships of a company do not apply for the purposes of corporation tax in computing the profits or loss of an offshore fund.
(3) The second assumption is that for the purposes of corporation tax the profits and gains, and losses, that are to be taken to arise from the creditor relationships of an offshore fund are to be computed—
(a) in accordance with the provisions applicable, in the case of unauthorised unit trusts, for the purposes of income tax; and
(b) as if the provisions so applicable had effect in relation to an accounting period of an offshore fund as they have effect, in the case of unauthorised unit trusts, in relation to a year of assessment.
(4) In this paragraph “unauthorised unit trust” means the trustees of any unit trust scheme which is not an authorised unit trust but is a unit trust scheme for the purposes of section 469 of the Taxes Act 1988.”.
40 (1) In Schedule 11 (loan relationships: special provisions for insurers) Part 1 (insurance companies) is amended as follows.
(2) In paragraph 1 (I minus E basis) after sub-paragraph (1) (which provides that nothing in the Chapter prevents profits and gains from loan relationships of insurance companies referable to life assurance business from being included in profits and gains chargeable in accordance with the I minus E basis) insert—
“(1A) Where—
(a) the I minus E basis is applied for any accounting period in respect of any life assurance business carried on by an insurance company, and
(b) in that accounting period the insurance company is a party to a loan relationship which is to any extent referable to that business,
then, in applying the I minus E basis to that business, sections 92(1)(f), 93(1)(a) and (b) and 96(1)(b) of this Act shall be disregarded in relation to that loan relationship to that extent.”.
41 (1) In Schedule 15 (loan relationships: savings and transitional provisions) paragraph 11 is amended as follows.
(2) After sub-paragraph (2) insert—
“(2A) If, in a case where the continuing loan relationship is a creditor relationship,—
(a) the company acquired its rights under the relationship on or before 31st March 1996 by virtue of an arm’s length transaction,
(b) for the accounting period in which it acquired those rights—
(i) there was no connection (as defined in sub-paragraph (2C) below) between the company and the person from whom the company acquired the asset, but
(ii) there was such a connection between the company and a company standing in the position of a debtor as respects the money debt, and
(c) there had been no such connection between the companies mentioned in paragraph (b)(ii) above at any time in the period which—
(i) begins 4 years before the date on which the company acquired those rights, and
(ii) ends twelve months before that date,
this paragraph shall have effect as if the amount mentioned in sub-paragraph (2)(b) above were an amount equal to the greater of the amounts mentioned in sub-paragraph (2B) below.
(2B) Those amounts are—
(a) the fair value of the rights at the time when the company ceases to be a party to the loan relationship; and
(b) the fair value of the rights on 1st April 1996.
(2C) For the purposes of sub-paragraph (2A) above there is a connection between a company and another person at any time if at that time—
(a) the other person is a company and one of the companies has control of the other,
(b) the other person is a company and both companies are under the control of the same person, or
(c) the company is a close company and the other person is a participator in that company or the associate of a person who is such a participator,
and there is a connection between a company and another person for an accounting period if there is a connection (within paragraphs (a) to (c) above) between the company and the person at any time in that accounting period.
(2D) For the purposes of sub-paragraph (2C) above—
(a) subsections (2) to (6) of section 416 of the Taxes Act 1988 (meaning of control) shall apply as they apply for the purposes of Part 11 of that Act;
(b) subject to paragraph (c) below, “participator” and “associate” have the meaning given for the purposes of that Part by section 417 of that Act;
(c) a person shall not be regarded as a participator in relation to a company by reason only that he is a loan creditor of the company.”.
42 In Schedule 15, after paragraph 11 (other adjustments in the case of chargeable assets etc) insert—
11A (1) This paragraph applies where, in the case of any asset representing in whole or in part a loan relationship of a company, an amount representing a deemed allowable loss would (apart from this paragraph) fall or have fallen to be brought into account in accordance with paragraph 8(3) above for an accounting period (whenever beginning or ending), but for section 251(4) of the 1992 Act (no allowable loss on disposal of debt acquired from connected person).
(2) Where this paragraph applies, the amount of any credit falling within sub-paragraph (3) below shall be treated for the purposes of this Chapter as reduced (but not below nil) by the amount described in sub-paragraph (1) above.
(3) A credit falls within this sub-paragraph if (apart from this paragraph)—
(a) the credit falls to be given by virtue of paragraph 11(3)(a) above for an accounting period beginning on or after 1st October 2002; and
(b) the loan relationship mentioned in paragraph 11(1)(a) above in the case of the credit is the same loan relationship as the one mentioned in sub-paragraph (1) above.”.
43 The Taxes Act 1988 is amended as follows.
44 In section 77(2)(a) (meaning of “qualifying loan” etc) omit sub-paragraph (ii) (interest deductible under section 338 against total profits).
45 In section 403ZC (amounts eligible for group relief: non-trading deficit on loan relationships) omit subsection (2) (which refers to a claim under section 83(2) of the Finance Act 1996 (c. 8)).
46 (1) Section 432A is amended as follows.
(2) In subsection (9A)(a) (meaning of “net value”) for “money debt” substitute “loan relationship”.
(3) In subsection (9B) (definitions)—
(a) in paragraph (b) of the definition of “investment reserve” for “money debt” substitute “loan relationship”; and
(b) omit the definition of “money debt”.
47 (1) Section 477A(3) (where regulations apply for any year of assessment, dividends or interest to be dealt with for the purposes of corporation tax as there described) is amended as follows.
(2) In paragraph (a) (liability to pay to be treated as a liability arising under a loan relationship) at the beginning insert “to the extent that it would not otherwise fall to be so regarded,”.
(3) In paragraph (aa) (dividends or interest payable to company to be treated as payable in pursuance of right under loan relationship) after “payable to a company,” insert “then, to the extent that they would not otherwise fall to be so regarded,”.
48 In section 477B, after subsection (1) (which allows deduction of such costs) insert—
“(1A) A deduction shall not be allowed by virtue of subsection (1) above to the extent that the costs in question fall to be brought into account as debits for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships).”.
49 (1) Section 510A is amended as follows.
(2) In paragraph (b) of subsection (3) (charging tax in respect of gains) for “gains” substitute “chargeable gains”.
(3) After that paragraph add
“;but paragraph (a) above is subject to subsection (6A) below.”.
(4) After subsection (6) (trade or profession carried on by grouping treated for tax on income and gains as carried on by a partnership) insert—
“(6A) Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) shall have effect in relation to a grouping as it has effect in relation to a partnership (see in particular section 87A of, and paragraphs 19 and 20 of Schedule 9 to, that Act).”.
50 In section 582, after subsection (3) insert—
“(3A) Chapter 2 of Part 4 of the Finance Act 1996 has effect subject to and in accordance with this section, notwithstanding anything in section 80(5) of that Act (matters to be brought into account in the case of loan relationships only under Chapter 2 of Part 4 of that Act).”.
51 In section 730, after subsection (2) insert—
“(2A) This section does not have effect for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships).”.
52 (1) Section 730A is amended as follows.
(2) After subsection (5) insert—
“(5A) For the purposes of the Corporation Tax Acts, a company has a relationship to which this section applies in any case where—
(a) the circumstances are as set out in subsection (1) above; and
(b) interest on a deemed loan is deemed by virtue of subsection (2) above to be paid by or to the company;
and references to a relationship to which this section applies, and to a company’s being party to such a relationship, shall be construed accordingly.”.
(3) For subsection (6) (application of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) in relation to deemed interest) substitute—
“(6) Where a company has a relationship to which this section applies—
(a) Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) shall, as respects that company, have effect in relation to the interest deemed by virtue of subsection (2) above to be paid or received by the company under that relationship as it would have effect if it were interest under a loan relationship to which the company is a party,
(b) the debits and credits falling to be brought into account for the purposes of that Chapter so far as they relate to the deemed interest shall be those given by the use in relation to the deemed interest of an authorised accruals basis of accounting, and
(c) the only debits or credits to be brought into account for the purposes of that Chapter by virtue of this subsection in respect of a relationship are those relating to that deemed interest,
and, subject to paragraphs (b) and (c) above, references in the Corporation Tax Acts to a loan relationship accordingly include a reference to a relationship to which this section applies.”.
(4) After subsection (6A) (trading or non-trading debits or credits) insert—
“(6B) To the extent that debits or credits fall to be brought into account by a company under section 82(2) above in the case of a relationship to which this section applies, the company shall be regarded for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 as being party to the relationship for the purposes of a trade carried on by the company.”.
53 (1) Section 787 is amended as follows.
(2) After subsection (1) insert—
“(1A) This section has effect in relation to Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) but taking the reference in subsection (1) above to giving relief to any person in respect of any payment of interest as including a reference to the bringing into account by any person in accordance with that Chapter of any debit in respect of interest (whether a payment or not); and other references in this section to relief shall be construed accordingly.”.
(3) For subsection (3) (determination of question as to benefit that might be expected to accrue in a case where the relief is claimed by virtue of section 83(2)(b) of the Finance Act 1996) substitute—
“(3) Where the relief is claimed by virtue of section 403—
(a) in respect of a deficit to which section 83 of the Finance Act 1996 applies (non-trading deficit on loan relationships), or
(b) in respect of trading losses, in a case where in computing those losses debits in respect of loan relationships are treated under section 82(2)(b) of that Act as expenses of the trade which are deductible in computing the profits of the trade,
any question under this section as to what benefit might be expected to accrue from the transaction in question shall be determined by reference to the claimant company and the surrendering company taken together.”.
54 In section 797, in subsection (3B) (amounts that must be allocated to trading profits) in paragraph (b) (claims under section 83(2)(d) of the Finance Act 1996) for “a claim under subsection (2)(d) of” substitute “subsection (3A) of”.
55 (1) Section 797A is amended as follows.
(2) In subsection (5) (which specifies certain amounts under section 83 of the Finance Act 1996 (c. 8) which are to be aggregated for the purposes of subsection (4))—
(a) in paragraph (a)—
(i) for “(2)(b), (c) or (d)” substitute “(2)(c)”; and
(ii) for the words from “(group relief” to “deficits)” substitute “(deficit carried back and set against profits)”;
(b) after paragraph (a) insert—
“(aa) so much of any non-trading deficit for that period as is surrendered as group relief by virtue of section 403 of the Taxes Act 1988; and”; and
(c) in paragraph (b), for “(3)” substitute “(3A)”.
(3) In subsection (6), for “in pursuance of a claim under section 83(2)(d)” substitute “under section 83(3A)”.
56 (1) Section 842 is amended as follows.
(2) In paragraph (a) of subsection (1) (income must be wholly or mainly eligible investment income)—
(a) after “the company’s income” insert “(as determined in accordance with subsection (1AB) below)”; and
(b) after “eligible investment income” insert “(as so determined)”.
(3) In paragraph (e) of subsection (1) (company must not retain more than 15% of eligible investment income)—
(a) for “more than” substitute “an amount which is greater than”; and
(b) after “eligible investment income” insert “(determined in accordance with subsection (1AB) below)”.
(4) After subsection (1AA) insert—
“(1AB) In determining for the purposes of paragraph (a) or (e) of subsection (1) above (and accordingly of subsection (2A)(b) below)—
(a) the amount of a company’s income, or
(b) the amount of income which a company derives from shares or securities,
the amounts to be brought into account under Chapter 2 of Part 4 of the Finance Act 1996 in respect of the company’s loan relationships shall be determined without reference to any debtor relationships of the company.”.
57 (1) Section 842AA is amended as follows.
(2) In paragraph (f) of subsection (2) (company must not retain more than 15% of income derived from shares or securities) for “more than” substitute “an amount which is greater than”.
(3) In section 842AA(11) (which applies provisions of section 842 to provisions of section 842AA)—
(a) before paragraph (a) insert the following paragraph—
“(za) subsection (1AB) of that section shall apply in relation to subsection (2)(a) above as it applies in relation to subsection (1)(a) of that section;”; and
(b) in paragraph (b) (which applies subsections (2A) to (2C) of section 842 to subsection (2)(f) of section 842AA) after “subsections” insert “(1AB) and”.
Finance Act 2002