Office of Public Sector Information
PART 3 continued CHAPTER 2 continued
(4) Where a company has made an election under this section and—
(a) an asset in relation to which the election has effect is transferred to another company (“the transferee company”) in pursuance of a transfer scheme, and
(b) immediately after the transfer either—
(i) the transferee company is resident in the United Kingdom, or
(ii) the asset is held for the purposes of a business carried on by the transferee company in the United Kingdom through a branch or agency,
this section applies as if the transferee company had made an election under this section in relation to that asset.
(5) In this section—
“insurance business” means business that consists of the effecting or carrying out of contracts of insurance and for the purposes of this definition “contract of insurance” has the meaning given in Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544);
“insurance company”, “long-term business” and “long-term insurance fund” have the same meaning as in Chapter 1 of Part 12 of the Taxes Act 1988 (see section 431(2) of that Act);
“transfer scheme” means—
a scheme under section 105 of the Financial Services and Markets Act 2000 (c. 8), including an excluded scheme falling within Case 2, 3 or 4 of subsection (3) of that section, or
a qualifying overseas transfer scheme.
(6) A “qualifying overseas transfer scheme” means—
(a) so much of a transfer of the whole or part of the business of an overseas life insurance company carried on through a branch or agency in the United Kingdom as takes place in accordance with an authorisation granted outside the United Kingdom for the purposes of Article 11 of the third life insurance directive, or
(b) so much of a transfer of the whole or part of the business of an insurance company other than an overseas life insurance company as takes place in accordance with an authorisation granted outside the United Kingdom for the purposes of Article 12 of the third non-life insurance directive.
(7) In subsection (6)—
“overseas life insurance company” has the same meaning as in Chapter 2 of Part 12 of the Taxes Act 1988 (see section 431(2) of that Act);
“the third life insurance directive” means Council Directive 92/96/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directive 79/267/EEC and 990/96/EEC; and
“the third non-life insurance directive” means Council Directive 92/49/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC.
(1) In section 473 of the Taxes Act 1988 (roll-over of securities held as circulating capital)—
(a) in the opening words of subsection (2), omit “, if the securities were not such as are mentioned in subsection (1)(b) above”;
(b) in subsection (2)(a), and in subsection (7), for “would result” substitute “results”; and
(c) in subsection (2)(b) for “would be” substitute “is”.
(2) After subsection (2) of that section insert—
“(2A) This section does not apply to securities in respect of which unrealised profits or losses, calculated by reference to the fair value of the securities at the end of a period of account, are taken into account in the period of account in which the transaction mentioned in subsection (2) above occurs.
(2B) Subsection (2A) above shall be disregarded in determining for the purposes of section 66 of the Finance Act 2002 (election to continue postponement of mark to market) whether an asset was held by a person on 1st January 2002.”.
(3) In section 81 of the Finance Act 1999 (c. 16) (acquisitions disregarded under insurance companies concession), at the end add—
“(13) If the relevant company changes from—
(a) not recognising a profit or loss on an asset until it is realised, to
(b) bringing assets into account in each period of account at a fair value,
then, in calculating the amount of any adjustment required under Schedule 22 to the Finance Act 2002 (calculation of adjustment on change of basis), the amount to be taken into account as the cost of the asset in relation to a period of account before the change is the cost of the previous acquisition.”.
(4) The provisions of this section come into force as follows—
(a) the amendments in subsections (1) and (2) apply in relation to periods of account ending on or after 1st August 2001;
(b) the amendment in subsection (3) applies wherever an adjustment falls to be made under Schedule 22 to the Finance Act 2002 (see Part 5 of that Schedule).
(1) In section 577A(1) of the Taxes Act 1988 (no deduction to be made for expenditure incurred in making a payment the making of which constitutes a criminal offence)—
(a) after “incurred” insert “(a)”, and
(b) at the end insert “, or
(b) in making a payment outside the United Kingdom where the making of a corresponding payment in any part of the United Kingdom would constitute a criminal offence there.”.
(2) This section applies in relation to expenditure incurred on or after 1st April 2002.
(1) After section 168 of the Finance Act 1994 (c. 9) insert—
(1) Where in any accounting period a qualifying contract to which a company is party has an unallowable purpose, any amounts which for that period fall, in the case of the company, to be brought into account for the purposes of section 155 above as part of amount B shall (subject to subsection (2) below) not include so much of the amounts given by the accounting method used as respects the contract as, on a just and reasonable apportionment, is referable to the unallowable purpose.
(2) The total of any amounts which by virtue of subsection (1) above are not to be brought into account in the accounting period as part of amount B may not exceed the maximum amount.
(3) For the purposes of subsection (2) above, the maximum amount, in relation to the accounting period, is—
(a) if in the accounting period amount B exceeds amount A, the amount by which amount B exceeds amount A; and
(b) if in the accounting period amount A exceeds or equals amount B, nil.
(4) For the purposes of subsection (3) above, amount A and amount B shall be determined in relation to the qualifying contract in accordance with section 155 above and, in so determining amount B, so much of any amount as is referable to the unallowable purpose of the contract shall (notwithstanding subsection (1) above) be brought into account.
(5) For the purposes of this section a qualifying contract to which a company is party shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company is party to the contract include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company.
(6) For the purposes of this section the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax.
(7) For the purposes of this section, where one of the purposes for which a company is party to a qualifying contract at any time is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is party to the contract at that time.
(8) The reference in subsection (7) above to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person).
(9) In this section “tax advantage” has the same meaning as in Chapter 1 of Part 17 of the Taxes Act 1988 (tax avoidance).”.
(2) Subject to subsection (3), this section has effect for accounting periods ending on or after 26th July 2001 in relation to any qualifying contract to which a company is party, unless the company has ceased to be a party to the contract before that date.
(3) Where such an accounting period begins before 26th July 2001, there shall not be included in the amounts, which by virtue of section 168A(1) of the Finance Act 1994 (c. 9) (as it has effect subject to section 168A(2) (maximum amount)) are not to be brought into account, such part of those amounts as, on a just and reasonable apportionment, is attributable to the part of the accounting period which falls before 26th July 2001.
(4) For the purposes of subsection (3), section 168A(3) shall have effect for the purposes of determining the maximum amount in section 168A(2) as if the references in section 168A(3) to amount A and amount B were references to such part of amount A or amount B as, on a just and reasonable apportionment, is attributable to the part of the accounting period which falls after 25th July 2001.
(1) In section 153 of the Finance Act 1994 (c. 9) (qualifying payments), for subsections (4) and (5) (premiums and discounts) substitute—
“(5) For the purposes of this Chapter, in the case of any qualifying contract which is a currency contract,—
(a) the amount of any forward discount arising under the contract to a qualifying company shall be treated as a qualifying payment received by the company; and
(b) the amount of any forward premium arising under the contract from a qualifying company shall be treated as a qualifying payment made by the company.
(6) The amounts of any forward discounts and premiums arising under a contract to a qualifying company shall be determined for the purposes of subsection (5) above—
(a) in accordance with subsections (7) to (9) below in the case of a currency contract which provides for a rate of exchange between the reporting currency and another currency, and
(b) in accordance with subsection (10) below in the case of a currency contract which provides for a rate of exchange between two currencies, neither of which is the reporting currency.
(7) For the purposes of subsection (5)(a) above, the cases where a forward discount arises under a currency contract to a company are those cases where—
(a) the acquisition spot price exceeds the acquisition contract price, or
(b) the sale contract price exceeds the sale spot price;
and the amount of the forward discount is the amount of the excess mentioned in paragraph (a) or (b) above, as the case may be.
(8) For the purposes of subsection (5)(b) above, the cases where a forward premium arises under a currency contract from a company are those cases where—
(a) the acquisition contract price exceeds the acquisition spot price, or
(b) the sale spot price exceeds the sale contract price;
and the amount of the forward premium is the amount of the excess mentioned in paragraph (a) or (b) above, as the case may be.
(9) In subsections (7) and (8) above—
“the acquisition contract price” means the amount of any currency (other than the reporting currency) to be acquired under the contract by the company, expressed in the reporting currency, using the rate of exchange determined by the terms of the contract;
“the acquisition spot price” means the amount of any currency (other than the reporting currency) to be acquired under the contract by the company, expressed in the reporting currency, using such rate of exchange for the date on which the company becomes entitled to rights and subject to duties under the contract as is used for the purposes of the company’s accounts (as defined in section 156(6) below);
“the sale contract price” means the amount of any currency (other than the reporting currency) to be disposed of under the contract by the company, expressed in the reporting currency, using the rate of exchange determined by the terms of the contract;
“the sale spot price” means the amount of any currency (other than the reporting currency) to be disposed of under the contract by the company, expressed in the reporting currency, using such rate of exchange for the date on which the company becomes entitled to rights and subject to duties under the contract as is used for the purposes of the company’s accounts (as defined in section 156(6) below).
(10) Where this subsection has effect in accordance with subsection (6)(b) above, the amounts of any forward premiums and discounts arising under the contract are the amounts which, in accordance with generally accepted accounting practice, are brought into account in the same way as any forward premiums and discounts which fall to be determined in accordance with subsections (7) and (8) above.
(11) Subsection (5) above is subject to subsection (12) below.
(12) Where a qualifying company is using, as respects a qualifying contract which is a currency contract, a basis of accounting which conforms to generally accepted accounting practice and—
(a) an amount which would, but for this subsection, fall to be treated as a qualifying payment by virtue of subsection (5) above is brought into account by the company, in accordance with that basis of accounting, as a qualifying payment made or received by the company but otherwise than by virtue of being a forward premium or discount, or
(b) that basis of accounting is such that no forward premiums or discounts are treated as arising under a qualifying contract,
subsection (5) above shall not have effect in relation to that amount or, as the case may be, in relation to that contract.
(13) In this section “the reporting currency” means sterling, unless the case is one where section 93 of the Finance Act 1993 (use of foreign currency) applies, in which case it means the currency which is the relevant foreign currency for the purposes of that section.”.
(2) This section has effect for accounting periods ending on or after 26th July 2001 in relation to any currency contract to which a company is party, unless the company has ceased to be a party to the contract before that date.
(1) After section 88 of the Finance Act 1996 (c. 8) insert—
(1) This section applies where—
(a) the conditions in subsections (2) and (3) below are satisfied in relation to an asset representing a creditor relationship of a company; and
(b) the object, or one of the main objects, of the company entering into or becoming a party to the creditor relationship was the securing, whether for itself or any other person, of a tax advantage (within the meaning of Chapter 1 of Part 17 of the Taxes Act 1988).
(2) The first condition is that there is or has at any time been a change in—
(a) the rate of interest payable in the case of the asset;
(b) the amount payable to discharge the debt; or
(c) the time at which any payments under the asset (whether of interest or otherwise) fall due.
(3) The second condition is that the difference between—
(a) the fair value of the asset immediately after the change, and
(b) the issue price of the asset,
is equal to at least 5 per cent of the issue price of the asset.
(4) On and after the day on which the conditions in subsections (2) and (3) above become satisfied in the case of an asset, the only accounting method authorised for the purposes of this Chapter for use by any company as respects a creditor relationship represented by the asset shall be an authorised mark to market basis of accounting.
(5) Where section 90 below applies in consequence of subsection (4) above, no debit shall be brought into account under subsection (2)(c) or (3)(b) of that section.
(6) In determining the fair value of an asset for any purpose of this section it shall be assumed that all amounts payable by the debtor will be paid in full as they fall due.”.
(2) This section has effect on and after the relevant day.
(3) Where an authorised mark to market basis of accounting—
(a) is required by virtue of this section to be used on and after the relevant day as respects a creditor relationship of a company, but
(b) was not being used immediately before that day as respects the relationship,
the asset representing the relationship shall be treated for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 as having been acquired by the company for the asset’s fair value (as determined for the purposes of section 88A of that Act) on the relevant day.
(4) For the purposes of this section “the relevant day” is—
(a) 19th December 2001, in a case where section 88A of that Act applies by reason of a change in the rate of interest payable in the case of the asset in question; or
(b) 24th April 2002, in any other case.
(1) Section 92 of the Finance Act 1996 (c. 8) (convertible securities etc) is amended as follows.
(2) Amend subsection (1) (the assets to which section 92 applies) in accordance with subsections (3) to (9).
(3) In paragraph (b) (which requires the asset to carry rights to acquire any shares in a company) for “any shares in a company” substitute “shares in a company”.
(4) After paragraph (b) insert—
“(bb) the only shares that may be so acquired under any such provision are shares which, at the time when the asset comes or came into existence are or were, and at all times since have been,—
(i) qualifying ordinary shares in one or more companies, or
(ii) mandatorily convertible preference shares in one or more companies;”.
(5) In paragraph (c) (extent to which shares may be acquired under that provision not to be determined using specified cash value) for “that provision”, where first occurring, substitute “any such provision”.
(6) In paragraph (d) (asset not to be a relevant discounted security within the meaning of Schedule 13 to the Finance Act 1996) after “Act” insert “or an excluded indexed security within the meaning of that Schedule”.
(7) After paragraph (d) insert—
“(dd) the rights attached to the asset do not include provision by virtue of which the company may require a person other than the issuing company to acquire the asset for an amount which would, if payable on redemption, be an amount involving a deep gain for the purposes of paragraph 3 of that Schedule;”.
(8) In paragraph (e) (more than negligible likelihood of the right to acquire shares being exercised to significant extent)—
(a) for “the right” substitute “the rights”, and
(b) omit “and”.
(9) After paragraph (e) insert—
“(ee) the rights to acquire shares in a company (whether by conversion or exchange or otherwise) are such that exercising them to their full extent would result in the replacement of the asset—
(i) wholly by shares, or
(ii) in a case where exercising the rights to acquire shares to their full extent would not confer an entitlement to a whole number of shares, wholly by shares and a cash adjustment in respect of the fraction of a share so arising,
and the ending of the creditor relationship; and”.
(10) After subsection (1) insert—
“(1A) In subsection (1) above—
“the issuing company” means the company that brought into existence the asset mentioned in subsection (1) above;
“mandatorily convertible preference shares” means shares (other than qualifying ordinary shares) which are issued upon terms that stipulate that, by a time no more than 24 hours after their acquisition by a person who immediately before that acquisition had the creditor relationship represented by those shares, they must be converted into or exchanged for qualifying ordinary shares;
“qualifying ordinary shares” means shares in a company which satisfy the conditions in subsections (1B) and (1C) below.
(1B) The first condition is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the company, other than—
(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company, or
(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of the company.
(1C) The second condition is that the shares are—
(a) shares which are listed on a recognised stock exchange, or
(b) shares in a company which is a trading company or a holding company;
and for this purpose “trading company” and “holding company” have the meaning given by paragraph 22(1) of Schedule A1 to the Taxation of Chargeable Gains Act 1992.”.
(11) After subsection (1C) insert—
“(1D) For the purposes of subsection (1)(ee)(ii) above, the amount which may be paid by way of a cash adjustment may not exceed five per cent of the value of the relevant shares at the relevant time; and for these purposes—
(a) “the relevant shares” means the shares which would be acquired by exercising the rights attached to the asset to their full extent, and
(b) “the relevant time” means the time at which the rights to acquire those shares are exercised.”.
(12) In consequence of the amendments made by this section and sections 73 and 74, the sidenote becomes “Convertible securities etc: creditor relationships”.
(13) The amendments made by this section do not have effect for the purpose of determining, in relation to such part of an accounting period as falls before 26th July 2001, whether an asset is, or has ceased to be, an asset to which section 92 of the Finance Act 1996 (c. 8) applies.
(14) Subsection (15) has effect where—
(a) an asset is, immediately before 26th July 2001, an asset to which section 92 of the Finance Act 1996 applies, but
(b) on that date, by virtue only of the amendments of that section made by this section, the asset ceases to be an asset to which that section applies.
(15) Where this subsection has effect, the asset shall be taken to have ceased immediately before 26th July 2001 to be an asset to which section 92 of the Finance Act 1996 (c. 8) applies and, accordingly, any deemed disposal and re-acquisition under subsection (7) of that section shall be treated as having taken place immediately before that date.
(16) Subject to subsections (13) to (15), the amendments made by this section have effect for accounting periods ending on or after 26th July 2001 in relation to any asset representing a creditor relationship of a company, unless the creditor relationship in question is one to which the company ceased to be a party before that date.
(1) In section 92 of the Finance Act 1996 (convertible securities etc) after subsection (1D) (which is inserted by section 72) insert—
“(1E) This section does not apply to an asset representing a creditor relationship of a company if, for the accounting period in which the asset comes into existence, there is a connection between the company and the company which is the issuing company in relation to that asset.
(1F) If, in the case of an asset representing a creditor relationship of a company, the company and the company which is the issuing company in relation to that asset become companies between which, for any accounting period, there is a connection—
(a) the asset shall cease to be an asset to which this section applies, and
(b) it shall be treated, for the purposes of subsection (7)(a) below, as having ceased to be such an asset at the time when the circumstances giving rise to that connection arose.
(1G) Section 87(3) above (connection between a company and another person for an accounting period) applies for the purposes of subsections (1E) and (1F) above.”.
(2) The amendments made by this section do not have effect for the purpose of determining, in relation to such part of an accounting period as falls before 19th December 2001, whether an asset is, or has ceased to be, an asset to which section 92 of the Finance Act 1996 applies.
(3) Subsection (4) has effect where—
(a) an asset is, immediately before 19th December 2001, an asset to which section 92 of the Finance Act 1996 applies, but
(b) on that date, by virtue only of the amendments of that section made by this section, the asset ceases to be an asset to which that section applies.
(4) Where this subsection has effect, the asset shall be taken to have ceased immediately before 19th December 2001 to be an asset to which section 92 of the Finance Act 1996 applies and, accordingly, any deemed disposal and re-acquisition under subsection (7) of that section shall be treated as having taken place immediately before that date.
(5) Subject to subsections (2) to (4), the amendments made by this section have effect for accounting periods ending on or after 19th December 2001 in relation to any asset representing a creditor relationship of a company—
(a) unless the creditor relationship in question is one to which the company ceased to be a party before that date, or
(b) unless, as regards the company holding the asset representing the creditor relationship immediately before 19th December 2001 (“the creditor company”) and the company which brought that asset into existence (“the issuing company”), the first or the second condition is satisfied.
(6) The first condition is that, during any period before 19th December 2001 when the creditor company was holding the asset, there was an accounting period in which there was no connection between the creditor company and the issuing company.
(7) The second condition is that immediately before 19th December 2001—
(a) the creditor company was not a 100 per cent subsidiary of the issuing company,
(b) the issuing company was not a 100 per cent subsidiary of the creditor company, and
(c) the creditor company and the issuing company were not 100 per cent subsidiaries of the same company.
(8) Section 87(3) of the Finance Act 1996 (c. 8) (connection between a company and another person for an accounting period) applies for the purposes of subsection (6).
(9) In its application for the purposes of subsection (7), section 838 of the Taxes Act 1988 (meaning of “subsidiaries” for the purposes of the Tax Acts) has effect as if in subsection (1)(b) of that section—
(a) “a 100 per cent subsidiary” were substituted for “a 75 per cent subsidiary”, and
(b) “not less than 100 per cent” were substituted for “not less than 75 per cent”.
(1) After section 92 of the Finance Act 1996 insert—
(1) This section applies to a liability if—
(a) the liability represents a debtor relationship of a company (“the debtor company”); and
(b) the rights attached to the asset that represents the corresponding creditor relationship include provision by virtue of which a person is or may become entitled to acquire (whether by conversion or exchange or otherwise)—
(i) any shares in the debtor company, or
(ii) any shares in another company.
(2) The debits falling for any accounting period to be brought into account for the purposes of this Chapter in respect of a debtor relationship represented by a liability to which this section applies shall not include debits in relation to any of the amounts falling within subsection (3) below.
(3) The amounts are—
(a) any amounts payable by the debtor company in respect of, or in connection with, any such acquisition of shares as is described in subsection (1)(b)(ii) above, but not any amounts to which subsection (4) below applies; and
(b) any charges or expenses incurred by the debtor company as described in paragraph (b), (c) or (d) of section 84(3) above, where the related transaction in question relates to, or is connected with, the acquisition of shares by another person (whether by conversion or exchange or otherwise) as described in subsection (1)(b) above.
(4) This subsection applies to amounts payable by the debtor company, as described in subsection (3)(a) above, in respect of the debtor relationship in a case where—
(a) the debtor company is carrying on a banking business or a business consisting wholly or partly in dealing in securities, and
(b) it entered into the debtor relationship in the ordinary course of that business.
(5) For the purposes of subsection (4) above “securities” has the same meaning as in section 473 of the Taxes Act.
(6) Subject to subsection (7) below, only an authorised accruals basis of accounting shall be used for ascertaining the amounts which fall to be taken into account as described in subsection (2) above.
(7) The requirement in subsection (6) above to use an authorised accruals basis of accounting does not apply in the case of a debtor relationship where—
(a) the debtor company is carrying on a banking business or a business consisting wholly or partly in dealing in securities, and
(b) it entered into the debtor relationship in the ordinary course of that business.”.
(2) The amendments made by this section have effect—
(a) in relation to any amounts falling within section 92A(3)(a), where those amounts fall to be paid after 25th July 2001, and
(b) in relation to any charges or expenses falling within section 92A(3)(b), where those charges or expenses accrue after 25th July 2001.
Finance Act 2002