Office of Public Sector Information
Section 39
1 (1) Part 2 of ICTA (which, at sections 43A to 43G, includes provisions about rent factoring) is amended as follows.
(2) Section 43C(1) (section 43B not to apply where term over which financial obligation is to be reduced exceeds 15 years) shall cease to have effect.
(3) In section 43E (interposed lease: exceptions etc) in subsection (1), omit paragraphs (a) and (b) (which relate to certain periods exceeding 15 years).
(4) The amendments made by this paragraph have effect in relation to finance agreements entered into on or after 16th March 2005.
(5) But where—
(a) a finance agreement was entered into on or after 20th March 2000 and before 16th March 2005, and
(b) section 43D of ICTA (interposed lease) would apply in relation to the agreement but for section 43E(1)(a) or (b) of that Act,
sub-paragraph (6) has effect.
(6) In any such case, any amount of principal in rent paid on or after 16th March 2005 which, apart from this sub-paragraph, would—
(a) be deductible as an expense in computing profits charged under Case I of Schedule D, or
(b) be deductible under section 75 of ICTA (expenses of management), or
(c) fall to be brought into account under section 76 of that Act (expenses of insurance companies) at Step 1 in subsection (7) of that section,
shall not be so deductible or brought into account for any accounting period ending on or after 16th March 2005.
(7) If payment of an amount of principal in rent is made on or after 16th March 2005 in respect of a rental period that falls—
(a) partly before that date, and
(b) partly on or after it,
sub-paragraph (6) has effect in relation to only so much of the payment as relates to the part of the period falling on or after 16th March 2005.
(8) In this paragraph—
“amount of principal in rent” means so much of any amount of rent payable under a lease as, in the case of the finance agreement in question, reduces the amount of the financial obligation mentioned in section 43A(1) of ICTA;
“rental period” means a period in respect of which rent is paid.
2 (1) Section 730 of ICTA (transfers of income arising from securities) is amended as follows.
(2) In each place where it occurs—
(a) for “interest” substitute “distribution”;
(b) for “securities” substitute “shares”.
(3) In subsection (1) (interest deemed to be income of owner etc)—
(a) in paragraph (a), for “deemed to be” substitute “treated as”,
(b) in paragraph (b), for “deemed to be” substitute “treated as”, and
(c) omit paragraph (c).
(4) For subsection (2) (sale etc where proceeds chargeable to tax by virtue of section 18(3B) of ICTA) substitute—
“(2) This section does not have effect in relation to a sale or transfer if the proceeds of the sale or transfer are chargeable to tax.”.
(5) Omit subsection (2A) (loan relationships).
(6) For subsection (3) substitute—
“(3) The proceeds of any subsequent sale or other realisation of the right to receive the distribution shall not, for any of the purposes of the Tax Acts, be regarded as the income of the seller or the person on whose behalf the right is otherwise realised.”.
(7) In subsection (4), in the words following paragraph (b) after their substitution by paragraph 300(3)(b) of Schedule 1 to ITTOIA 2005, for “interest” substitute “distribution”.
(8) In subsection (4A), for “interest arising” substitute “distribution”.
(9) In subsection (4B), for “interest” substitute “distribution”.
(10) For subsection (7) (definitions) substitute—
“(7) In this section—
“distribution”, in relation to shares in a company,—
has the same meaning as it has in the Corporation Tax Acts (see section 209), but
also includes any amount that would be a distribution if the company paying it were resident in the United Kingdom;
“shares” means shares in a company.”.
(11) In subsection (8) (information powers) omit from “and for the purpose” to the end of the subsection.
(12) The heading to the section becomes “Transfers of rights to receive distributions in respect of shares”.
(13) The amendments made by this paragraph have effect in relation to sales or transfers on or after 2nd December 2004.
3 (1) In section 768B(10) of ICTA (Part 4 of Schedule 28A to have effect for restricting the debits to be brought into account in respect of loan relationships) after “debits”, where first occurring, insert “and non-trading deficits”.
(2) In section 768C(9) of ICTA (Part 4 of Schedule 28A to have effect for restricting the debits to be brought into account in respect of loan relationships) after “debits”, where first occurring, insert “and non-trading deficits”.
(3) Schedule 28A to ICTA (change in ownership of investment company: deductions) is amended as follows.
(4) In paragraph 7(1)(b) (apportionment of excess in paragraph 6(c), or of non-trading deficit, to first part of accounting period) after “the whole amount of the excess” insert “or, as the case may be, of the deficit”.
(5) After paragraph 9 insert—
“9A (1) This paragraph has effect in any case to which section 768B applies where the non-trading deficit mentioned in paragraph 6(dc) above is apportioned by paragraph 7(b) above to the first part of the accounting period being divided.
(2) In any such case, none of that non-trading deficit shall be carried forward to—
(a) the accounting period beginning immediately after the change in the ownership of the company, or
(b) any subsequent accounting period.”.
(6) After paragraph 10 insert—
“10A (1) This paragraph has effect in any case to which section 768C applies where the non-trading deficit mentioned in paragraph 13(1)(ec) below is apportioned by paragraph 16(1)(b) below to the first part of the accounting period being divided.
(2) In any such case, none of that non-trading deficit shall be carried forward to—
(a) the accounting period beginning immediately after the change in the ownership of the company, or
(b) any subsequent accounting period.”.
(7) In paragraph 16(1)(b) (apportionment of excess in paragraph 13(1)(ec), or of non-trading deficit, to first part of accounting period) after “the whole amount of the excess” insert “or, as the case may be, of the deficit”.
(8) The title of Part 4 of the Schedule becomes “Disallowed debits and non-trading deficits”.
(9) The amendments made by this paragraph have effect in any case where the change in ownership is on or after 10th February 2005.
4 (1) After section 775 of ICTA (sale by individual of income derived from his personal activities) insert—
(1) This section applies in any case where—
(a) a person sells or transfers the right to receive an annual payment to which this section applies (see subsection (4)), and
(b) the consideration (if any) for the sale or transfer would not, apart from this section, be chargeable to tax.
(2) In any such case, tax is charged—
(a) in the case of income tax, under this section; or
(b) in the case of corporation tax, under Case III of Schedule D.
(3) Where this section applies—
(a) the tax is charged on an amount equal to the market value of the right to receive the annual payment;
(b) the tax is charged for the chargeable period in which the sale or transfer takes place;
(c) the person liable for the tax is the person who sells or transfers the right to the annual payment.
(4) This section applies to any annual payment other than—
(a) an annual payment under a life annuity;
(b) an annual payment under a pension annuity;
(c) an annual payment to which section 347A applies (annual payments that are not charges on income);
(d) an annual payment in respect of which, by virtue of section 727 of ITTOIA 2005 (payments by individuals arising in UK), no liability to income tax arises under Part 5 of that Act.
(5) This section applies in relation to part of an annual payment as it applies in relation to the whole of an annual payment.
(6) For the purposes of this section, a sale or transfer of all rights under an agreement for annual payments, or under an annuity, is a sale or transfer of the rights to each individual payment under the agreement or annuity.
(7) In this section—
“life annuity” means—
a life annuity, as defined in section 657(1); or
a life annuity, as defined in section 473(2) of ITTOIA 2005;
“pension annuity” means an annuity which is pension income within the meaning of Part 9 of ITEPA 2003 (see section 566(2) of that Act).”.
(2) The amendment made by this paragraph has effect in relation to sales or transfers on or after 16th March 2005.
5 (1) Section 807A of ICTA is amended as follows.
(2) After subsection (2A) (exclusion of certain tax) insert—
“(2B) Where, in the case of any share, section 91A or 91B of the Finance Act 1996 (shares treated as loan relationships) applies in relation to a company for an accounting period, this section has effect—
(a) in relation to a distribution in respect of the share as it has effect in relation to interest under a loan relationship, and
(b) in relation to a distribution accruing in respect of the share at a time when the company does not (within the meaning of the section in question) hold the share as it applies in relation to interest accruing under a loan relationship at a time when the company is not a party to the loan relationship.”.
(3) The amendment made by this paragraph has effect in relation to shares held by a company on or after 16th March 2005.
6 (1) In Schedule 23A to ICTA (manufactured dividends and interest) paragraph 3 (manufactured interest on UK securities) is amended as follows.
(2) In sub-paragraph (2A) (restriction on relief under sub-paragraph (2)(c))—
(a) in paragraph (a) (receipt of interest or payment representative of it) after “is chargeable to income tax” insert “(and see section 714(5) for the amount so chargeable in a case where section 714(4) applies)”, and
(b) for paragraph (b) (accrued income scheme) substitute—
“(b) is, by virtue of section 714(2), chargeable to income tax on annual profits or gains in respect of transfers of securities which are subject to the arrangement giving rise to the payment of manufactured interest; or”.
(3) In sub-paragraph (2A), in the paragraph (b) so substituted, for “annual profits or gains” substitute “income”.
(4) The amendment made by sub-paragraph (3) has effect in relation to payments of manufactured interest made on or after 6th April 2005.
(5) The other amendments made by this paragraph have effect in relation to payments of manufactured interest made on or after 16th March 2005.
7 (1) Section 48 of TCGA 1992 (consideration due after time of disposal) is amended as follows.
(2) At the beginning insert “(1)”.
(3) At the end add—
“(2) Subsection (1) above does not apply in relation to so much of any consideration as consists of rights under a creditor relationship to which a company becomes a party as a result of the disposal.
(3) In the computation of the gain in a case where subsection (2) above has effect in relation to any consideration, the amount to be brought into account in respect of that consideration is the fair value of the creditor relationship.
(4) In this section—
(a) “creditor relationship”, and
(b) “fair value”, in relation to a creditor relationship,
each have the same meaning as in Chapter 2 of Part 4 of the Finance Act 1996 (see section 103(1) of that Act).”.
8 In TCGA 1992, after section 151C (strips: manipulation of price: associated payment giving rise to loss) insert—
(1) This section applies if—
(a) as a result of any scheme or arrangement which has an unallowable purpose, the circumstances are, or might have been, as mentioned in paragraph (a), (b) or (c) of section 452G(2) of ITTOIA 2005,
(b) under the scheme or arrangement, a payment falls to be made otherwise than in respect of the acquisition or disposal of a corporate strip, and
(c) as a result of that payment or the circumstances in which it is made, a loss accrues to any person.
(2) The loss shall not be an allowable loss.
(3) For the purposes of this section a scheme or arrangement has an unallowable purpose if the main benefit, or one of the main benefits, that might have been expected to result from, or from any provision of, the scheme or arrangement (apart from section 452G of ITTOIA 2005 and this section) is—
(a) the obtaining of a tax advantage by any person, or
(b) the accrual to any person of an allowable loss.
(4) The reference in subsection (1)(b) above to the acquisition or disposal of a corporate strip shall be construed as if it were in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see, in particular, sections 437 and 452F of that Act for the meaning of “disposal” and section 452E of that Act for the meaning of “corporate strip”).
(5) In subsection (3)(a) above “tax advantage” has the meaning given by section 709(1) of the Taxes Act.
(6) This section applies to losses accruing on or after 6th April 2005.”.
9 (1) Section 171 of TCGA 1992 (transfers within a group: general provisions) is amended as follows.
(2) After subsection (3) insert—
“(3A) Subsection (1) above does not apply—
(a) if section 91A of the Finance Act 1996 (shares subject to third party obligations)—
(i) does not apply in the case of the asset in relation to company A immediately before the disposal, but
(ii) does apply in the case of the asset in relation to company B immediately after its acquisition, or
(b) if that section—
(i) applies in the case of the asset in relation to company A immediately before the disposal, but
(ii) does not apply in the case of the asset in relation to company B immediately after its acquisition.”.
(3) The amendment made by this paragraph has effect in any case where the disposal is on or after 16th March 2005.
10 (1) After section 91 of FA 1996 insert the following heading—
(2) After that heading insert the following section—
(1) This section applies for the purposes of corporation tax in relation to a company if at any time in an accounting period—
(a) that company (“the investing company”) holds a share in another company (“the issuing company”),
(b) the share is subject to outstanding third party obligations (see subsection (5)), and
(c) the share is an interest-like investment (see subsections (7) and (8)).
(2) This Chapter shall have effect for the accounting period of the investing company in accordance with subsection (3) below as if—
(a) the share were rights under a creditor relationship of that company, and
(b) any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988.
(3) The debits and credits to be brought into account by the investing company for the purposes of this Chapter as respects the share must be determined on the basis of fair value accounting.
(4) No debits are to be brought into account in respect of any transaction (or series of transactions) which (apart from the assumption in subsection (8)(b) below) would have the effect of causing the condition in paragraph (a) or (b) of subsection (7) below not to be satisfied.
(5) For the purposes of this section, the cases where a share is subject to outstanding third party obligations are those cases where—
(a) the share is subject to obligations of any description in subsection (6) below,
(b) the obligations are obligations of a person other than the investing company, and
(c) the obligations are yet to be discharged,
and where a share is subject to any such obligations, they are for the purposes of this section the “third party obligations” in the case of that share.
(6) The descriptions of obligation are—
(a) an obligation to meet unpaid calls on the share;
(b) an obligation (not falling within paragraph (a) above) to make a contribution to the capital of the issuing company that could affect the value of the share.
(7) In this section “interest-like investment” means a share whose nature is such that the fair value of the share—
(a) is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest (see section 103(3A)), and
(b) is unlikely to deviate to a substantial extent from that rate of increase.
Fluctuations in value resulting from changes in exchange rates are to be left out of account for the purposes of paragraph (b) above.
(8) For the purposes of subsection (7) above, it shall be assumed—
(a) that any third party obligations will be met in the amounts, and at the time, at which they are due, and
(b) that no transaction (or series of transactions) intended to cause the condition in paragraph (a) or (b) of that subsection not to be satisfied will be entered into.
(9) For the purposes of this section, the fair value of a share that is subject to outstanding third party obligations must include the fair value of the obligations.
(10) For the purposes of this section a company shall be treated as continuing to hold a share notwithstanding that the share has been transferred to another person—
(a) under a repo or stock lending arrangement, or
(b) under a transaction which is treated by section 26 of the Taxation of Chargeable Gains Act 1992 as not involving any disposal.”.
(3) After section 91A insert—
(1) This section applies for the purposes of corporation tax in relation to a company if at any time in an accounting period—
(a) the company (“the investing company”) holds a share in another company (“the issuing company”),
(b) the share is not one which, by virtue of paragraph 4 of Schedule 10 to this Act (holdings in unit trusts and offshore funds), falls to be treated for that accounting period as if it were rights under a creditor relationship of the investing company, and
(c) the share is a non-qualifying share (see subsection (6)),
and at no time in the accounting period does section 91A above apply in relation to the investing company in the case of that share.
(2) This Chapter shall have effect for that accounting period in accordance with subsection (3) below as if—
(a) the share were rights under a creditor relationship of the investing company, and
(b) any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988.
(3) The debits and credits to be brought into account by the investing company for the purposes of this Chapter as respects the share must be determined on the basis of fair value accounting.
(4) In any case where Condition 1 in section 91C below is satisfied, no debits are to be brought into account in respect of any transaction (or series of transactions) which (apart from the assumption in subsection (6) of section 91C below) would have the effect of causing the condition in paragraph (a) or (b) of subsection (1) of that section not to be satisfied.
(5) In any case where Condition 3 in section 91E below is satisfied—
(a) debits and credits shall be brought into account for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) by the investing company in respect of any associated transaction falling within section 91E below as if it were, or were a transaction in respect of, a derivative contract (if that is not in fact the case), and
(b) those debits and credits shall be determined on the basis of fair value accounting.
(6) A share is a non-qualifying share for the purposes of this section if—
(a) it is not one where section 95 of the Taxes Act 1988 (dealers etc) applies in relation to distributions in respect of the share, and
(b) one or more of the Conditions in sections 91C to 91E below is satisfied.
(7) Subsection (10) of section 91A above (company treated as holding a share) also applies for the purposes of this section.”.
(4) After section 91B insert—
(1) Condition 1 is that the assets of the issuing company are of such a nature that the fair value of the share—
(a) is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest, and
(b) is unlikely to deviate to a substantial extent from that rate of increase.
Fluctuations in value resulting from changes in exchange rates are to be left out of account for the purposes of paragraph (b) above.
(2) But Condition 1 is not satisfied if the whole or substantially the whole by fair value of the assets of the issuing company are income producing.
(3) The assets which, for the purposes of this section, are “income producing” are—
(a) any share as respects which the conditions in section 91A(1) above are satisfied;
(b) any share as respects which Condition 1 above is satisfied or would, apart from subsection (2) above, be satisfied;
(c) any share as respects which Condition 2 in section 91D below is satisfied or would, apart from subsection (1)(c) of that section (excepted shares), be satisfied;
(d) any share as respects which Condition 3 in section 91E below is satisfied;
(e) any asset of a description specified in any paragraph of paragraph 8(2) of Schedule 10 to this Act (qualifying investments in relation to a unit trust scheme or an offshore fund);
(f) rights under a repo in relation to which section 730A of the Taxes Act 1988 applies;
(g) any share in a company the whole or substantially the whole by fair value of whose assets are assets within paragraphs (a) to (f) above.
(4) The Treasury may by regulations amend this section for the purpose of adding to the assets which are income producing.
(5) The provision that may be made by regulations under this section includes provision for the regulations to have effect in relation to accounting periods (whenever beginning) which end on or after the day on which the regulations come into force.
(6) For the purposes of subsection (1) above, it shall be assumed that no transaction (or series of transactions) intended to cause the condition in paragraph (a) or (b) of that subsection not to be satisfied will be entered into by the investing company.
(7) This section shall be construed as one with section 91B above.
(1) Condition 2 is that the share—
(a) is redeemable (see subsection (2)),
(b) is designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest, and
(c) is not an excepted share (see subsection (3)).
(2) For the purposes of this section, a share is to be regarded as redeemable only if it is redeemable as a result of its terms of issue (or any collateral agreements, arrangements or understandings)—
(a) requiring redemption,
(b) entitling the holder to require redemption, or
(c) entitling the issuer to redeem.
(3) A share is an “excepted share” for the purposes of this section if—
(a) it is a qualifying publicly issued share (see subsections (4) and (5)),
(b) it is a share that mirrors a public issue (see subsections (6) to (8)), or
(c) the investing company’s purpose in acquiring the share is not an unallowable purpose (see subsection (9)).
(4) A share is a “qualifying publicly issued share” for the purposes of this section if—
(a) it was issued by a company as part of an issue of shares to independent persons, and
(b) less than 10% of the shares in that issue are held by the investing company or persons connected with it.
(5) But a share is not a qualifying publicly issued share for those purposes if the investing company’s purpose in acquiring the share is an unallowable purpose by virtue of subsection (9)(a) below.
(6) The cases where a share mirrors a public issue are those set out in subsections (7) and (8) below.
(7) Case 1 is where—
(a) a company (company A) issues shares (the public issue) to independent persons,
(b) within 24 hours of that issue, one or more other companies (companies BB) issue shares (the mirroring shares) to company A on the same, or substantially the same, terms as the public issue,
(c) company A and companies BB are associated companies (see subsection (11)), and
(d) the total nominal value of the mirroring shares does not exceed the nominal value of the public issue,
and in any such case the mirroring shares are shares that mirror a public issue.
Finance (No. 2) Act 2005