Finance Bill 2005
Detailed notes on substantive changes to clauses1) Clauses 24 to 31, and Schedule 3: Avoidance involving tax arbitrage
2) Clause 37 and Schedule 6: International Accounting Standards
3) Clause 39 and Schedule 7: Avoidance involving financial arrangements
4) Clause 42 and Schedule 9: Insurance companies
5) Clause 49 and Schedule 10: Miscellaneous amendments – Stamp duty land tax
6) Clauses 51 to 65: European Company Statute
List of minor changes to clauses
- Clause 7: Social security pension lump sum
Minor technical amendment - Clause 12, Sch 2: Employee securities: anti-avoidance
Two small consequential changes to ensure that the interaction between this legislation and Part 7 ITEPA works correctly - Clause 16: Authorised Investment Funds
Minor technical changes to clarify the intended effect of the legislation - Clauses 31 and 32: Chargeable Gains and Non-Residents
Some minor technical changes to the legislation for the purposes of clarification - Clause 46: Disclosure of information contained in land transaction
returns
One consequential change to refer to Commissioners of Revenue and Customs - Clause 65: EU Mutual Assistance Directive
One consequential change to refer to the name of the Revenue Commissioners - Clause 66: VED: Late Renewal Supplements
Minor technical amendment
1) Clauses 24 to 31, and Schedule 3: Avoidance involving tax arbitrage
Clauses 24 to 31 contain several changes to the original Bill following representations. The main changes are:
- It has been made explicit that companies can make partial disclaimers when amending their CT self-assessment, so as to cancel the effect of schemes which would otherwise be caught.
- The “grandfathering period”, which allows unconnected companies to unwind their arrangements to avoid a charge, has been extended to 31 August 2005.
- Several minor technical changes have been made including amending the definition of hybrid to exclude apportionment under any countries controlled Foreign Company rules (and not just those of the UK).
In addition, substantially revised draft guidance covering the application of the legislation, and further practical detail about the operation of the new Arbitrage legislation has been issued by HM Revenue and Customs today.
2) Clause 37 and Schedule 6: International Accounting Standards
1. Schedule 6 contains a variety of measures that amend and build on the legislation on the use of International Accounting Standards (IAS) for tax purposes, including that introduced in Finance Act 2005.
2. It prevents a tax charge on the debtor company where a company connected with the debtor (“the new creditor”) buys debt at less than face value. The charge is removed where the new creditor buys the debt from another company in the same group. Provision has also been introduced to ensure the rule works as intended where the debt has been issued at a discount. The changes apply to transactions occurring on or after 16 March 2005.
3. It extends the deadline for companies not using IAS or the new UK GAAP equivalent to elect for convertible and asset-linked securities to be taxed as if the company had adopted the new standards – the deadline, previously 31 July 2005, becomes 31 December 2005. It also clarifies the effect of an election.
4. It enables changes to be made by statutory instrument to ensure that provisions on the definition and treatment of exchange gains and losses on loan relationships and derivative contracts work correctly where fair value accounting is used.
5. Other provisions in the Schedule make minor changes to FA 2005 and other legislation concerned with IAS.
3. Clause 39 and Schedule 7: Avoidance involving financial arrangements
Schedule 7 contains a number of measures to combat avoidance schemes involving financial products disclosed under the FA 2004 avoidance disclosure rules. The Schedule has been updated as follows:
Paragraph 1: rent factoring
1. This paragraph has been clarified to ensure that for interposed lease cases in existence at 16 March 2005, the disallowance of rent payable for periods after that date only applies to that part of the rent that reduces the original financial obligation.
Paragraphs 5, 10 and 13: shares treated as loan relationships
2. These paragraphs have been changed to ensure they are better targeted and to make consequential amendments.
3. For both new sections 91A and 91B, the prohibition on debits is now limited to those arising from transactions intended to cause the relevant conditions in each section not to be met. This will ensure that where there are changes in fair value of shares, both increases and falls in that value will be brought into the tax computation.
4. New section 91B has been tightly targeted to ensure it does not catch normal commercial structures which do not involve avoidance. The three Conditions, now in sections 91C to 91E, have been amended as follows:
- Condition 1 has been clarified to make clear that companies carrying on normal commercial activities, such as group finance companies are not caught.
- Condition 2 has three new filters to ensure that normal commercial financing structures within groups are not caught. Shares issued to the public, and shares which move finance raised by such issues within a group are now excluded. In addition, the rules only apply where the purpose, or one of the main purposes, in holding the share is to obtain a tax advantage. The meaning of “redeemable” shares has also been clarified.
- Condition 3 has been widened to include arrangements involving not only shares and derivative contracts, but shares and various other types of contracts.
5. The regulatory power, in section 91F, is now cast in terms of adding, varying or removing Conditions for the purposes of section 91B, and can also be used to make consequential changes to relevant parts of the tax code. But the regulatory power no longer has any retrospective element to it.
6. The capital gains rules in what is now section 91G have been amended to allow companies to unwind arrangements within sections 91A or 91B without crystallising a capital gains charge in respect of increases in value up to Budget day. This applies where the shares became subject to the new rules on 16 March 2005 and cease to satisfy the relevant conditions on or before 31 December 2005.
7. Paragraphs 5 and 13 of the Schedule make consequential changes:
- Paragraph 5 ensures that double tax relief on distributions in respect of shares subject to the new rules is allowed on the same basis as applies for interest in respect of loan relationships
- In order to be seen as “interest-like” within sections 91A or 91B, the return on a share must equate to the return on an investment of money at a commercial rate of interest. Paragraph 13 provides a definition of “commercial rate of interest”.
Paragraph 12: Money debts and discounts
8. Paragraph 12 taxes discount arising from a money debt. It has been amended to allow tax relief where discount that has been taxed is not actually received (“impairment”) and to tax any recovery of such impairment.
Paragraphs 18 and 24: Group continuity and de-grouping charge
9. Paragraphs 18 (loan relationships) and 24 (derivative contracts) provide for a de-grouping charge where a loan relationship or derivative contract is transferred between group companies and the transferee company then leaves the group within 6 years. Both paragraphs have been amended to disapply the charge where the transferee company leaves a group in circumstances where an exempt distribution is made. However, the charge is reinstated if within 5 years of the exempt distribution, a “chargeable payment” is made.
10. Both paragraphs have also been changed to allow a debit to be taken into account where the debit arises on a derivative contract hedging a loan relationship on which a credit arises, or where the debit arises on a loan relationship which is hedged by a derivative contract in relation to which a credit arises
4) Clause 42 and Schedule 9: Insurance companies
Clause 42 and Schedule 9 contain six measures arising from representations on the original Bill. The new measures:
- Introduce a time limit to the regulation-making power which enables the life insurance company tax provisions relating to the apportionment of income and gains to various categories of business to be amended to give effect to the proper taxation of 'inherited estates' (a company's assets which are surplus to its business requirements);
- Amend the definition of "income and gains of the company's life assurance business" in section 88 Finance Act 1989 to ensure that the policy holders’ share of certain items of income are taxed at the correct rate;
- Extend an existing regulation making power to enable changes to the rules governing overseas life insurance companies with UK branches so that they cover the situation where such a company changes its regulatory authority from the Financial Services Authority to a foreign equivalent;
- Make minor changes to the definition of "pension business" so that the rules work as intended when the new pension regime comes in on 6 April 2006;
- Make changes to define when a period of account ends where there is a transfer of life business to cope with the situation where a company stops writing long-term business but continues writing general business;
- Remove a tax charge that may arise where a company has expenses relating to its investment properties.
5) Clause 49 and Schedule 10: Miscellaneous amendments – Stamp duty land tax
1. The measure on sale and leaseback arrangements which was announced in the Budget is not included in this Finance Bill.
2. In response to representations, the measure on loans and deposits on the grant or assignment of a lease (paragraph 14 of Schedule 10) is amended so as to exempt a deposit which does not exceed two years’ rent (that is, twice the amount of the highest rent payable in any twelve-month period for the five years following the grant or assignment).
3. The provisions on withdrawal of group relief (paragraph 4 of Schedule 10) are amended so as to clarify that where the relevant transaction was the grant of a lease the charge on withdrawal of group relief is on the market value of the lease, together with any rent payable.
4. The commencement date of the measures originally announced in the Budget is amended. These measures will now apply (broadly speaking) to any transaction with an effective date after 19 May 2005. With one exception there is no change to the transitional provisions, which apply only to contracts entered into on or before 16 March 2005. The exception is the measure mentioned in paragraph 3 above, where the transitional provisions apply to contracts entered into on or before 19 May 2005.
6) Clauses 51 to 65: European Company Statute
1. An additional clause (Clause 53) has been included in the Finance Bill to ensure that the UK intangible assets regime is fully compliant with the EU Mergers Directive.
2. The new clause relates to the transfer of intangible assets (held in a permanent establishment outside the UK) upon the merger of two or more companies in accordance with the Regulation.
3. It provides that where tax would, but for the Mergers Directive, have been chargeable in the Member State in which the permanent establishment is located, double taxation relief shall have effect as if the amount of tax that would have been charged had actually been charged.
4. This achieves the Government's policy aim that a UK company’s decision to merge with a company in another member State to form a European Company is not disadvantaged (or driven) by tax considerations.
