Technical note on funding bond legislation
This legislative change has been included in the Finance Bill 2008. Draft guidance on the legislation is now available for comment.
Scope of consultation
Comments are invited on the draft legislation below on a proposed minor legislative change to clarify the way that repayment claims for tax, paid by funding bond are satisfied. This technical note may be of particular interest to people in the insolvency industry.
Background
The legislation on funding bonds is in section 582 Income and Corporation Taxes Act 1988, section 380 Income Tax (Trading and Other Income) Act 2005 and sections 939 and 940 Income Tax Act 2007.
The legislation applies when a debtor company pays a creditor interest, not in money but by the issue of a funding bond. A funding bond is a bond, stock, share or security or other certificate of indebtedness. Where a debtor company pays its creditors by funding bond then there are certain consequences for tax.
The most important is that the issue of the funding bonds is treated as if it were a payment of interest equivalent to the value of the funding bond at the date of issue. As a consequence of this if the debtor company would be obliged to deduct tax from the interest if it were paid in money it is similarly obliged to deduct tax when the interest is paid by funding bond. The tax is deducted by the debtor company retaining the relevant percentage of the funding bond (currently 20 per cent).
The tax deducted needs to be paid to HM Revenue and Customs (HMRC) and payment of the tax can be satisfied either in money or by forwarding to HMRC the funding bond retained with the debtor companies quarterly return of interest received and paid (form CT61).
Repayment of tax deducted from funding bond
It is sometimes the case that the income tax deducted from the interest paid by funding bond is repayable. For example the creditor may be non-taxpayer, such as a charity.
What is the problem?
The funding bond legislation does not specifically refer to repayment claims for tax deducted from interest paid by funding bond or how such claims are to be satisfied. Historically, where appropriate, the funding bond(s) held by HMRC have been used to satisfy such repayment claims and it is to clarify this position that the following legislative change is proposed. The draft legislation would enable HMRC to satisfy repayment claims for tax paid by funding bond by transferring to the claimant all or part of the funding bond representing the tax.
It is proposed that the section 939 Income Tax Act 2007 be amended as follows and a new section 940A be inserted.
(1) Section 939 of ITA 2007 (duty to retain bonds where issue treated as payment of interest) is amended as follows.
(2) After subsection (4) insert.
(4A) If bonds are tendered in accordance with subsection (4), the Commissioners for Her Majesty’s Revenue and Customs may tender the bonds in satisfaction of any amount that is payable by the Commissioners to the relevant creditor in connection with the relevant debt.
(4B) For the purposes of subsection (4A).
(a) “relevant creditor” and “relevant debt” mean the creditor and the debt mentioned in subsection (1) (a), and
(b) a bond is to be taken to have the same value that it had at the time of its issue.
(4C) If bonds that are to be tendered in accordance with subsection (4) or (4A) are subject to restrictions on their tender or transfer, the restrictions do not prevent the bonds from being –
(a) tendered in accordance with that subsection, or
(b) transferred from the person tendering them to the person to whom they are tendered.
(3) Omit subsection (5).
(4) After section 940 of ITA 2007 insert.
940A No appropriate bond or combination of bonds
(1) This section applies if -
(a) the Commissioners for Her Majesty’s Revenue and Customs hold one or more bonds tendered in accordance with section 939(4),
(b) the Commissioners wish to tender bonds in accordance with section
939(4A) in satisfaction of an amount payable to the relevant creditor,
and
(c) the Commissioners consider that they do not hold a bond, or combination
of bonds, that is appropriate for satisfying the amount payable.
(2) If requested to do so by the Commissioners, the bond issuer must secure that the Commissioners hold a bond, or combination of bonds, that the Commissioners consider to be appropriate for satisfying the amount payable.
(3) If requested to do so by the bond issuer, a person must assist the bond issuer to comply with subsection (2).
(4) The duty under subsection (2), or under subsection (3), does not apply if it would be impracticable for the bond issuer, or the other person, to comply with the duty.
(5) The matters which the Commissioners may take into account when considering whether or not a bond or combination of bonds is appropriate for satisfying the amount payable include.
(a) the value of a bond at the time of its issue,
(b) the interest which the relevant creditor, or any other person, has in a bond (including the nature or size of the interest), and
(c) the terms on which a bond is issued.
(6) For the purposes of this section.
(a) "'bond issuer"' means the person by or through whom bonds were issued, and
(b) “relevant creditor” and “relevant debt” have the same meanings as in section 939(4A).
(5) The amendments made by this section have effect in relation to funding bonds issued on or after dd/mm/yyyy.
Expected impact of the draft legislation
The number of companies that issue funding bonds and are obliged to deduct tax is extremely small and the number of repayment claims based on tax paid by funding bond is again extremely small. The draft legislation is designed to enable HMRC to fulfil its obligation by satisfying the repayment claim by the claimant (who will also be a creditor of the issuing company) with funding bonds. The claimant will already hold funding bonds in the debtor company which it will have received net of the tax deducted. By repaying the tax deducted with the funding bond the creditor will then hold funding bonds representing the total amount of interest paid by the debtor company. This is of course subject to any residual taxing rights in the relevant double taxation agreement.
It is expected that the legislative change will have no impact on the obligations of the debtor company and will have a minimal impact on the creditors making repayment claims and will facilitate such repayment claims.
Any comments on this technical paper should be sent to:
Lesley Hamilton,
tel 020 7147 2564
no later than the 12 March 2008.
A printed copy of this technical note is available on request.
