Finance Act 1974

26 In Schedule 16 to the Finance Act 1972, in paragraph 1(2) for the words " paragraphs 2 and 3 " there shall be substituted the words " paragraphs 2 to 3A ", in paragraph 5(7) after the words " paragraph 3 " there shall be inserted the words " or 3A " and after paragraph 3 there shall be inserted the following paragraph:—

“3A (1) Subject to the following provisions of this paragraph, there may be apportioned under paragraph 1 above as if it were income of a close company for an accounting period any interest paid by the company in that period.

(2) Sub-paragraph (1) above does not apply to a company—

(a) if it is a trading company, or

(b) if it is a member of a trading group, or

(c) if more than 75 per cent, of its income is of one or more of the following descriptions, that is—

(i) estate or trading income,

(ii) interest, and dividends or other distributions, received from a 51 per cent, subsidiary of it (both companies being bodies corporate) if the subsidiary is itself within any of paragraphs (a), (b) and (c) of this sub-paragraph ;

and for the purposes of paragraph (c) above no account shall be taken of any deduction from the company's profits for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description.

(3) Sub-paragraph (1) above shall not apply—

(a) to interest which would be eligible for relief under section 75 of this Act if paid by an individual; or

(b) to interest which is money wholly and exclusively laid out or expended for the purposes of a trade carried on by the company.

(4) If any amount of interest apportionable by virtue of this paragraph is interest paid to a participator in the close company or is (apart from this paragraph) treated for the purposes of income tax as the income of such a participator, the amount so apportionable to that participator shall be reduced by the first-mentioned amount (and without requiring the reduction to be reflected in the amount apportioned to any other person).

(5) Any amount apportionable by virtue of this paragraph shall be in addition to the amount (if any) apportionable under paragraph 1 above without this paragraph, and nothing in sub-paragraph (2) of that paragraph shall apply to any apportionment made by virtue of this paragraph.

(6) In determining for the purposes of this Schedule the person to whom any amount is to be apportionable by virtue of this paragraph, any interest which any person possesses as a loan creditor shall be disregarded (but without prejudice to the making of an apportionment to him in any other capacity).

(7) In determining for the purposes of sub-paragraph (2)(c)(ii) above whether one body corporate is a 51 per cent, subsidiary of another, that other shall be treated as not being the owner—

(a) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom, or

(b) of any share capital which it owns indirectly and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt.”