Finance Act 2004

36 Balancing payments and elections to pay tax instead

(1) Schedule 28AA to the Taxes Act 1988 is amended as follows.

(2) After paragraph 7A (which is inserted by section 30) insert—

“Securities: election to discharge tax liability instead of making balancing payments

7B (1) This paragraph applies in any case where—

(a) both of the affected persons are companies,

(b) the circumstances are as described in paragraph 6(1) above, and

(c) the actual provision is provision in relation to a security (the “relevant security”).

(2) The disadvantaged person may make an election under this paragraph in respect of the relevant security if the condition in sub-paragraph (3) below is satisfied.

(3) The condition is that—

(a) the actual provision forms part of a capital market arrangement,

(b) the capital market arrangement involves the issue of a capital market investment,

(c) the securities that represent the capital market investment are issued wholly or mainly to independent persons (see sub-paragraph (9) below), and

(d) the total value of the capital market investments made under the capital market arrangement is at least £50 million.

(4) An election under this paragraph in respect of the relevant security is an election for the disadvantaged person—

(a) to make no balancing payment within paragraph 7A above to the advantaged person in respect of the application of paragraph 1(2) above in relation to the relevant security in a chargeable period by virtue of paragraph 1A above, but

(b) instead, to undertake sole responsibility for discharging the advantaged person’s liability to tax for that period so far as resulting from the application of paragraph 1(2) above in relation to the relevant security by virtue of paragraph 1A above.

(5) Where an election under this paragraph has effect in relation to an accounting period of the advantaged person, the tax mentioned in sub-paragraph (4)(b) above—

(a) shall be recoverable from the disadvantaged person as if it were an amount of corporation tax due and owing from that person, and

(b) shall not be recoverable from the advantaged person.

(6) Any election under this paragraph in respect of the relevant security—

(a) must be made by being included (whether by amendment or otherwise) in the disadvantaged person’s company tax return for the chargeable period in which the relevant security is issued,

(b) has effect in relation to each of the affected persons for the chargeable period in which the relevant security is issued and all subsequent chargeable periods, and

(c) is irrevocable.

For the purposes of this sub-paragraph a security issued in a chargeable period beginning before 1st April 2004 shall be treated as if it had been issued in the chargeable period beginning on that date.

(7) An election under this paragraph by a person is of no effect if the Board give that person a notice under this sub-paragraph refusing to accept the election.

(8) A notice under sub-paragraph (7) above may be given only after a notice of enquiry in respect of the company tax return containing the election has been given to the disadvantaged person.

(9) In this paragraph—

• “capital market arrangement” has the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraph 1 of Schedule 2A to that Act);

• “capital market investment” has the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraphs 2 and 3 of Schedule 2A to that Act);

• “company tax return” means the return required to be delivered pursuant to a notice under paragraph 3 of Schedule 18 to the Finance Act 1998, as read with paragraph 4 of that Schedule;

• “independent person” means a person—

  (a)

  who is not the disadvantaged person, and

  (b)

  who does not have a participatory relationship with either of the affected persons.

(10) The following provisions of paragraph 1A above also apply for the purposes of this paragraph—

(a) sub-paragraph (8) (meaning of participatory relationship);

(b) sub-paragraph (9) (meaning of security);

(c) sub-paragraph (10) (extended meaning of security).”.

(3) After paragraph 7B insert—

“Balancing payments by guarantor to issuer: no charge to, or relief from, tax

7C (1) This paragraph applies in any case where—

(a) the circumstances are as described in paragraph 6D(1) above,

(b) one or more payments (the “balancing payments”) are made by the guarantor company to the issuing company, and

(c) the sole or main reasons for making those payments are that paragraph 1(2) above applies by virtue of paragraph 1B above or that paragraph 6D above applies.

(2) To the extent that the balancing payments made by all the guarantor companies do not in the aggregate exceed the amount TR in paragraph 6D(3) above (total reductions within paragraph 6D(1)(c) above), those payments—

(a) shall not be taken into account in computing for the purposes of corporation tax the profits or losses of the guarantor company or companies or the issuing company, and

(b) shall not for any purpose of the Corporation Tax Acts be regarded as distributions or charges on income.”.

(4) After paragraph 7C insert—

“Guarantees: election to discharge tax liability instead of making balancing payments

7D (1) This paragraph applies where the following conditions are satisfied—

(a) both of the affected persons are companies,

(b) the circumstances are as described in paragraph 6(1) above,

(c) the actual provision falls within paragraph 1B(1) above.

(2) Sub-paragraphs (2) to (8) of paragraph 7B above apply in a case where this paragraph applies as they apply in a case where that paragraph applies, but with the modifications in sub-paragraphs (3) and (4) below.

(3) The relevant security is the security in paragraph 1B(1)(a) above.

(4) In sub-paragraph (4) (nature of the election)—

(a) for “paragraph 7A above” substitute “paragraph 7C below”;

(b) for “paragraph 1A”, in both places, substitute “paragraph 1B”.”.