736CDeemed interest: cash collateral under stock lending arrangements

1

This section applies where—

a

the borrower under a stock lending arrangement is treated under section 736B(2) as paying under that arrangement an amount representative of interest on any securities (“the relevant securities”),

b

an amount of money (“cash collateral”) is payable to or for the benefit of the lender for the purpose of securing the discharge of the requirement to transfer the relevant securities back to the lender,

c

the stock lending arrangement is designed to produce a return to the borrower which equates, in substance, to the return on an investment of money at interest, and

d

the main purpose, or one of the main purposes, of the stock lending arrangement is the obtaining of a tax advantage.

2

Where this section applies—

a

the Tax Acts are to apply as if the borrower receives an amount of interest payable in respect of the cash collateral, and

b

the amount of the interest is calculated in accordance with the following provisions of this section (see, in particular, subsections (3) to (7)).

3

The interest is treated for the purposes of the Tax Acts as if it were received on the date (“the return date”) on which the borrower transfers the relevant securities back to the lender.

4

The interest is treated for the purposes of the Tax Acts as if it were payable in respect of the period (“the interest period”)—

a

beginning with the date on which the lender transfers the relevant securities to the borrower, and

b

ending with the return date.

5

The rate of interest payable in respect of the cash collateral is a rate that is reasonably comparable to the rate that the borrower could obtain by placing the cash collateral on deposit for the interest period.

6

For the purposes of this section, the amount of the cash collateral on which the interest is payable is taken to be—

a

in any case where the amount of the cash collateral varies at any time on or before the return date, the highest amount of the cash collateral at any time on or before the return date, and

b

in any other case, the amount of the cash collateral as at the return date.

7

The amount of the interest which the borrower is treated as receiving in respect of the cash collateral for the interest period is reduced (but not below nil) by any interest which the borrower actually receives in respect of that collateral for that period.

8

If the borrower is a person within the charge to income tax, the interest which the borrower is treated as receiving is charged to income tax under Chapter 2 of Part 4 of ITTOIA 2005 (interest).

9

If the borrower is a company within the charge to corporation tax—

a

the interest which the borrower is treated as receiving is treated for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) as payable to it on a money debt,

b

that money debt is treated for those purposes as a relationship to which section 100 of the Finance Act 1996 applies (money debts etc not arising from the lending of money), and

c

the credits to be brought into account for those purposes in respect of the interest must be determined using an amortised cost basis of accounting.

10

The fact that the borrower is treated as receiving an amount of interest is not to be taken as implying that the interest is payable by the lender or any other person.

11

For the purposes of this section—

• “money” includes money expressed in a currency other than sterling,

• “stock lending arrangement” and “securities” have the same meanings as in section 263B of the 1992 Act,

• “tax advantage” has the meaning given by section 709(1).

12

For the purposes of this section—

a

any reference to the transfer of securities back has the same meaning as in section 263B of the 1992 Act (see, in particular, sections 263B(5) and 263C(1) of that Act), but

b

if it becomes apparent that the borrower will not comply with the requirement to transfer any securities back, the borrower is treated as if he transfers them back on the date on which it becomes so apparent.

13

For the purposes of this section it does not matter—

a

whether the cash collateral is payable by the borrower or by any other person,

b

whether the cash collateral is payable under the stock lending arrangement or under any other arrangement,

c

whether collateral in another form is also provided in connection with the stock lending arrangement.

4

See section 736D for provision treating certain arrangements as stock lending arrangements for the purposes of this section.

14

See section 736D—

a

for provision treating certain arrangements as stock lending arrangements for the purposes of this section, and

b

for provision treating certain amounts as cash collateral for those purposes.

736DQuasi-stock lending arrangements and quasi-cash collateral

1

In this section “quasi-stock lending arrangement” means so much of any arrangements between two or more persons as are not stock lending arrangements, but are arrangements under which—

a

a person (“the lender”) transfers securities to another person (“the borrower”), and

b

a requirement is imposed on a person to transfer any or all of the securities, or any other property, back to the lender or any other person,

and it does not matter whether the person on whom that requirement is imposed is the borrower or any other person.

2

In this section “quasi-cash collateral”, in relation to any stock lending arrangement or quasi-stock lending arrangement, means—

a

any money which is payable for a relevant purpose, plus

b

any other property which is transferable for a relevant purpose.

3

Money or other property is payable or transferable for a relevant purpose if it is payable or transferable to or for the benefit of—

a

the lender under the stock lending arrangement or quasi-stock lending arrangement, or

b

a person connected with that lender,

for the purpose of securing the discharge of the requirement to transfer any or all of the securities, or any other property, back to that lender or any other person.

4

For the purposes of sections 736B and 736C, a quasi-stock lending arrangement is treated as if it were a stock lending arrangement.

5

For the purposes of section 736C, in relation to any stock lending arrangement or quasi-stock lending arrangement,—

a

quasi-cash collateral is treated as if it were cash collateral, and

b

the amount of the quasi-cash collateral in relation to the stock lending arrangement or quasi-stock lending arrangement is taken to be the amount of the cash collateral.

6

If any property other than money is transferable for a relevant purpose, the amount of the quasi-cash collateral so far as relating to that property is determined by reference to its market value.

7

In any case where—

a

section 736C applies in relation to a quasi-stock lending arrangement, and

b

the person for whom the tax advantage was designed to be obtained is a person (“the other person”) other than the borrower under that arrangement,

that section has effect as if the other person were the person who receives the amount of interest mentioned in that section.

8

In any case where section 736C applies in relation to a quasi-stock lending arrangement—

a

any reference in that section to cash collateral being payable to or for the benefit of the lender includes its being payable to or for the benefit of a person connected with the lender,

b

the reference in subsection (1)(c) of that section to a return to the borrower includes a return to any other person, and

c

any reference in that section to the transfer back of the relevant securities by the borrower to the lender includes the transfer back of any or all of the securities, or any other property, by any person to the lender or any other person.

9

Section 839 (connected persons) applies for the purposes of this section.

10

In this section—

• “money” includes money expressed in a currency other than sterling,

• “property” means property in any form,

• “stock lending arrangement” and “securities” have the same meaning as in section 263B of the 1992 Act,

• “transfer” means a transfer otherwise than by way of sale.

Factoring of income receipts etc

774AMeaning of “structured finance arrangement” for purposes of s.774B

1

For the purposes of section 774B an arrangement is a structured finance arrangement in relation to a person (“the borrower”) if the following condition is met in relation to the borrower.

2

The condition is that—

a

under the arrangement the borrower receives from another person (“the lender”) any money or other asset (“the advance”) in any period,

b

in accordance with generally accepted accounting practice the accounts of the borrower for that period record a financial liability in respect of the advance,

c

the borrower, or a person connected with the borrower, makes a disposal of an asset (“the security”) under the arrangement to or for the benefit of the lender or a person connected with the lender,

d

the lender, or a person connected with the lender, is entitled under the arrangement to payments in respect of the security, and

e

in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower.

3

For the purposes of this section, in any case where the borrower is a partnership, references to the accounts of the borrower include the accounts of any member of the partnership.

4

For the purposes of this section and section 774B—

a

references to a person connected with the borrower do not include the lender, and

b

references to a person connected with the lender do not include the borrower.

774BDisregard of intended effects of arrangement involving disposals of assets

1

If—

a

an arrangement is a structured finance arrangement in relation to a person (“the borrower”), and

b

the arrangement would (disregarding this section) have had the relevant effect (see subsections (2) and (3)),

the arrangement is not to have that effect.

2

If the borrower is a person other than a partnership, the relevant effect is that—

a

an amount of income on which the borrower, or a person connected with the borrower, would otherwise have been charged to tax is not so charged,

b

an amount which would otherwise have been brought into account in calculating for tax purposes any income of the borrower, or of a person connected with the borrower, is not so brought into account, or

c

the borrower, or a person connected with the borrower, becomes entitled to an income deduction.

3

If the borrower is a partnership, the relevant effect is that—

a

an amount of income on which a member of the partnership would otherwise have been charged to tax is not so charged,

b

an amount which would otherwise have been brought into account in calculating for tax purposes any income of a member of the partnership is not so brought into account, or

c

a member of the partnership becomes entitled to an income deduction.

4

If—

a

a person in relation to whom the structured finance arrangement would otherwise have had the relevant effect is a person within the charge to income tax, and

b

in accordance with generally accepted accounting practice the accounts of the person record an amount as a finance charge in respect of the advance,

that person may treat the amount for income tax purposes as interest payable on a loan.

5

If a person in relation to whom the structured finance arrangement would otherwise have had the relevant effect is a company within the charge to corporation tax—

a

the advance is to be treated, in relation to the company, for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 as a money debt owed by the company,

b

the arrangement is to be treated, in relation to the company, for the purposes of that Chapter as a loan relationship of the company (as a debtor relationship), and

c

any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the company as a finance charge in respect of the advance is to be treated as interest payable under that relationship.

6

For the purposes of this section, in any case where the borrower is a partnership,—

a

references to accounts include the accounts of the partnership, and

b

any deemed interest is treated as payable by the partnership (whether or not the finance charge is recorded in the accounts of the partnership).

7

For the purpose of determining when any deemed interest in respect of the advance is paid—

a

the payments mentioned in section 774A(2)(d) are treated as consisting of amounts for repaying the advance and amounts (“the interest elements”) in respect of interest on the advance, and

b

the interest elements of those payments are treated as paid when those payments are paid,

and the deemed interest in respect of the advance is treated as paid at the times when the interest elements are treated as paid.

8

In this section “deemed interest” means any amount which is treated as interest as a result of subsection (4) or (5).

9

This section is subject to the exceptions contained in section 774E.

774CMeaning of “structured finance arrangement” for purposes of s.774D

1

For the purposes of section 774D an arrangement is a structured finance arrangement in relation to a partnership (“the borrower partnership”) if condition A or B is met in relation to the borrower partnership.

2

Condition A is that—

a

a person (“the transferor partner”) disposes of an asset (“the security”) under the arrangement to the borrower partnership,

b

the transferor partner is a member of the borrower partnership immediately after the disposal (whether or not a member immediately before the disposal),

c

under the arrangement the borrower partnership receives from another person (“the lender”) any money or other asset (“the advance”) in any period,

d

in accordance with generally accepted accounting practice the accounts of the borrower partnership for that period record a financial liability in respect of the advance,

e

there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender (see subsection (6)),

f

under the arrangement the share of the lender or person connected with the lender in the profits of the borrower partnership is determined by reference (wholly or partly) to payments in respect of the security, and

g

in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower partnership.

3

For the purposes of condition A, references to the accounts of the borrower partnership include the accounts of the transferor partner.

4

Condition B is that—

a

the borrower partnership holds an asset (“the security”) as a partnership asset at any time before the arrangement is made,

b

under the arrangement the borrower partnership receives from another person (“the lender”) any money or other asset (“the advance”) in any period,

c

in accordance with generally accepted accounting practice the accounts of the borrower partnership for that period record a financial liability in respect of the advance,

d

there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender,

e

under the arrangement the share of the lender or person connected with the lender in the profits of the borrower partnership is determined by reference (wholly or partly) to payments in respect of the security, and

f

in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower partnership.

5

For the purposes of condition B, references to the accounts of the borrower partnership include the accounts of any person who is a member of the partnership immediately before the arrangement is made.

6

For the purposes of this section and section 774D there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender if directly or indirectly in consequence of, or otherwise in connection with, the arrangement—

a

the lender, or a person connected with the lender, becomes a member of the borrower partnership at any time, or

b

there is at any time a change in the share of a member of the borrower partnership in the profits of the borrower partnership in a case where that member is the lender or a person connected with the lender.

7

For the purposes of subsection (6)(b) the reference to a person connected with the lender includes a person who at any time becomes connected with the lender directly or indirectly in consequence of, or otherwise in connection with, the arrangement.

774DDisregard of intended effects of arrangement involving change in relation to a partnership

1

This section applies if—

a

an arrangement is a structured finance arrangement in relation to a partnership (“the borrower partnership”), and

b

any relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender would (disregarding this section) have had the following effect.

2

The effect is that—

a

an amount of income on which a relevant member of the borrower partnership would otherwise have been charged to tax is not so charged,

b

an amount which would otherwise have been brought into account in calculating for tax purposes any income of a relevant member of the borrower partnership is not so brought into account, or

c

a relevant member of the borrower partnership becomes entitled to an income deduction.

3

In this section “relevant member of the borrower partnership” means—

a

in any case where condition A in section 774C is met in relation to the arrangement, the transferor partner, and

b

in any case where condition B in that section is met in relation to the arrangement, any person other than the lender who is a member of the borrower partnership immediately before the time at which the relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender occurs.

4

Part 9 of ITTOIA 2005 and section 114 above are to have effect in relation to any relevant member of the borrower partnership as if the relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender had not occurred.

Accordingly, the structured finance arrangement is not to have the effect mentioned in subsection (2).

5

The following provisions of this section confer relief from tax the availability of which depends on which of the conditions in section 774C is met in relation to the arrangement.

6

In any case where condition A in section 774C is met, if—

a

the transferor partner is a person within the charge to income tax, and

b

in accordance with generally accepted accounting practice the accounts of the borrower partnership record an amount as a finance charge in respect of the advance,

the transferor partner may treat the amount for income tax purposes as interest payable by the transferor partner on a loan.

7

In any case where condition A in that section is met, if the transferor partner is a company within the charge to corporation tax—

a

the advance is to be treated, in relation to the company, for the purposes of paragraph 19 of Schedule 9 to the Finance Act 1996 (and the other provisions of Chapter 2 of Part 4 of that Act) as a money debt owed by the borrower partnership,

b

the arrangement is to be treated, in relation to the company, as a transaction for the lending of money from which that debt is treated as arising for those purposes, and

c

any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the borrower partnership as a finance charge in respect of the advance is to be treated as interest payable by the company under that transaction.

8

For the purposes of subsections (6) and (7), references to the accounts of the borrower partnership include the accounts of the transferor partner.

9

In any case where condition B in section 774C is met, if—

a

a relevant member of the borrower partnership is a person within the charge to income tax, and

b

in accordance with generally accepted accounting practice the accounts of the borrower partnership record an amount as a finance charge in respect of the advance,

the relevant partner may treat the amount for income tax purposes as interest payable by the borrower partnership on a loan.

10

In any case where condition B in that section is met, if a relevant member of the borrower partnership is a company within the charge to corporation tax—

a

the advance is to be treated, in relation to the company, for the purposes of paragraph 19 of Schedule 9 to the Finance Act 1996 (and the other provisions of Chapter 2 of Part 4 of that Act) as a money debt owed by that partnership,

b

the arrangement is to be treated, in relation to the company, as a transaction for the lending of money from which that debt is treated as arising for those purposes, and

c

any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the borrower partnership as a finance charge in respect of the advance is to be treated as interest payable by the borrower partnership under that transaction.

11

For the purposes of subsections (9) and (10), references to the accounts of the borrower partnership include the accounts of any relevant member of the borrower partnership.

12

For the purpose of determining when any deemed interest in respect of the advance is paid—

a

the payments mentioned in section 774C(2)(f) or (4)(e) are treated as consisting of amounts for repaying the advance and amounts (“the interest elements”) in respect of interest on the advance, and

b

the interest elements of those payments are treated as paid when those payments are paid,

and the deemed interest in respect of the advance is treated as paid at the times when the interest elements are treated as paid.

13

In this section “deemed interest” means any amount which is treated as interest as a result of any of subsections (6) to (10).

14

This section is subject to the exceptions contained in section 774E.

774ESections 774B and 774D: exceptions

1

Section 774B or 774D does not apply if the whole of the advance under the structured finance arrangement—

a

is charged to tax on a relevant person (see subsection (7)) as an amount of income,

b

is brought into account in calculating for tax purposes any income of a relevant person, or

c

is brought into account for the purposes of any provision of the Capital Allowances Act as a disposal receipt, or proceeds from a balancing event or disposal event, of a relevant person.

For the purposes of this subsection the effect of section 785A (rent factoring of leases of plant or machinery) is to be disregarded.

2

Subsection (1)(c) is not to be taken as met in any case where—

a

the receipt or proceeds gives rise to a balancing charge, and

b

the amount of the balancing charge is limited by any provision of the Capital Allowances Act.

3

Section 774B or 774D does not apply if, at all times, the whole of the advance under the structured finance arrangement—

a

is a debtor relationship of a relevant person for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships), or

b

would be a debtor relationship of a relevant person for those purposes if that person were a company within the charge to corporation tax.

For the purposes of this subsection references to a debtor relationship do not include a relationship to which section 100 of the Finance Act 1996 (money debts etc not arising from the lending of money) applies.

4

Section 774B or 774D does not apply in so far as the structured finance arrangement is an arrangement in relation to which—

a

section 263A of the 1992 Act (agreements for sale and repurchase of securities) applies,

b

paragraph 15 of Schedule 9 to the Finance Act 1996 (repo transactions and stock-lending) applies, or

c

Chapter 5 of Part 2 of the Finance Act 2005 (alternative finance arrangements) has effect.

5

Section 774B or 774D does not apply in so far as—

a

the security under the structured finance arrangement is plant or machinery which is the subject of a sale and finance leaseback, or

b

the structured finance arrangement is an arrangement in relation to which sections 228B to 228D of the Capital Allowances Act apply with the modifications contained in section 228F of that Act (lease and finance leaseback).

6

For the purposes of subsection (5)(a), whether plant or machinery is the subject of a sale and finance leaseback is determined in accordance with section 221 of the Capital Allowances Act.

But, in applying that section, it is to be assumed that the words “and which are not a long funding lease in the case of the lessor” were omitted from section 219(1)(b) of that Act (meaning of “finance lease”).

7

For the purposes of this section a “relevant person” means—

a

if section 774B applies, a person in relation to whom the structured finance arrangement would (but for that section) otherwise have had the relevant effect (within the meaning of that section), and

b

if section 774D applies, a relevant member of the borrower partnership (within the meaning of that section).

774FSections 774B and 774D: power to provide further exceptions

1

The Treasury may make regulations prescribing other circumstances in which section 774B or 774D is not to apply in relation to a structured finance arrangement.

2

Any regulations under subsection (1) may make provision amending section 774E.

3

The power to make regulations under subsection (1) includes—

a

power to make provision having effect in relation to times before the making of the regulations (but not times earlier than 6th June 2006),

b

power to make different provision for different cases or different purposes, and

c

power to make incidental, supplemental, consequential or transitional provision and savings.

774GSections 774A to 774D: minor definitions etc

1

For the purposes of sections 774A to 774D “arrangement” includes any agreement or understanding (whether or not legally enforceable).

2

For the purposes of sections 774A to 774D “income deduction” means—

a

a deduction in calculating any income for tax purposes, or

b

a deduction against total income or total profits.

3

For the purposes of sections 774A to 774D—

a

references to a person's receiving any asset include the person's obtaining directly or indirectly the value of any asset or otherwise deriving directly or indirectly any benefit from it,

b

references to a disposal of an asset include anything which constitutes a disposal of the asset for the purposes of the 1992 Act,

c

references to payments in respect of any asset include obtaining directly or indirectly the value of any asset or otherwise deriving directly or indirectly any benefit from it.

4

For the purposes of sections 774A to 774D, section 839 (connected persons) applies.

5

For the purposes of sections 774A to 774D references to the accounts of any person who is a company include the consolidated group accounts of a group of companies of which it is a member.

6

If any person does not draw up accounts in accordance with generally accepted accounting practice, sections 774A to 774D apply as if the accounts had been drawn up by the person in accordance with that practice.

7

Sections 277 to 281 of ITTOIA 2005 and section 34 above (lease premiums) are not to apply in relation to a premium paid in respect of a grant of a lease where the grant constitutes a disposal of an asset for the purposes of section 774A(2)(c) or 774C(2)(a).

5A

This section does not apply in so far as section 774B or 774D (structured finance arrangements) applies in relation to the arrangements mentioned in paragraph (c) of subsection (1) above as a result of the transfer mentioned in that paragraph.

5ZA

But subsection (5) above does not apply if the person mentioned in that subsection is, as a result of section 774B or 774D (structured finance arrangements), chargeable to tax on the amount of income assigned, surrendered, waived or forgone.

263EStructured finance arrangements

1

This section applies if—

a

section 774B of the Taxes Act (disregard of intended effects of arrangement involving disposals of assets) applies in relation to a structured finance arrangement,

b

the borrower or a person connected with the borrower makes a disposal of any security at any time under the arrangement to or for the benefit of the lender or a person connected with the lender, and

c

condition A or B is met.

2

Condition A is that the person making the disposal subsequently acquires under the arrangement the asset disposed of by that disposal.

3

Condition B is that—

a

the asset disposed of by that disposal subsequently ceases to exist at any time, and

b

that asset was held by the lender, or a person connected with the lender, from the time of the disposal until that time.

4

The disposal of the security by the borrower or a person connected with the borrower is to be disregarded for the purposes of this Act.

5

Any subsequent acquisition by the person making the disposal of the asset disposed of by that disposal is to be disregarded for the purposes of this Act.

6

In this section—

• “the borrower”, in relation to a structured finance arrangement, means the person who is the borrower under the arrangement for the purposes of section 774A of the Taxes Act,

• “the lender”, in relation to a structured finance arrangement, means the person who is the lender under the arrangement for the purposes of that section,

• “security” means any such asset as is mentioned in subsection (2)(c) and (d) of that section.

7

For the purposes of this section—

a

references to a person connected with the borrower do not include the lender, and

b

references to a person connected with the lender do not include the borrower.