Search Legislation

Finance Act 2006

Status:

Point in time view as at 19/07/2006.

Changes to legislation:

Finance Act 2006 is up to date with all changes known to be in force on or before 17 October 2019. There are changes that may be brought into force at a future date. Changes that have been made appear in the content and are referenced with annotations. Help about Changes to Legislation

Close

Changes to Legislation

Changes and effects yet to be applied by the editorial team are only applicable when viewing the latest version or prospective version of legislation. They are therefore not accessible when viewing legislation as at a specific point in time. To view the ‘Changes to Legislation’ information for this provision return to the latest version view using the options provided in the ‘What Version’ box above.

SCHEDULES

Section 27

SCHEDULE 1U.K.Group relief where surrendering company not resident in UK

Part 1 U.K.Amendments of Chapter 4 of Part 10 of ICTA

Availability of reliefU.K.

1(1)Section 402 of ICTA (surrender of relief between members of groups and consortia) is amended as follows.U.K.

(2)In subsection (1) (availability of relief) for the words from the beginning to “set out” substitute—

(1)Subject to and in accordance with this Chapter and section 492(8)—

(a)relief for trading losses and other amounts eligible for relief from corporation tax, or

(b)losses and other amounts not eligible for relief from corporation tax,

may, in the cases set out.

(3)For subsection (2) (group claims) substitute—

(2)In respect of amounts falling within subsection (1)(a) above, group relief shall be available in a case where—

(a)the surrendering company and the claimant company are both members of the same group,

(b)the surrendering company is resident in the United Kingdom or is not so resident but carries on a trade there through a permanent establishment, and

(c)the claimant company is resident in the United Kingdom or is not so resident but carries on a trade there through a permanent establishment,

and, in respect of amounts falling within subsection (1)(b) above, group relief shall be available in a case where the condition in subsection (2A) below is satisfied.

A claim made by virtue of this subsection is referred to as a “group claim”.

(2A)The condition in this subsection is satisfied if the surrendering company is within the charge to tax under the law of any EEA territory and—

(a)the surrendering company is a 75 per cent. subsidiary of the claimant company and the claimant company is resident in the United Kingdom, or

(b)both the surrendering company and the claimant company are 75 per cent. subsidiaries of a third company that is resident in the United Kingdom.

(2B)For the purposes of subsection (2A) above, the surrendering company is within the charge to tax under the law of any EEA territory if—

(a)it is a non-resident company which is resident in any EEA territory, or

(b)it is a non-resident company which is not resident in any EEA territory but which carries on a trade in any EEA territory through a permanent establishment..

(4)In subsection (3A) (group relief not available unless both companies satisfy following condition) for “Group relief is not available” substitute “ A consortium claim shall not be made ”.

Limits on group reliefU.K.

2(1)Section 403A of ICTA (limits on group relief) is amended as follows.U.K.

(2)In subsection (10) (qualifying conditions for the purposes of subsection (9)), for paragraph (a) (group claims) substitute—

(a)if (or so far as) the claim is a group claim for the surrender of any loss or other amount other than a qualifying overseas loss, whenever the conditions in paragraphs (a) to (c) of section 402(2) are satisfied;

(ab)if (or so far as) the claim is a group claim for the surrender of a qualifying overseas loss, whenever the condition specified in section 402(2A) is satisfied; and.

(3)After that subsection insert—

(11)For the purposes of subsection (10) above a “qualifying overseas loss” means a loss or other amount that is available for surrender by way of group relief in accordance with sections 403F and 403G and Schedule 18A (relief in respect of overseas losses of non-resident companies)..

Relief for or in respect of non-resident companies within the charge to corporation taxU.K.

3(1)Section 403D of ICTA (relief for or in respect of non-resident companies) is amended as follows.U.K.

(2)In subsection (1) (provision for determining amounts available for surrender by a non-resident company), in the opening words,—

(a)after “non-resident company” insert “ carrying on a trade in the United Kingdom through a permanent establishment ”, and

(b)after “as so available” insert “ (but see also subsection (11) below) ”.

(3)At the end insert—

(11)Any loss or other amount that is available for surrender by way of group relief in accordance with this section is in addition to any loss or other amount that is so available in accordance with sections 403F and 403G and Schedule 18A (relief in respect of overseas losses of non-resident companies)..

(4)In consequence of the amendments made by this paragraph, the title to the section becomes “ Relief for or in respect of UK losses of non-resident companies ”.

Relief in respect of overseas losses of non-resident companiesU.K.

4(1)After section 403E of ICTA (relief for overseas losses of UK resident companies) insert—U.K.

403FRelief in respect of overseas losses of non-resident companies

(1)This section has effect for determining for the purposes of this Chapter the extent to which a loss or other amount is available for surrender by way of group relief by a non-resident company—

(a)which is resident in an EEA territory, or

(b)which is not so resident but which carries on a trade in an EEA territory through a permanent establishment,

in a case where a group claim may be made as a result of the condition in section 402(2A) being satisfied.

(2)A loss or other amount is not available for surrender by way of group relief by the non-resident company except in so far as, in relation to the EEA territory, the amount meets—

(a)the equivalence condition,

(b)the EEA tax loss condition,

(c)the qualifying loss condition, and

(d)the precedence condition.

(3)Part 1 of Schedule 18A determines, in the case of any amount and any EEA territory, the extent to which those conditions are met.

(4)In so far as a loss or other amount meets those conditions, Part 2 of Schedule 18A applies—

(a)for calculating the amount of the loss or other amount (if any) that is available for surrender by way of group relief, and

(b)otherwise for making provision in relation to the application of this Chapter to the non-resident company.

(5)This section is subject to section 403G (unallowable overseas losses of non-resident companies)..

(2)After section 403F of ICTA (as inserted by sub-paragraph (1)) insert—

403GUnallowable overseas losses of non-resident companies

(1)This section applies in the case of a loss or other amount arising to a non-resident company—

(a)which is resident in any EEA territory, or

(b)which is not so resident but which carries on a trade in an EEA territory through a permanent establishment,

where the amount is not attributable for corporation tax purposes to any UK permanent establishment of the non-resident company.

(2)The amount is not available for surrender by way of group relief by the non-resident company in so far as conditions A and B are met.

(3)Condition A is that—

(a)the amount would not qualify for group relief but for any relevant arrangements, or

(b)the amount would not have arisen to the non-resident company but for any relevant arrangements.

(4)Condition B is that the main purpose, or one of the main purposes, of the relevant arrangements was to secure that the amount would qualify for group relief.

(5)In this section references to relevant arrangements, in relation to any amount, are to—

(a)arrangements made on or after 20th February 2006, or

(b)arrangements made before that date where the amount would (but for this section) first qualify for group relief on or after that date or (as the case may be) the amount arises on or after that date.

(6)In this section—

  • arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable),

  • UK permanent establishment”, in relation to the non-resident company, means any permanent establishment through which it carries on a trade in the United Kingdom..

Interpretation of Chapter 4 of Part 10 of ICTAU.K.

5(1)Section 413 of ICTA (interpretation) is amended as follows.U.K.

(2)In subsection (1) (general definitions), after the definition of “consortium claim”, insert—

EEA territory”, in relation to any time, means a territory outside the United Kingdom which is within the European Economic Area at that time;.

Group relief: equity holders and profits or assets available for distributionU.K.

6(1)Schedule 18 to ICTA (group relief: equity holders and profits or assets available for distribution) is amended as follows.U.K.

(2)In paragraph 5F (special rules in the case of non-resident companies), in sub-paragraph (1)(b) (application of paragraph for relevant purposes) for “by the consortium” substitute “ by the consortium; but this paragraph does not have effect in relation to any determination in the case of amounts falling within section 402(1)(b). ”.

(3)In paragraph 7 (supplemental matters), in sub-paragraph (1) (definition of “the relevant accounting period”), in the opening words, after “means” insert “ (subject to sub-paragraphs (1A) to (1C) below) ”.

(4)After that sub-paragraph insert—

(1A)In this Schedule “the relevant accounting period” means, in the case of a non-resident company which is not within the charge to corporation tax, the accounting period which the company would have on the following assumption.

(1B)The assumption is that the company became resident in the United Kingdom (and, accordingly, within the charge to corporation tax) at the time when it became a 75 per cent. subsidiary as mentioned in section 402(2A).

(1C)For the purposes of sub-paragraph (1B) above the reference to the company's being a 75 per cent. subsidiary is to its being such a subsidiary disregarding section 413(7)..

Meaning of conditions in section 403F etcU.K.

7After Schedule 18 to ICTA (group relief: equity holders and profits or assets available for distribution) insert—

Section 403F

SCHEDULE 18AU.K.Group relief: overseas losses of non-resident companies
Part 1 U.K.Meaning of conditions for the purposes of section 403F
IntroductionU.K.

1This Part of this Schedule applies, in the case of any non-resident company, for the purposes of section 403F (relief in respect of overseas losses of non-resident companies).

The equivalence conditionU.K.

2An amount meets the equivalence condition if it corresponds (in all material respects) to an amount of a kind that, for the purposes of section 403, could be available for surrender by way of group relief by a company resident in the United Kingdom.

The EEA tax loss condition: companies resident in EEA territoryU.K.

3(1)In the case of a non-resident company which is resident in an EEA territory (“the relevant territory”), an amount meets the EEA tax loss condition in relation to the relevant territory in so far as conditions A and B are met.

(2)Condition A is that the amount is calculated in accordance with the applicable rules under the law of the relevant territory for determining, in the case of the company, the amount of any loss or other amount eligible for relief from any tax under the relevant territory.

(3)Condition B is that, for the purposes of corporation tax, the amount is not attributable to a UK permanent establishment of the company.

(4)UK permanent establishment”, in relation to the company, means any permanent establishment through which it carries on a trade in the United Kingdom.

(5)For the meaning of tax under any territory outside the United Kingdom, see paragraph 17.

The EEA tax loss condition: companies not resident in EEA territoryU.K.

4(1)In the case of a non-resident company which is not resident in any EEA territory but which carries on a trade in an EEA territory (“the relevant territory”) through a permanent establishment, an amount meets the EEA tax loss condition for any period in relation to the relevant territory in so far as conditions A and B are met.

(2)Condition A is that the amount is calculated in accordance with the applicable rules under the law of the relevant territory for determining, in the case of the company, the amount of any loss or other amount eligible for relief from any tax under the relevant territory.

(3)Condition B is that the amount is not attributable to activities of the company which are made exempt from tax under the relevant territory for the period by any double taxation arrangements.

(4)For this purpose, activities of the company are made exempt from tax under the relevant territory for the period by any double taxation arrangements if those arrangements—

(a)have the following effect, or

(b)would have the following effect if a claim were made.

(5)The effect is that the income and gains (if any) arising for the period from those activities are ignored in calculating the company's profits, income or gains chargeable to tax under the relevant territory for the period.

(6)For the purposes of this paragraph, arrangements are double taxation arrangements if they are made with a view to affording relief from double taxation in relation to—

(a)any tax under the relevant territory and any other territory outside the United Kingdom, or

(b)any tax under the relevant territory and United Kingdom income or corporation tax.

The qualifying loss conditionU.K.

5(1)This paragraph applies in the case of a non-resident company—

(a)which is resident in any EEA territory, or

(b)which is not so resident but which carries on a trade in an EEA territory through a permanent establishment,

and for the purposes of this paragraph “the EEA territory concerned” means the EEA territory in which the company is resident or (as the case may be) in which it carries on a trade through a permanent establishment.

(2)An amount meets the qualifying loss condition in so far as the amount—

(a)cannot be given qualifying relief for any period (“the current period”) or any other period, and

(b)has not been given any other qualifying relief under the law of any territory outside the United Kingdom (other than the EEA territory concerned).

(3)Paragraph 6 determines whether the amount cannot be given qualifying relief for the current period or any previous period.

(4)Paragraph 7 determines whether the amount cannot be given qualifying relief for any period after the current period.

(5)Paragraph 8 determines whether the amount has not been given qualifying relief under the law of any territory outside the United Kingdom (other than the EEA territory concerned).

Qualifying relief for current period and previous periodsU.K.

6(1)For the purposes of paragraph 5, an amount cannot be given qualifying relief for the current period or any previous period if conditions A and B are met.

(2)Condition A is that, for the purposes of any tax under the EEA territory concerned or under any relevant territory, the amount cannot be taken into account in calculating any profits, income or gains which—

(a)arise to the company or any other person in the current period or any previous period, and

(b)are chargeable to that tax for the current period or any previous period.

(3)Condition B is that, for the purposes of any tax under the EEA territory concerned or under any relevant territory, the amount cannot be relieved in the current period or any previous period—

(a)by the payment of a credit,

(b)by the elimination or reduction of a tax liability, or

(c)by any other means of any kind.

(4)An amount is to be regarded for the purposes of this paragraph as meeting conditions A and B if (but only if) every step to secure that the amount is so taken into account or relieved is taken (whether by the company or any other person).

(5)In this paragraph “relevant territory” means—

(a)if the company is resident in any EEA territory and is also resident in any other territory outside the United Kingdom, that other territory,

(b)if the company is not resident in any EEA territory but carries on a trade in an EEA territory through a permanent establishment, the territory (or territories) in which it is resident.

Qualifying relief for future periodsU.K.

7(1)For the purposes of paragraph 5, an amount cannot be given qualifying relief for any period after the current period if conditions A and B are met.

(2)Condition A is that, for the purposes of any tax under the EEA territory concerned or under any relevant territory, the amount cannot be taken into account in calculating any profits, income or gains which—

(a)might arise to the company or any other person in any period after the current period, and

(b)(if there were any) would be chargeable to that tax for any period after the current period.

(3)Condition B is that, for the purposes of any tax under the EEA territory concerned or under any relevant territory, the amount cannot be relieved in any period after the current period—

(a)by the payment of a credit,

(b)by the elimination or reduction of a tax liability, or

(c)by any other means of any kind.

(4)In determining for the purposes of conditions A and B whether an amount can be so taken into account or relieved, the time at which the determination is to be made is the time immediately after the end of the current period.

(5)In this paragraph “relevant territory” means—

(a)if the company is resident in any EEA territory and is also resident in any other territory outside the United Kingdom, that other territory,

(b)if the company is not resident in any EEA territory but carries on a trade in an EEA territory through a permanent establishment, the territory (or territories) in which it is resident.

Amount not given other qualifying relief under law of territory outside UKU.K.

8(1)For the purposes of paragraph 5, an amount has not been given qualifying relief under the law of any territory outside the United Kingdom (other than the EEA territory concerned) if conditions A and B are met.

(2)Condition A is that, for the purposes of any tax under any territory outside the United Kingdom (other than the EEA territory concerned), the amount has not been taken into account in calculating any profits, income or gains which—

(a)have arisen to the company or any other person in any period, and

(b)were chargeable to that tax for the period (or, but for so taking the amount into account, would have been so chargeable).

(3)Condition B is that, for the purposes of any tax under any territory outside the United Kingdom (other than the EEA territory concerned), the amount has not been relieved in any period—

(a)by the payment of a credit,

(b)by the elimination or reduction of a tax liability, or

(c)by any other means of any kind.

Precedence conditionU.K.

9(1)This paragraph applies in the case of a non-resident company (“the relevant company”)—

(a)which is resident in any EEA territory, or

(b)which is not so resident but which carries on a trade in an EEA territory through a permanent establishment.

(2)An amount meets the precedence condition in relation to the EEA territory concerned in so far as relief for the amount cannot be given in any other territory outside the United Kingdom which is a qualifying territory in relation to the relevant company.

(3)For this purpose a territory is a qualifying territory in relation to the relevant company if—

(a)another company is resident in that territory (which need not be an EEA territory),

(b)that other company owns directly or indirectly any ordinary share capital in the relevant company,

(c)a third company which is resident in the United Kingdom owns directly or indirectly any ordinary share capital of that other company,

(d)the relevant company is a 75 per cent. subsidiary of that third company, and

(e)the relevant company is not a 75 per cent. subsidiary of that third company as a result of its being a 75 per cent. subsidiary of a fourth company which is resident in the United Kingdom.

(4)In this paragraph references, in relation to any amount and any territory, to relief being given for the amount in the territory are to relief being given—

(a)by taking the amount into account in calculating any profits, income or gains of any person chargeable to tax under the law of that territory,

(b)by the payment of a credit to any person under the law of that territory,

(c)by the elimination or reduction of a tax liability of any person under the law of that territory, or

(d)by any other means of any kind.

(5)The EEA territory concerned” means the EEA territory in which the relevant company is resident or (as the case may be) in which it carries on a trade through a permanent establishment.

Part 2 U.K.Application of UK rules to non-resident company
IntroductionU.K.

10(1)This Part of this Schedule applies in the case of any loss or other amount (“the EEA amount”) arising to a non-resident company (“the EEA company”) in any period (“the loss period”) in so far as the EEA amount meets the conditions mentioned in subsection (2)(a) to (d) of section 403F.

(2)In this Part of this Schedule “the EEA territory concerned” means the EEA territory in which the EEA company is resident or (as the case may be) in which it carries on a trade through a permanent establishment.

(3)In this Part of this Schedule any reference to the appropriate part of the EEA amount is to that amount in so far as it meets the conditions mentioned in subsection (2)(a) to (d) of section 403F.

Basic rulesU.K.

11(1)The EEA amount must, on the relevant assumptions (see sub-paragraph (5)), be recalculated in accordance with the applicable UK tax rules (see paragraph 16).

(2)The amount of the EEA amount that is available for surrender by the EEA company by way of group relief is so much of the appropriate part of it as does not exceed the relevant proportion (see sub-paragraph (5)) of the amount given by that recalculation.

(3)But if the amount given by that recalculation is an amount of income or other profits, no part of the EEA amount is available for surrender by way of group relief.

(4)So far as any part of the EEA amount is available for surrender by the EEA company by way of group relief, the provisions of this Chapter have effect in that case on the basis that the relevant assumptions are made.

(5)In this paragraph—

  • “the relevant assumptions” are the assumptions set out in paragraphs 12 to 15, and

  • the relevant proportion” means the proportion that the appropriate part of the EEA amount bears to the EEA amount.

Assumptions as to UK residenceU.K.

12(1)It is to be assumed that the EEA company is resident in the United Kingdom throughout the loss period.

(2)But this does not require it to be assumed—

(a)that there is any change in the place or places at which the EEA company carries on its activities (although see paragraph 13), or

(b)that the EEA company ceases to be resident in the United Kingdom at the end of the loss period.

(3)It is to be assumed that the EEA company becomes resident in the United Kingdom (and, accordingly, within the charge to corporation tax) at the beginning of the loss period.

Assumptions as to places in which activities carried outU.K.

13(1)In the case of any trade carried on by the EEA company in the loss period wholly or partly in the EEA territory concerned, it is to be assumed that the trade is carried on wholly or partly in the United Kingdom.

(2)In the case of any estate, interest or rights in or over land in the EEA territory concerned which are held by the EEA company, it is to be assumed that the land is in the United Kingdom.

(3)For this purpose, the reference to domestic concepts of law in relation to the land in the EEA territory concerned is to be read so as to produce the result that most closely corresponds with that produced for Schedule A purposes in relation to land in the United Kingdom.

Deemed accounting periodU.K.

14(1)It is to be assumed that an accounting period of the EEA company begins at the beginning of the loss period.

(2)It is to be assumed that the accounting period ends on the earlier of—

(a)the end of 12 months from the beginning of the loss period, or

(b)the end of the loss period.

(3)If an accounting period ends in accordance with sub-paragraph (2)(a), it is to be assumed that a further accounting period begins when the previous one ends.

(4)It is to be assumed that the further accounting period ends on the earlier of—

(a)the end of 12 months from the beginning of the further accounting period, or

(b)the end of the loss period.

Capital allowancesU.K.

15(1)This paragraph applies if, before the beginning of the loss period, the EEA company incurs any capital expenditure on the provision of plant or machinery for the purposes of any activity.

(2)It is to be assumed for the purposes of Part 2 of the Capital Allowances Act that the plant or machinery—

(a)was provided for purposes wholly other than those of the activity, and

(b)was not brought into use for the purposes of the activity until the beginning of the loss period,

and section 13 of the Capital Allowances Act (use for qualifying activity of plant or machinery provided for other purposes) is to apply accordingly.

(3)This paragraph is to be read as one with Part 2 of the Capital Allowances Act.

Applicable UK tax rulesU.K.

16(1)For the purposes of this Part of this Schedule references to recalculating the EEA amount in accordance with the applicable UK tax rules are to recalculating it in accordance with any provision made by or under the Corporation Tax Acts—

(a)which applies for the purpose of calculating for corporation tax purposes the amount of the loss or other amount to which the EEA amount corresponds, or

(b)which otherwise affects in any way the amount of that loss or other amount for which relief from corporation tax is available.

(2)For the purposes of sub-paragraph (1), the Treasury may by regulations provide for the modification of any provision made by or under the Corporation Tax Acts—

(a)which applies as mentioned in sub-paragraph (1)(a), or

(b)which otherwise affects an amount as mentioned in sub-paragraph (1)(b).

(3)Regulations under this paragraph may make provision in relation to—

(a)all classes of trade or business, or

(b)any particular class or classes of trade or business.

(4)Regulations under this paragraph may make—

(a)different provision for different cases or different purposes, and

(b)incidental, supplemental, consequential or transitional provision and savings.

(5)Regulations under this paragraph may make provision having effect before the date on which the regulations are made.

Part 3 U.K.Definitions for the purposes of this Schedule
Charge to tax under the law of any territory outside the United KingdomU.K.

17(1)This paragraph applies for the purposes of this Schedule.

(2)Any reference to a tax under a territory outside the United Kingdom is a reference to a tax chargeable under the law of that territory which—

(a)is charged on income and corresponds to United Kingdom income tax, or

(b)is charged on income or chargeable gains or both and corresponds to United Kingdom corporation tax.

(3)A tax chargeable under the law of a territory outside the United Kingdom is not to be regarded as failing to correspond to income or corporation tax just because—

(a)it is chargeable under the law of a province, state or other part of a country, or

(b)it is levied by or on behalf of a municipality or other local body..

Part 2 U.K.Amendments of other enactments

Claims for group reliefU.K.

8After paragraph 77 of Schedule 18 to FA 1998 (joint amended returns) insert—

Claims in respect of overseas losses of non-resident companiesU.K.

77A(1)This paragraph applies if a claim for group relief is made in respect of any loss or other amount as a result of the condition in section 402(2A) of the Taxes Act 1988 being satisfied (relief in respect of overseas losses of non-resident companies).

(2)In relation to the surrendering company, this Part of this Schedule applies as if—

(a)references to the relief being surrendered were to the EEA amount and to the relief being claimed, and

(b)references to its accounting period were to its deemed accounting period under Part 2 of Schedule 18A to the Taxes Act 1988.

(3)Notice of consent of the surrendering company—

(a)is to be given to the officer of the Board under paragraph 70(3)(b) by the claimant company (and not by the surrendering company), and

(b)is to be given to the officer to whom the claimant company makes its company tax returns.

(4)If the surrendering company is not within the charge to income or corporation tax, the requirement under paragraph 71(1)(e) for notice of consent by the surrendering company to contain details of its tax district reference is not to apply.

(5)If notice of consent is withdrawn under paragraph 71, the notice of the withdrawal is to be given to the officer of the Board by the claimant company (and not by the surrendering company).

(6)If notice of consent is withdrawn under paragraph 75—

(a)the notice of withdrawal, and any copy of any new notice of consent, is to be sent to an officer of Revenue and Customs by the claimant company (and not by the surrendering company), and

(b)any notice containing directions by an officer of Revenue and Customs under sub-paragraph (4) of that paragraph is to be given to the claimant company (and not to the surrendering company).

(7)The remaining provisions of that paragraph, and the rest of this Part of this Schedule, are, accordingly, to be read with the appropriate modifications (so that, in particular, it is the claimant company (and not the surrendering company) which can bring an appeal under paragraph 75(7)).

(8)A notice under paragraph 27 (notice to produce documents etc for purposes of an enquiry) given to the claimant company may require the claimant company—

(a)to explain why the EEA amount meets the conditions mentioned in subsection (2)(a) to (d) of section 403F of the Taxes Act 1988 and is not prevented from being surrendered by section 403G of that Act, and

(b)to provide details of the recalculation required under Part 2 of Schedule 18A to that Act in relation to the EEA amount.

(9)Except where expressly indicated, requirements imposed under this paragraph are in addition to those imposed apart from this paragraph.

(10)In this paragraph “the EEA amount” has the same meaning as in Part 2 of Schedule 18A to the Taxes Act 1988..

Part 3 U.K.Commencement

CommencementU.K.

9(1)The amendments made by this Schedule, other than those made by paragraphs 4(2) and 5, have effect—U.K.

(a)in relation to any accounting period of a claimant company beginning on or after 1st April 2006, and

(b)in relation to any period (“the loss period”) beginning on or after 1st April 2006 in which any loss or other amount arises to a non-resident company.

(2)If an accounting period (a “straddling period”) of a claimant company begins before 1st April 2006 and ends on or after that date—

(a)so much of the straddling period as falls before 1st April 2006, and

(b)so much of the straddling period as falls on or after that date,

are to be treated as separate accounting periods for the purposes of the amendments made by this Schedule other than those made by paragraphs 4(2) and 5.

(3)The amount of the claimant company's profits for the straddling period is to be attributed, on an apportionment in accordance with this paragraph, to those separate accounting periods.

(4)If the loss period of the non-resident company begins before 1st April 2006 and ends on or after that date—

(a)so much of the loss period as falls before 1st April 2006, and

(b)so much of the loss period as falls on or after that date,

are to be treated as separate periods for the purposes of the amendments made by this Schedule other than those made by paragraphs 4(2) and 5.

(5)The amount of the loss or other amount of the non-resident company for the loss period is to be attributed, on an apportionment in accordance with this paragraph, to those separate periods.

(6)Any apportionment under this paragraph is to be made on a just and reasonable basis.

Section 28

SCHEDULE 2U.K.Relief for research and development: subjects of clinical trials

Amendments to Schedule 20 to FA 2000U.K.

1(1)Schedule 20 to FA 2000 (tax relief for expenditure on research and development by small or medium-sized enterprises) is amended as follows.U.K.

(2)In paragraph 3 (qualifying R&D expenditure), in sub-paragraph (4), after paragraph (b) insert—

(ba)is incurred on relevant payments to the subjects of a clinical trial (see paragraph 6A),.

(3)After paragraph 6 (expenditure on software or consumable items), insert—

Relevant payments to subjects of clinical trialsU.K.

6A(1)For the purposes of this Schedule “relevant payment”, in relation to a subject of a clinical trial, means a payment made to him for participating in the trial.

(2)For the purposes of this Schedule “clinical trial” means an investigation in human subjects undertaken in connection with the development of a health care treatment or procedure.

(4)In paragraph 10 (treatment of expenditure where company and sub-contractor are connected persons), in sub-paragraph (2)(a)(iii), for “or on software or consumable items” substitute “ , on software or consumable items or on relevant payments to the subjects of a clinical trial ”.

Amendments to Schedule 12 to FA 2002U.K.

2(1)Schedule 12 to FA 2002 (tax relief for expenditure on research and development: large companies etc) is amended as follows.U.K.

(2)In paragraph 4 (qualifying expenditure on direct research and development), in sub-paragraph (3)—

(a)omit the word “or” at the end of paragraph (b);

(b)after that paragraph insert—

(ba)is incurred on relevant payments to the subjects of a clinical trial, or.

(3)In paragraph 9 (expenditure on research and development directly undertaken by the SME), in sub-paragraph (2)—

(a)omit the word “or” at the end of paragraph (b);

(b)after that paragraph insert—

(ba)is incurred on relevant payments to the subjects of a clinical trial, or.

(4)In paragraph 17 (which applies certain definitions from Schedule 20 to FA 2000)—

(a)in the heading, after “ “software or consumable items”” insert “ , “relevant payments to the subjects of a clinical trial” ”;

(b)omit the word “and” at the end of paragraph (c);

(c)after that paragraph insert—

(ca)paragraph 6A (relevant payments to subjects of clinical trials); and.

Amendments to Schedule 13 to FA 2002U.K.

3(1)Schedule 13 to FA 2002 (tax relief for expenditure on vaccine research etc) is amended as follows.U.K.

(2)In paragraph 3 (qualifying expenditure on direct research and development), in sub-paragraph (5)—

(a)omit the word “or” at the end of paragraph (b);

(b)after that paragraph insert—

(ba)is incurred on relevant payments to the subjects of a clinical trial, or.

(3)In paragraph 5 (which applies certain definitions from Schedule 20 to FA 2000)—

(a)in the heading, after “ “software or consumable items”,” insert “ “relevant payments to the subjects of a clinical trial”, ”;

(b)in sub-paragraph (3), after paragraph (c) insert—

(ca)paragraph 6A (relevant payments to subjects of clinical trials);.

(4)In paragraph 9 (relevant expenditure of the sub-contractor), in sub-paragraph (3)—

(a)omit the word “or” at the end of paragraph (b);

(b)after that paragraph insert—

(ba)is incurred on relevant payments to the subjects of a clinical trial, or.

Section 29

SCHEDULE 3U.K.Claims for relief for research and development

IntroductoryU.K.

1Schedule 18 to FA 1998 (company tax returns, assessments and related matters) is amended as follows.

Claims to be included in returnU.K.

2(1)Paragraph 10 (other claims and elections to be included in return) is amended as follows.U.K.

(2)In sub-paragraph (2) (claims to which Part 8, 9 or 9A of Schedule 18 applies) for “R&D tax credit” substitute “ R&D tax relief ”.

(3)After sub-paragraph (2A) insert—

(2B)A claim to which Part 9BA of this Schedule applies (claims for relief under Schedule 12 to the Finance Act 2002) can only be made by being included in a company tax return (see paragraph 83LB).

(4)In sub-paragraph (3) (claims to which Part 9C of Schedule 18 applies) for “tax credits under Schedule 13 to the Finance Act 2002” substitute “ tax relief under Schedule 13 to the Finance Act 2002 ”.

Claims for R&D tax reliefU.K.

3In paragraph 83A (Part 9A: introduction) for “claims for R&D tax credits” substitute “ claims for R&D tax relief ”.

4In each of the following provisions for “claim for an R&D tax credit” substitute “ claim to which this Part of this Schedule applies ”

(a)paragraph 83B(1) (claim to be included in company tax return);

(b)paragraph 83C (content of claim);

(c)paragraph 83D (amendment or withdrawal of a claim);

(d)paragraph 83E(1) (time limit for claims).

5In the title of Part 9A, “R&D tax credit” becomes “ R&D tax relief ”.

Claims for relief under Schedule 12 to FA 2002U.K.

6After paragraph 83L insert—

Part 9BA U.K.Claims for relief under Schedule 12 to the Finance Act 2002

83LAIntroduction

This Part of this Schedule applies to claims for relief under Schedule 12 to the Finance Act 2002.

83LBClaim to be included in company tax return

(1)A claim to which this Part of this Schedule applies must be made by being included in the claimant company's company tax return for the accounting period for which the claim is made.

(2)It may be included in the return originally made or by amendment.

83LCContent of claim

A claim to which this Part of this Schedule applies must specify the amount of the relief claimed, which must be an amount quantified at the time the claim is made.

83LDAmendment or withdrawal of claim

A claim to which this Part of this Schedule applies may be amended or withdrawn by the claimant company only by amending its company tax return.

83LETime limit for claims

(1)A claim to which this Part of this Schedule applies may be made, amended or withdrawn at any time up to the first anniversary of the filing date for the company tax return of the claimant company for the accounting period for which the claim is made.

(2)The claim may be made, amended or withdrawn at a later date if an officer of Revenue and Customs allows it.

Claims for relief under Schedule 13 to FA 2002U.K.

7In paragraph 83M (Part 9C: introduction) for “claims for tax credits” substitute “ claims for relief ”.

8In paragraph 83R (penalty), in sub-paragraph (1)(a) for “a claim to which this Part of this Schedule applies” substitute “ a claim for a tax credit under Schedule 13 to the Finance Act 2002 ”.

9In the title of Part 9C, “tax credit” becomes “ relief ”.

Commencement and transitional provisionU.K.

10The amendments made by paragraphs 2 to 9 have effect in relation to accounting periods ending on or after 31st March 2006.

11(1)This paragraph applies where a company is entitled to relief under Schedule 20 to FA 2000 or Schedule 12 or 13 to FA 2002 for any accounting period of the company falling within sub-paragraph (2).U.K.

(2)An accounting period of a company falls within this sub-paragraph if it ends on a day falling after 31st March 2002 but before 31st March 2006.

(3)Sub-paragraphs (4) and (5) apply to any claim by the company for such relief for an accounting period falling within sub-paragraph (2), other than a claim by the company for—

(a)an R&D tax credit under Schedule 20 to FA 2000, or

(b)a tax credit under Schedule 13 to FA 2002.

(4)A claim to which this sub-paragraph applies may be made, amended or withdrawn by the company at any time up to and including 31st March 2008.

(5)A claim to which this sub-paragraph applies may be made, amended or withdrawn by the company at a later date if an officer of Revenue and Customs allows it.

Valid from 01/01/2007

Section 37

SCHEDULE 4U.K.Taxation of activities of film production company

Films to which this Schedule appliesU.K.

Prospective

1The provisions of this Schedule apply in relation to films that commence principal photography on or after 1st April 2006.

Activities treated as separate tradeU.K.

2The activities of the film production company in relation to such a film are treated as a trade separate from any other activities of the company (and from any activities in relation to any other film).

When the trade beginsU.K.

3The film production company is treated as starting to carry on the trade—

(a)when pre-production of the film begins, or

(b)if earlier, when any income from the film is received by the company.

Pre-trading expenditureU.K.

4(1)Where a company incurs expenditure on development of a film and subsequently begins to carry on a trade as the film production company in relation to the film, the expenditure may be treated as expenditure of that trade and as if incurred immediately after the company began to carry it on.U.K.

(2)If expenditure so treated has previously been taken into account for other tax purposes, the company must amend any relevant company tax return accordingly.

(3)Any amendment or assessment necessary to give effect to sub-paragraph (2) may be made notwithstanding any limitation on the time within which an amendment or assessment may normally be made.

Costs of the filmU.K.

5(1)References in this Schedule to the costs of the film are to expenditure incurred by the company on—U.K.

(a)film-making activities in connection with the film, or

(b)activities with a view to exploiting the film.

(2)This is subject to any provision of the Corporation Tax Acts prohibiting the making of a deduction, or restricting the extent to which a deduction is allowed, in calculating the profits of a trade.

(3)Expenditure that (apart from this provision) would be regarded as of a capital nature by reason only of being incurred on the creation of an asset (the film) is treated as being of a revenue nature.

Income from the filmU.K.

6(1)References in this Schedule to income from the film are to any receipts by the company in connection with the making or exploitation of the film.U.K.

(2)This includes—

(a)receipts from the sale of the film or rights in it;

(b)royalties or other payments for use of the film or aspects of it (for example, characters or music);

(c)payments for rights to produce games or other merchandise;

(d)receipts by the company by way of a profit share agreement.

(3)Receipts that (apart from this provision) would be regarded as of a capital nature are treated as being of a revenue nature.

Calculation of profit or lossU.K.

7(1)For the first period of account there shall be brought into account in determining profit or loss—U.K.

(a)as a debit, the costs of the film incurred (and represented in work done) to date, and

(b)as a credit, the proportion of the estimated total income from the film treated as earned at the end of that period.

(2)For any period of account after the first there shall be brought into account in determining profit or loss—

(a)as a debit, the difference between the amount of the costs of the film incurred (and represented in work done) to date and the corresponding amount for the previous period, and

(b)as a credit, the difference between the proportion of the estimated total income from the film treated as earned at the end of that period and the corresponding amount for the previous period.

(3)The proportion of estimated total income treated as earned at the end of any period of account is determined using the formula:

where—

C is the total to date of costs incurred (and reflected in work done),

T is the estimated total cost of the film, and

I is the estimated total income from the film.

EstimatesU.K.

8Estimates for the purposes of this Schedule must be made as at the balance sheet date for each period of account, on a fair and reasonable basis taking into consideration all relevant circumstances.

When costs are taken to be incurredU.K.

9(1)For the purposes of this Schedule costs are incurred when they are represented in the state of completion of the work in progress.U.K.

(2)Accordingly—

(a)payments in advance for work to be done are ignored until the work has been carried out, and

(b)deferred payments are recognised to the extent that the work is represented in the state of completion.

(3)The costs incurred on a film shall be taken to include an amount that has not been paid only if it is the subject of an unconditional obligation to pay.

(4)Where an obligation is linked to income being earned from the film no amount is to be brought into account in respect of the costs of the obligation unless an appropriate amount of income is or has been brought into account.

Exclusion of expenditure relieved under other provisionsU.K.

10Expenditure in respect of which relief has been given under—

(a)section 40B, 41 or 42 of F(No.2)A 1992,

(b)section 48 of F(No.2)A 1997, or

(c)section 135, 136 to 138A or 139 to 142 of ITTOIA 2005,

shall not be taken into account for the purposes of this Schedule.

Valid from 01/01/2007

Section 42

SCHEDULE 5U.K.Film tax relief: further provisions

Part 1 U.K.Entitlement to film tax relief

IntroductionU.K.

Prospective

1(1)Film tax relief is available in accordance with this Schedule in respect of expenditure on a film—

(a)that qualifies for the relief (see section 38), and

(b)that commences principal photography on or after 1st April 2006.

(2)References in this Part of this Schedule to the trade of a film production company are to the trade that it is treated as carrying on under Schedule 4.

Additional deduction in computing profits of tradeU.K.

2The film production company may (on making a claim) make an additional deduction in calculating the profit or loss of its trade in respect of qualifying expenditure on the film.

Qualifying expenditureU.K.

3(1)Qualifying expenditure for this purpose means core expenditure on the film that falls to be taken into account under Schedule 4 in calculating the profit or loss of the trade for tax purposes.U.K.

(2)The Treasury may by regulations—

(a)amend sub-paragraph (1);

(b)provide that expenditure of a specified description is or is not to be regarded for the purposes of this Part of this Schedule as qualifying expenditure.

(3)No such regulations shall be made unless a draft of the regulations has been laid before and approved by a resolution of the House of Commons.

Amount of additional deductionU.K.

4(1)For the first period of account during which the trade is carried on the amount of the additional deduction is given by—U.K.

where—

E is—

  • (a) so much of the qualifying expenditure as is UK expenditure, or

  • (b) if less, 80% of the total amount of qualifying expenditure; and

R is the rate of enhancement (see paragraph 5).

(2)For any period of account after the first the amount of the additional deduction is given by—

where—

E is—

  • (a) so much of the qualifying expenditure incurred to date as is UK expenditure, or

  • (b) if less, 80% of the total amount of qualifying expenditure incurred to date,

R is the rate of enhancement (see paragraph 5), and

P is the amount of the additional deduction given in the previous period or, as the case may be, the aggregate amount of the additional deductions given in previous periods.

(3)The Treasury may by regulations amend the percentage stated in sub-paragraph (1) or (2).

(4)No such regulations shall be made unless a draft of the regulations has been laid before and approved by a resolution of the House of Commons.

Rate of enhancementU.K.

5The rate of enhancement is—

(a)for a limited-budget film, 100%;

(b)for a film other than a limited-budget film, 80%.

Film tax creditsU.K.

6(1)A film production company may claim a film tax credit for an accounting period in which it has a surrenderable loss.U.K.

(2)The amount of the company's surrenderable loss in any period is equal to whichever is the less of—

(a)the amount of its trading loss for that period, and

(b)the available qualifying expenditure.

(3)For the first period of account during which the trade is carried on, the available qualifying expenditure is the amount that is E for that period for the purposes of paragraph 4(1).

(4)For any period of account after the first, the available qualifying expenditure is given by—

where—

E is the amount that is E for that period for the purposes of paragraph 4(2), and

S is the amount surrendered in the previous period, or (as the case may be) the aggregate amount of the amounts surrendered in previous periods, under paragraph 7.

Modifications etc. (not altering text)

C1Sch. 5 para. 6 modified (retrospectively) by Finance (No. 3) Act 2010 (c. 33), s. 14(8)

Amount of creditU.K.

7(1)The company may surrender the whole or part of its surrenderable loss in a period.U.K.

(2)The amount of the film tax credit to which a company is entitled for a period is given by the formula—

where—

L is the amount of the loss surrendered, and

R is the payable credit rate (see paragraph 8).

Payable credit rateU.K.

8The payable credit rate is—

(a)for a limited-budget film, 25%;

(b)for a film other than a limited-budget film, 20%.

Payment in respect of film tax creditU.K.

9(1)Where—

(a)a company is entitled to a film tax credit for a period, and

(b)makes a claim,

the Commissioners shall pay to the company the amount of the credit.

(2)An amount payable in respect of—

(a)a film tax credit, or

(b)interest on a film tax credit under section 826 of ICTA,

may be applied in discharging any liability of the company to pay corporation tax.

To the extent that it is so applied the Commissioners' liability under sub-paragraph (1) is discharged.

(3)Where the company's company tax return for the accounting period is enquired into by the Commissioners, no payment in respect of a film tax credit for that period need be made before the Commissioners' enquiries are completed (see paragraph 32 of Schedule 18 to FA 1998).

In those circumstances the Commissioners may make a payment on a provisional basis of such amount as they think fit.

(4)No payment need be made in respect of a film tax credit for an accounting period before the company has paid to the Commissioners any amount that it is required to pay for payment periods ending in that accounting period—

(a)under PAYE regulations,

(b)under section 555 of ICTA (foreign entertainers), or

(c)in respect of Class 1 national insurance contributions.

Payment in respect of film tax credit not incomeU.K.

10A payment in respect of film tax credit is not income of the company for any tax purpose.

Trading loss reduced by amount surrendered for film tax creditU.K.

11The amount of a film production company's trading loss for an accounting period is reduced by any amount surrendered for a film tax credit.

Modifications etc. (not altering text)

C2Sch. 5 para. 11 modified (retrospectively) by Finance (No. 3) Act 2010 (c. 33), s. 14(8)

No account to be taken of amounts if unpaidU.K.

12(1)In determining for the purposes of this Part of this Schedule the amount of costs incurred on a film at the end of a period of account no account is to be taken of any amount that has not been paid four months after the end of that period.U.K.

(2)This is without prejudice to the operation of paragraph 9 of Schedule 4 (general rules as to when costs are taken to be incurred).

Artificially inflated claims for deduction or film tax creditU.K.

13(1)To the extent that a transaction is attributable to arrangements entered into wholly or mainly for a disqualifying purpose, it shall be disregarded in determining for any period—U.K.

(a)any additional deduction to which a company is entitled under this Part of this Schedule, and

(b)any film tax credit to which a company is entitled.

(2)Arrangements are entered into wholly or mainly for a disqualifying purpose if their main object, or one of their main objects, is to enable a company to obtain—

(a)an additional deduction under this Part of this Schedule to which it would not otherwise be entitled or of a greater amount than that to which it would otherwise be entitled, or

(b)a film tax credit to which it would not otherwise be entitled or of a greater amount than that to which it would otherwise be entitled.

(3)In this paragraph “arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable.

InterpretationU.K.

14In this Part of this Schedule—

  • the Commissioners” means Her Majesty's Commissioners for Revenue and Customs;

  • national insurance contributions” means contributions under Part 1 of the Social Security Contributions and Benefits Act 1992 (c. 4) or Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7); and

  • PAYE regulations” means regulations under section 203 of ICTA.

Part 2 U.K.Certification of British films for purposes of film tax relief

15For section 6 of the Films Act 1985 (c. 21) (certification of master negatives, tapes and discs for purposes of section 72 of FA 1982) substitute)—

6Certification of British films

Schedule 1 to this Act has effect with respect to the certification by the Secretary of State of a film as a British film for the purposes of film tax relief..

16For the heading to Schedule 1 to that Act substitute “ Certification of British films for purposes of film tax relief ”.

17For paragraph 1 of that Schedule substitute—

PreliminaryU.K.

1(1)In this Schedule—

  • film” includes any record, however made, of a sequence of visual images that is capable of being used as a means of showing that sequence as a moving picture;

  • film production company” has the same meaning as in Chapter 3 of Part 3 of the Finance Act 2006 (see section 32 of that Act).

(2)For the purposes of this Schedule each part of a series of films is treated as a separate film, unless—

(a)the films form a series with not more than 26 parts,

(b)the combined playing time is not more than 26 hours, and

(c)the series constitutes a self-contained work or is a series of documentaries with a common theme,

in which case the films are treated as a single film.

(3)References in this Schedule to a film include the film soundtrack.

(4)For the purposes of this Schedule a film is completed when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public..

18For paragraph 2 of that Schedule substitute—

Applications for certificationU.K.

2(1)The film production company may apply to the Secretary of State for the certification of a film as a British film.

(2)The application may be for an interim or final certificate.

(3)An interim certificate is a certificate granted before the film is completed that the film, if completed in accordance with the proposals set out in the application, will be a British film.

(4)A final certificate is a certificate granted after the film is completed that the film is a British film.

(5)The applicant must—

(a)produce to the Secretary of State such books or other documents relating to the application, and

(b)provide the Secretary of State with such other information with respect to it,

as the Secretary of State may require for the purposes of determining the application.

(6)The Secretary of State may require information provided for the purposes of the application to be accompanied by a statutory declaration, by the person providing it, as to the truth of the information..

19For paragraph 3 of that Schedule substitute—

Certification and withdrawal of certificationU.K.

3(1)If the Secretary of State is satisfied that the requirements are met for interim or final certification of a film as a British film, he shall certify the film accordingly.

(2)If the Secretary of State is not satisfied that those requirements are met, he shall refuse the application.

(3)An interim certificate—

(a)may be given subject to conditions, and (unless the Secretary of State directs otherwise) is of no effect if the conditions are not met;

(b)may be expressed to expire after a specified period, and (unless the Secretary of State directs otherwise) ceases to have effect at the end of that period; and

(c)ceases to have effect when a final certificate is issued.

(4)If it appears to the Secretary of State that a film certified by him under this Schedule ought not to have been certified, he shall revoke its certification.

Unless the Secretary of State directs otherwise, a certificate that is revoked is treated as never having had effect..

20In paragraph 4 of that Schedule (British films for purposes of the Schedule), for sub-paragraphs (1) to (3) substitute—

(1)A film is a British film for the purposes of this Schedule if it passes the relevant cultural test (see paragraph 4A, 4B or 4C)..

21(1)Paragraph 5 of that Schedule (excluded films) is amended as follows.U.K.

(2)For sub-paragraph (1) substitute—

(1)A film must not be certified as a British film for the purposes of this Schedule if parts of the film whose playing time exceeds 10% of the total playing time of the film are derived from a previous film, unless—

(a)the two films have the same film production company or producer, and

(b)the previous film has not been certified under this Schedule..

(3)After sub-paragraph (2) insert—

(3)For the purposes of this paragraph—

(a)the film soundtrack shall be left out of account;

(b)producer” means the person by whom the arrangements necessary for the making of the film are undertaken;

(c)in relation to certification before the commencement of Chapter 3 of Part 3 of the Finance Act 2006, references to certification of a film shall be read as references to certification of the master negative, tape or disc of the film..

22In paragraph 9 of that Schedule (determination of disputes) for the words from “any decision of the Secretary of State” to “may” substitute “ any decision of the Secretary of State under paragraph 3 may ”.

23In paragraph 10 of that Schedule (regulations and orders)—

(a)in sub-paragraph (1)(c), for “2(4)” substitute “ 2(6); ”

(b)in sub-paragraph (2), for “4 to 8” substitute “ 4 to 5 ”.

Confidentiality of informationU.K.

Prospective

24(1)Section 18(1) of the Commissioners for Revenue and Customs Act 2005 (c. 11) (restriction on disclosure by Revenue and Customs officials) does not prevent disclosure to the Secretary of State for the purposes of his functions under Schedule 1 to the Films Act 1985 (c. 21) (certification of films as British films for the purposes of film tax relief).

(2)Information so disclosed may be disclosed to the UK Film Council.

(3)A person to whom information is disclosed under sub-paragraph (1) or (2) may not otherwise disclose it except—

(a)for the purposes of the Secretary of State's functions under Schedule 1 to the Films Act 1985 (c. 21),

(b)if the disclosure is authorised by an enactment,

(c)in pursuance of an order of a court,

(d)for the purposes of a criminal investigation or legal proceedings (whether civil or criminal) connected with the operation of that Schedule or this Chapter,

(e)with the consent of the Commissioners for Her Majesty's Revenue and Customs, or

(f)with the consent of each person to whom the information relates.

(4)The references in this paragraph to the functions of the Secretary of State under Schedule 1 to the Films Act 1985 do not include those functions in so far as they are exercised in relation to a film that commenced principal photography before 1st April 2006.

Wrongful disclosureU.K.

25(1)A person commits an offence if—U.K.

(a)he discloses information about a person in contravention of paragraph 24(3), and

(b)the person's identity is specified in the disclosure, or can be deduced from it.

(2)In sub-paragraph (1) “information about a person” means revenue and customs information relating to a person within the meaning of section 19(1) of the Commissioners for Revenue and Customs Act 2005 (c. 11) (wrongful disclosure).

(3)It is a defence for a person charged with an offence under this paragraph to prove that he reasonably believed—

(a)that the disclosure was lawful, or

(b)that the information had already and lawfully been made available to the public.

(4)A person guilty of an offence under this paragraph is liable—

(a)on conviction on indictment, to imprisonment for a term not exceeding two years or a fine or both, or

(b)on summary conviction, to imprisonment for a term not exceeding twelve months or a fine not exceeding the statutory maximum or both.

(5)A prosecution for an offence under this paragraph may be brought in England and Wales only—

(a)by the Director of Revenue and Customs Prosecutions, or

(b)with the consent of the Director of Public Prosecutions.

(6)A prosecution for an offence under this paragraph may be brought in Northern Ireland only—

(a)by the Commissioners for Her Majesty's Revenue and Customs, or

(b)with the consent of the Director of Public Prosecutions for Northern Ireland.

(7)In the application of this paragraph—

(a)in England and Wales, in relation to an offence committed before the commencement of section 282 of the Criminal Justice Act 2003 (c. 44), or

(b)in Scotland or Northern Ireland,

the reference in sub-paragraph (4)(b) to twelve months shall be read as a reference to six months.

Part 3 U.K.Consequential amendments

InterestU.K.

26(1)Section 826 of ICTA (interest on tax overpaid etc) is amended as follows.U.K.

(2)In subsection (1) (payments that carry interest) after paragraph (e) insert— ; or

(f)a payment of film tax credit falls to be made to a company..

(3)After subsection (3B) insert—

(3C)In relation to a payment of film tax credit the material date is whichever is the later of—

(a)the filing date for the company's company tax return for the accounting period for which the tax credit is payable, and

(b)the date on which the company tax return or amended company tax return containing the claim for payment is delivered to an officer of Revenue and Customs.

For this purpose “the filing date”, in relation to a company tax return, has the same meaning as in Schedule 18 to the Finance Act 1998..

(4)In subsection (8A) (recovery of overpaid amounts)—

(a)in paragraph (a), for “or (e)” substitute “ , (e) or (f) ”;

(b)in paragraph (b)(ii) after “life assurance company tax credit” insert “ or film tax credit ”.

(5)In subsection (8B) after “life assurance company tax credit” (twice) insert “ or film tax credit ”.

Claim to be made in tax returnU.K.

27In Schedule 18 to FA 1998 (company tax returns), in paragraph 10 (other claims etc to be included in return), after sub-paragraph (3) insert—

(4)A claim to which Part 9D of this Schedule applies (claims for film tax relief) can only be made by being included in a company tax return (see paragraph 83T)..

Recovery of excessive film tax creditU.K.

28In paragraph 52 of that Schedule (recovery of excessive repayments etc)—

(a)in sub-paragraph (2) (excessive repayments etc to which paragraphs 41 to 48 apply), after paragraph (bc) insert—

(bd)film tax credit,;

(b)in sub-paragraph (5) (connection of assessment for excessive payment to an accounting period), after paragraph (ad) insert—

(ae)an amount of film tax credit paid to a company for an accounting period,;

(c)in the closing words of that sub-paragraph, after “(ad)” insert “ , (ae) ”.

Claims for film tax creditsU.K.

29After Part 9C of that Schedule insert—

Part 9D U.K.Claims for film tax relief
Introduction

83SThis Part of this Schedule applies to claims for film tax relief.

Claim to be included in company tax return

83T(1)A claim to which this Part of this Schedule applies must be made by being included in the claimant company's tax return for the accounting period for which the claim is made.

(2)It may be included in the return originally made or by amendment.

Content of claim

83UA claim to which this Part of this Schedule applies must specify the amount of the relief claimed, which must be an amount quantified at the time the claim is made.

Amendment or withdrawal of claim

83VA claim to which this Part of this Schedule applies may be amended or withdrawn by the claimant company only by amending its company tax return.

Time limits for claim

83W(1)A claim to which this part of this Schedule applies may be made, amended or withdrawn at any time up to the first anniversary of the filing date for the company tax return of the claimant company for the accounting period for which the claim is made.

(2)The claim may be made, amended or withdrawn at a later date if an officer of Revenue and Customs allows it.

Penalty

83X(3)The company is liable to a penalty where it—

(a)fraudulently or negligently makes a claim for a film tax credit that is incorrect, or

(b)discovers that a claim for a film tax credit made by it (neither fraudulently nor negligently) is incorrect and does not remedy the error without unreasonable delay.

(4)The penalty is an amount not exceeding the excess film tax credit claimed, that is, the difference between—

(a)the amount (if any) of the film tax credit to which the company is entitled for the accounting period to which the claim relates, and

(b)the amount of the film tax credit claimed by the company for that period..

Part 4 U.K.Provisional entitlement to relief

IntroductionU.K.

30(1)In this Part of this Schedule—U.K.

  • the company” means the film production company;

  • the final accounting period” means the accounting period of the company in which—

    (a)

    the film is completed, or

    (b)

    where the company does not complete the film, it abandons film-making activities in relation to it;

  • interim accounting period” means any earlier accounting period of the company during which film-making activities are carried on in relation to the film;

  • “interim certificate” and “final certificate” refer to certificates under Schedule 1 to the Films Act 1985 (c. 21) (certification of films as British films for purposes of film tax relief);

  • relief” means—

    (a)

    film tax relief, or

    (b)

    relief under section 45 (transfer of terminal losses from one qualifying film to another).

(2)The company tax return of the company for the final accounting period must state that the film has been completed or, as the case may be, that the company has abandoned film-making activities in relation to it.

Certification as a British filmU.K.

31(1)The company is not entitled to relief for an interim accounting period unless its company tax return for the period is accompanied by an interim certificate.U.K.

(2)If an interim certificate ceases to be in force (otherwise than on being superseded by a final certificate) or is revoked, the company—

(a)is not entitled to relief for any period for which its entitlement depended on the certificate, and

(b)must amend accordingly its company tax return for any such period.

(3)If the film is completed by the company—

(a)its company tax return for the final accounting period must be accompanied by a final certificate;

(b)if that requirement is met, the final certificate has effect for the final accounting period and for any interim accounting period;

(c)if that requirement is not met, the company—

(i)is not entitled to relief for any period, and

(ii)must amend accordingly its company tax return for any period for which relief was claimed.

(4)If the company abandons film-making activities in relation to the film—

(a)its company tax return for the final accounting period may be accompanied by an interim certificate; and

(b)the abandonment of film-making activities does not affect any entitlement to relief in that or any previous accounting period.

(5)If a final certificate is revoked, the company—

(a)is not entitled to relief for any period, and

(b)must amend accordingly its company tax return for any period for which relief was claimed.

The UK expenditure conditionU.K.

32(1)The company is not entitled to relief for an interim accounting period unless—U.K.

(a)its company tax return for the period states the amount of planned core expenditure on the film that is UK expenditure, and

(b)that amount is such as to indicate that the condition in section 41 (the UK expenditure condition) will be met on completion of the film.

If those requirements are met, the company is provisionally treated in relation to that period as if that condition was met.

(2)If such a statement is made but it subsequently appears that condition will not be met on completion of the film, the company—

(a)is not entitled to relief for any period for which its entitlement depended on such a statement, and

(b)must amend accordingly its company tax return for any such period.

(3)When the film is completed or, as the case may be, the company abandons film-making activities in relation to it—

(a)the company tax return for the final accounting period must—

(i)state that the film has been completed or, as the case may be, the company has abandoned film-making activities in relation to it, and

(ii)be accompanied by a final statement of the amount of core expenditure on the film that is UK expenditure; and

(b)if the return shows that the condition in section 41 is not met, the company—

(i)is not entitled to relief for any period, and

(ii)must amend accordingly its company tax return for any period for which relief was claimed.

Whether film a limited-budget filmU.K.

33(1)The company is not entitled to film tax relief for an interim accounting period on the basis that the film is a limited-budget film unless—U.K.

(a)its company tax return for the period states the amount of planned core expenditure on the film, and

(b)that amount is such as to indicate that the condition in section 34(2) (definition of “limited-budget film”) will be met on completion of the film.

In that case, the film is provisionally treated in relation to that period as if that condition was met.

(2)If it subsequently appears that the condition will not be met on completion of the film, the company—

(a)is not entitled to film tax relief for any period on the basis that the film is a limited-budget film, and

(b)must amend accordingly its company tax return for any such period for which relief has been claimed on that basis.

(3)When the film is completed or, as the case may be, the company abandons film-making activities in relation to it—

(a)its company tax return for the final accounting period must—

(i)state that the film has been completed or, as the case may be, the company has abandoned film-making activities in relation to it, and

(ii)be accompanied by a final statement of the core expenditure on the film; and

(b)if the return shows that the film is not a limited-budget film, or (as the case may be) that having regard to the proportion of work on the film that was completed, it would not have been a limited-budget film if it had been completed, the company—

(i)is not entitled to film tax relief for any period on the basis that the film is a limited-budget film, and

(ii)must amend accordingly its company tax return for any period for which such relief was claimed on that basis.

Time limit for amendments and assessmentsU.K.

34Any amendment or assessment necessary to give effect to the provisions of this Part of this Schedule may be made notwithstanding any limitation on the time within which an amendment or assessment may normally be made.

Section 76

SCHEDULE 6U.K.Avoidance involving financial arrangements

Repeal of rent factoring provisionsU.K.

1(1)Sections 43A to 43G of ICTA (rent factoring) shall cease to have effect.U.K.

(2)The amendment made by this paragraph has effect in relation to transactions entered into on or after 6th June 2006.

Dividend stripping: subsequent sales etc of rights to receive dividends etcU.K.

2(1)Section 730 of ICTA (transfers of rights to receive distributions in respect of shares) is amended as follows.U.K.

(2)Omit subsection (3) (proceeds of subsequent sales etc of rights to receive distributions not to be regarded as income of the seller etc).

(3)The amendment made by this paragraph has effect in relation to sales or other realisations on or after 20th January 2006.

Deemed interest: cash collateral under stock lending arrangementsU.K.

3(1)After section 736B of ICTA (deemed manufactured payments in the case of stock lending arrangements) insert—U.K.

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..

(2)Section 736C of ICTA has effect in relation to any stock lending arrangement made on or after 5th December 2005.

(3)In relation to any stock lending arrangement made on or after that date but before 22nd March 2006, that section has effect as if subsection (6) were omitted.

(4)If—

(a)a stock lending arrangement was made before 5th December 2005 in respect of any securities (“the original securities”), and

(b)on or after that date the lender under the stock lending arrangement transfers securities (“the substituted securities”) in substitution for some or all of the original securities,

section 736C of ICTA has effect as if that arrangement were made on the date of the substitution (and the substituted securities were the relevant securities).

Quasi-stock lending arrangements and quasi-cash collateralU.K.

4(1)In section 736B of ICTA (deemed manufactured payments in the case of stock lending arrangements) at the end insert—U.K.

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

(2)In section 736C of ICTA (deemed interest: cash collateral under stock lending arrangements), as inserted by paragraph 3 above, at the end insert—

(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..

(3)After that section insert—

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..

(4)The amendments made by this paragraph have effect in relation to any arrangement made on or after 22nd March 2006.

Multiple holders of securities subject to sale and repurchase agreement: no relief for deemed manufactured paymentsU.K.

5(1)Section 737A of ICTA (sale and repurchase of securities: deemed manufactured payments) is amended as follows.

(2)In subsection (5) (application of Schedule 23A and dividend manufacturing regulations), after “apply” insert “ , subject to subsection (5A) below, ”.

(3)After that subsection insert—

(5A)If the relevant person is not the person to whom the transferor agreed to sell the securities, the relevant person is not entitled, by virtue of anything in Schedule 23A or any provision of dividend manufacturing regulations, or otherwise—

(a)to any deduction in computing profits or gains for the purposes of income tax or corporation tax, or

(b)to any deduction against total income or total profits,

by virtue of subsection (5) above.

Where the relevant person is a company, an amount may not be surrendered by way of group relief if a deduction in respect of it is prohibited by this subsection..

(4)In subsection (6) (interpretation), for—

(a)“subsection (5) above”, and

(b)“that subsection”,

substitute “ this section ”.

(5)The amendments made by this paragraph have effect in relation to securities if—

(a)the agreement to sell them was made on or after 27th June 2006, or

(b)a person other than the person to whom the transferor agreed to sell them became the relevant person in consequence of any other agreement made on or after that date.

Structured finance arrangements: factoring of income receipts etcU.K.

6(1)After section 774 of ICTA (transactions between dealing company and associated company) insert—U.K.

Factoring of income receipts etcU.K.

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)..

(2)The amendment made by this paragraph has effect in relation to any arrangements whenever made (but see sub-paragraphs (3) and (4)).

(3)In relation to arrangements made before 6th June 2006, amounts are, as a result of the amendment made by this paragraph,—

(a)to be charged to tax, or

(b)to be brought into account in calculating any income for tax purposes or deducted from any income for tax purposes,

only if the amounts arise on or after that date.

(4)The amendment made by this paragraph has no effect in relation to any arrangement made before that date in so far as section 43B or 43D of ICTA (rent factoring) applies to it.

(5)In any case where, in relation to arrangements made before that date, a person is treated, as a result of the amendment made by this paragraph, as being a party to any loan relationship—

(a)a period of account is to be treated for the purposes of Chapter 2 of Part 4 of FA 1996 as beginning on that date, and

(b)the loan relationship is to be treated for those purposes as being entered into by the person for a consideration equal to the notional carrying value of the liability representing the relationship.

(6)For this purpose, the notional carrying value is the amount that would have been the carrying value of the liability in the accounts of the person if a period of account had ended immediately before that date.

(7)“Carrying value” has the same meaning here as it has for the purposes of paragraph 19A of Schedule 9 to FA 1996.

Rent factoring of leases of plant or machineryU.K.

7(1)Section 785A of ICTA (rent factoring of leases of plant or machinery) is amended as follows.U.K.

(2)After subsection (5) (provision about partnerships with legal personality) insert—

(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..

Transactions associated with loans or creditU.K.

8(1)Section 786 of ICTA (transactions associated with loans or credit) is amended as follows.U.K.

(2)After subsection (5) (transaction under which a person assigns, surrenders etc income arising from property) insert—

(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..

Structured finance arrangements: chargeable gains treatment of acquisitions and disposalsU.K.

9(1)After section 263D of TCGA 1992 (gains accruing to persons paying manufactured dividends) insert—U.K.

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..

(2)The amendment made by this paragraph has effect in relation to disposals made on or after 6th June 2006.

(3)The amendment made by this paragraph also has effect in relation to any disposal made by a person before that date if the person makes a claim to that effect under this sub-paragraph.

Loan relationships: mandatory convertiblesU.K.

10(1)Section 81 of FA 1996 (meaning of “loan relationship” etc) is amended as follows.U.K.

(2)In subsection (2) (meaning of “money debt”)—

(a)omit the “or” immediately before paragraph (b) (transfer of right to settlement under a money debt), and

(b)at the end of that paragraph insert , or

(c)by the issue or transfer of any shares in any company,.

(3)The amendments made by this paragraph have effect in relation to relationships to which a company is a party on or after 22nd March 2006.

(4)The following provisions of this paragraph apply for the purposes of TCGA 1992 if—

(a)a company is a party to a relationship on 22nd March 2006,

(b)the relationship becomes a loan relationship on that date for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of the amendments made by this paragraph,

(c)the relationship is a creditor relationship of the company, and

(d)immediately before that date the asset representing the relationship was a chargeable asset in relation to the company.

(5)The company is treated as if—

(a)it had made a disposal of the asset representing the relationship immediately before 22nd March 2006, and

(b)the disposal had been for a consideration equal to the fair value of the asset at that time (within the meaning given by section 103(1) of FA 1996).

(6)Any chargeable gain or loss accruing to the company on the disposal is treated as accruing to the company when it ceases to be a party to the relationship.

(7)For the purposes of this paragraph an asset is a chargeable asset in relation to the company at any time if any gain accruing to it on the disposal of the asset at that time would be a chargeable gain for the purposes of TCGA 1992.

Loan relationships: computation in accordance with generally accepted accounting practiceU.K.

11(1)Section 85A of FA 1996 (computation in accordance with generally accepted accounting practice) is amended as follows.U.K.

(2)In subsection (1) (amounts to be brought into account are those recognised in determining company's profit or loss) after “Subject to the provisions of this Chapter” insert “ (including, in particular, section 84(1)) ”.

Loan relationships: amounts not fully recognised for accounting purposesU.K.

12(1)After section 85B of FA 1996 (amounts recognised in determining company's profit or loss) insert—U.K.

85CAmounts not fully recognised for accounting purposes

(1)This section applies if—

(a)a company is, or is treated as being, a party to a creditor relationship in any period,

(b)an amount is not fully recognised for the period in respect of the creditor relationship,

(c)the company is, or is treated as being, a party to a debtor relationship in the period or has at any time issued share capital which falls to be treated for accounting purposes as a liability (a “relevant accounting liability”) for the period,

(d)an amount is not fully recognised for the period in respect of the debtor relationship or relevant accounting liability, and

(e)the amounts are not fully recognised as mentioned in paragraphs (b) and (d) as a result of the application of generally accepted accounting practice in relation to the creditor relationship and the debtor relationship or relevant accounting liability.

(2)For the purposes of subsection (1) an amount is not fully recognised for the period in respect of any loan relationship or relevant accounting liability of the company if—

(a)no amount in respect of the relationship or liability is recognised in determining its profit or loss for the period, or

(b)an amount in respect of only part of the relationship or liability is recognised in determining its profit or loss for the period.

(3)In determining the credits and debits to be brought into account by the company in respect of the creditor relationship for the period for the purposes of this Chapter, the applicable assumption (see subsection (6)) must be made.

(4)In any case where the condition in subsection (1)(c) is met by reference to a debtor relationship of the company, in determining the credits and debits to be brought into account by the company in respect of that relationship for the period for the purposes of this Chapter, the applicable assumption must be made.

(5)But the amount of any debits to be brought into account by the company for any period for the purposes of this Chapter as a result of subsection (4) must not exceed the amount of any credits to be brought into account by the company for the period as a result of subsection (3).

(6)For the purposes of this section, in relation to any loan relationship, the applicable assumption is the assumption that an amount in respect of the whole of the relationship is recognised in determining the company's profit or loss for the period.

(7)In any case where—

(a)apart from this section any credits or debits are brought into account by the company in respect of any loan relationship for the period for the purposes of this Chapter, and

(b)the relationship is one to which this section applies,

the credits and debits to be so brought into account as a result of this section must be determined on the same basis of accounting on which the credits or debits mentioned in paragraph (a) were determined.

(8)In any other case, the credits and debits to be so brought into account as a result of this section must be determined on the amortised cost basis of accounting..

(2)The amendment made by this paragraph has effect in relation to periods of account ending on or after 22nd March 2006.

(3)But, in relation to a period of account beginning before 22nd March 2006, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of that amendment only if the amounts relate to any time on or after that date.

Shares treated as loan relationships: shares subject to outstanding third party obligationsU.K.

13(1)Section 91A of FA 1996 (shares subject to outstanding third party obligations) is amended as follows.U.K.

(2)In subsection (1) (conditions for section to apply), in the opening words, for “a company if at any time in an accounting period” substitute “ the times in a company's accounting period during which ”.

(3)In subsection (2) (how Chapter has effect for the accounting period) after “as if” insert “ during those times ”.

(4)In subsection (5) (cases where a share is subject to outstanding third party obligations)—

(a)in paragraph (a) (share is subject to obligations of description in subsection (6)) after “the share is subject to” insert “ , or will or might under any relevant arrangements be subject to, ”, and

(b)in paragraph (b) (obligations of a person other than the investing company) after “the investing company” insert “ or are obligations of the investing company which, under any relevant arrangements, will or might be discharged directly or indirectly by any other person ”.

(5)After that subsection insert—

(5A)For the purposes of subsection (5) above—

(a)arrangements” includes any agreement or understanding (whether or not legally enforceable),

(b)arrangements are “relevant” if they were entered into at any time on or before the share was issued..

(6)The amendments made by sub-paragraphs (2) and (3) have effect in relation to accounting periods ending on or after 22nd March 2006.

(7)The other amendments made by this paragraph have effect in relation to shares held by a company on or after 22nd March 2006.

(8)But, in relation to an accounting period beginning before 22nd March 2006, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of those other amendments only if the amounts relate to any time on or after that date.

Shares treated as loan relationships: application of rules to non-qualifying sharesU.K.

14(1)Section 91B of FA 1996 (non-qualifying shares) is amended as follows.U.K.

(2)In subsection (1) (conditions for section to apply)—

(a)in the opening words, for “a company if at any time in an accounting period” substitute “ the times in a company's accounting period during which ”, and

(b)in the words after paragraph (c), for “at no time in the accounting period does section 91A above apply” substitute “ , during those times, section 91A above does not apply ”.

(3)In subsection (2) (how Chapter has effect for the accounting period) after “as if” insert “ during those times ”.

(4)The amendments made by this paragraph have effect in relation to accounting periods ending on or after 22nd March 2006.

(5)But, in relation to an accounting period beginning before 22nd March 2006, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of those amendments only if the amounts relate to any time on or after that date.

Shares treated as loan relationships: redeemable shares U.K.

15(1)Section 91D of FA 1996 (condition 2 for section 91B(6)(b)) is amended as follows.U.K.

(2)For subsection (2) (cases in which share regarded as redeemable) substitute—

(2)For the purposes of this section, a share is to be regarded as redeemable if (and only if)—

(a)it is redeemable as a result of its terms of issue (or any collateral arrangements) requiring redemption, entitling the holder to require redemption or entitling the issuer to redeem, or

(b)there are arrangements which will or might entitle the investing company to qualifying redemption amounts..

(3)After that subsection insert—

(2A)For the purposes of subsection (2) above—

  • arrangements” includes any agreement or understanding (whether or not legally enforceable and whether or not forming part of the terms of issue of the share), and

  • qualifying redemption amounts” means amounts which, when taken together, are the same, or are substantially the same, as an amount that might be payable on the redemption of the share..

(4)In subsection (7) (shares mirroring a public issue: Case 1), in paragraph (b) (associated companies issuing mirroring shares to company within 24 hours of its issuing shares), for “24 hours” substitute “ 7 days ”.

(5)In subsection (8) (shares mirroring a public issue: Case 2), in paragraph (a) (second-level mirroring shares issued within 24 hours of the public issue), for “24 hours” substitute “ 7 days ”.

(6)The amendments made by sub-paragraphs (2) and (3) have effect in relation to any share held by a company on or after 12th May 2006 in any case where—

(a)the share is redeemable for the purposes of section 91D of FA 1996 as a result of any arrangements mentioned in subsection (2)(b) of that section (as substituted by sub-paragraph (2)), and

(b)the arrangements were entered into after the company acquired the share.

(7)But in that case, in relation to an accounting period beginning before 12th May 2006, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of those amendments only if the amounts relate to any time on or after that date.

(8)In any other case, the amendments made by sub-paragraphs (2) and (3) have effect in relation to shares held by a company on or after 22nd March 2006.

(9)But, in relation to an accounting period beginning before 22nd March 2006, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of those amendments only if the amounts relate to any time on or after that date.

(10)The amendments made by sub-paragraphs (4) and (5) have effect in relation to any case where the public issue (within the meaning of section 91D(7) and (8) of FA 1996) is on or after 22nd March 2006.

Creditor relationships and benefit derived by connected personsU.K.

16(1)After section 93B of FA 1996 insert—U.K.

93CCreditor relationships and benefit derived by connected persons

(1)This section applies in the case of any loan relationship which is a creditor relationship of a company (“company C”) if—

(a)the return to company C from the relationship is less than a return (a “commercial return”) on an investment of money at a commercial rate of interest,

(b)another company (“company P”) that is connected with company C directly or indirectly derives any benefit as a result of any arrangements made in consequence of, or otherwise in connection with, the relationship, and

(c)that benefit is designed to represent some or all of the amount by which the return to company C from the relationship is less than a commercial return.

(2)The credits to be brought into account by company C in respect of the relationship for the purposes of this Chapter must be determined on the basis of fair value accounting.

(3)The fair value of company C's rights under the relationship must include the fair value of the benefit which is derived by company P as a result of the arrangements.

(4)Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this section.

(5)In this section—

  • arrangements” includes any agreement or understanding (whether or not legally enforceable);

  • benefit” includes value in any form.

(6)In determining for the purposes of subsection (1)(a) the return to company C from the relationship, any benefit which company C derives directly or indirectly from the benefit derived by company P as mentioned in subsection (1)(b) is to be disregarded..

(2)The amendment made by this paragraph has effect in relation to loan relationships to which a company is a party on or after 22nd March 2006.

(3)But amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of that amendment only if the amounts relate to any time on or after that date.

Loan relationships: money debts etc not arising from the lending of moneyU.K.

17(1)Section 100 of FA 1996 (money debts etc not arising from the lending of money) is amended as follows.U.K.

(2)In subsection (1A) (conditions mentioned in subsection (1)(c)(iv)) for paragraph (e) (property not an asset representing a loan relationship or derivative contract) substitute—

(e)if the money debt is some or all of the consideration payable for a disposal of property, the property in question is not an asset representing a loan relationship or a derivative contract the disposal of which is a relevant disposal..

(3)After that subsection insert—

(1B)For the purposes of subsection (1A)(e) above “relevant disposal” means—

(a)a disposal to which paragraph 12 of Schedule 9 applies or would apply but for sub-paragraph (2A) of that paragraph,

(b)a disposal to which paragraph 28 of Schedule 26 to the Finance Act 2002 applies or would apply but for paragraph 30 of that Schedule,

(c)a disposal not falling within paragraph (a) or (b) above as respects which the whole of the consideration is brought into account for the purposes of this Chapter or Schedule 26 to the Finance Act 2002..

(4)The amendments made by this paragraph have effect in relation to disposals made on or after 22nd March 2006.

Loan relationships: meaning of “fair value” in Chapter 2 of Part 4 of FA 1996U.K.

18(1)Section 103 of FA 1996 (interpretation of Chapter 2 of Part 4 of FA 1996) is amended as follows.U.K.

(2)In subsection (1), in the definition of “fair value”, in paragraphs (a) and (b), omit “in respect of amounts which at that time are not yet due and payable”.

(3)The amendment made by this paragraph has effect in relation to periods of account ending on or after 22nd March 2006.

(4)But, in relation to a period of account beginning before 22nd March 2006, the amendment made by this paragraph has effect only in relation to—

(a)disposals or acquisitions (in whole or in part) of rights or liabilities under a loan relationship, or

(b)anything treated for the purposes of Chapter 2 of Part 4 of FA 1996 as such a disposal or acquisition,

which were made (or treated as made) on or after that date.

Loan relationships: continuity of treatment of groups etcU.K.

19(1)In Schedule 9 to FA 1996 (loan relationships: special computational provisions) paragraph 12 (continuity of treatment: groups etc) is amended as follows.U.K.

(2)In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair value accounting)—

(a)in the opening words, for “uses” substitute “ is regarded for the purposes of this sub-paragraph as using ”, and

(b)for paragraph (aa) (treatment of transferee in respect of the transaction) substitute—

(aa)for any accounting period in which it is a party to the relationship, the transferee company shall be treated for the purpose of determining the credits and debits to be brought into account for the purposes of this Chapter in respect of the relationship as if it had acquired the asset or liability representing the relationship for a consideration equal to the amount mentioned in paragraph (a) above (but on the assumption that sub-paragraph (2C)(b) below is omitted)..

(3)After that sub-paragraph insert—

(2B)The transferor company shall be regarded for the purposes of sub-paragraph (2A) above as using fair value accounting as respects the loan relationship only if—

(a)it uses fair value accounting as respects the relationship and the debits and credits to be brought into account for the purposes of this Chapter as respects the relationship are also determined on that basis, or

(b)it does not use fair value accounting as respects the relationship but the debits and credits to be brought into account for the purposes of this Chapter as respects the relationship are determined on that basis..

(4)After sub-paragraph (2B) (as inserted by sub-paragraph (3) above) insert—

(2C)In any case where a discount (within the meaning given by section 100(3A)) arises in respect of the transaction, the series of transactions or the transfer—

(a)the consideration for the purposes of sub-paragraph (2)(a) above is to be increased by the amount of the discount;

(b)the amount to be brought into account by virtue of sub-paragraph (2A)(a)(i) above is to be increased by the amount of the discount..

(5)The amendments made by this paragraph have effect in any case where the relevant transaction is on or after 22nd March 2006.

(6)For this purpose “the relevant transaction” means—

(a)the related transaction mentioned in paragraph 12(1)(a) of Schedule 9 to FA 1996,

(b)the first of the series of transactions mentioned in paragraph 12(1)(b) of that Schedule, or

(c)the transfer mentioned in paragraph 12(1)(c) or (d) of that Schedule,

as a result of which paragraph 12 of that Schedule applies or, but for sub-paragraph (2A) of that paragraph, would apply.

Loan relationships: repo and stock-lending arrangementsU.K.

20(1)In Schedule 9 to FA 1996 (loan relationships: special computational provisions), paragraph 15 (disposal or acquisition made in pursuance of repo and stock-lending arrangements not to be related transaction) is amended as follows.

(2)In sub-paragraph (2)(b) (transfer to original transferor (“A”) giving effect to entitlement or requirement to rights on re-transfer etc.), after “to A” insert “ by B ”.

(3)The amendment made by this paragraph has effect in relation to any transfer to A (within the meaning of paragraph (a) of sub-paragraph (3) of paragraph 15) under arrangements—

(a)consisting in or involving an agreement made on or after 27th June 2006 for the transfer of rights by A to B (within the meaning of that paragraph), or

(b)involving an agreement made on or after that date providing for a transfer giving effect to the entitlement or requirement described in paragraph (b) of that sub-paragraph otherwise than by B.

Derivative contracts: computation in accordance with generally accepted accounting practiceU.K.

21(1)Paragraph 17A of Schedule 26 to FA 2002 (computation in accordance with generally accepted accounting practice) is amended as follows.U.K.

(2)In sub-paragraph (1) (amounts to be brought into account are those recognised in determining company's profit or loss) after “Subject to the provisions of this Schedule” insert “ (including, in particular, paragraph 15(1)) ”.

Derivative contracts: transactions within groupsU.K.

22(1)In Schedule 26 to FA 2002 (derivative contracts), paragraph 28 (transactions within groups) is amended as follows.U.K.

(2)After sub-paragraph (3) (rule for determining the credits and debits to be brought into account) insert—

(3ZA)In any case where a discount (within the meaning given by section 100(3A) of the Finance Act 1996) arises in respect of the transaction or the series of transactions, the consideration for the purposes of sub-paragraph (3)(a) is to be increased by the amount of the discount..

(3)The amendment made by this paragraph has effect in any case where the relevant transaction is on or after 22nd March 2006.

(4)For this purpose “the relevant transaction” means—

(a)the related transaction mentioned in paragraph 28(2)(a) of Schedule 26 to FA 2002,

(b)the first of the series of transactions mentioned in paragraph 28(2)(b) of that Schedule, or

(c)the transfer mentioned in paragraph 28(2)(c) or (d) of that Schedule,

as a result of which paragraph 28 of that Schedule applies or, but for paragraph 30 of that Schedule, would apply.

Derivative contracts: transactions within groups (fair value accounting)U.K.

23(1)In Schedule 26 to FA 2002 (derivative contracts), paragraph 30 (transactions within groups: fair value accounting) is amended as follows.U.K.

(2)In sub-paragraph (1) (paragraph 28 not to apply where transferor uses fair value accounting) for paragraph (b) (treatment of transferee in respect of the transaction) substitute—

(b)for any accounting period in which it is a party to the contract, the transferee company shall be treated for the purpose of determining the credits and debits to be brought into account for the purposes of this Schedule in respect of the contract as if it had acquired the contract for a consideration equal to the amount mentioned in paragraph (a) (but on the assumption that sub-paragraph (1A) is omitted)..

(3)After that sub-paragraph insert—

(1A)In any case where a discount (within the meaning given by section 100(3A) of the Finance Act 1996) arises in respect of the transaction or the series of transactions, the amount to be brought into account by virtue of sub-paragraph (1)(a) is to be increased by the amount of the discount..

(4)The amendments made by this paragraph have effect in any case where the relevant transaction is on or after 22nd March 2006.

(5)For this purpose “the relevant transaction” has the meaning given by paragraph 22.

Derivative contracts: meaning of “fair value” in Schedule 26 to FA 2002U.K.

24(1)Paragraph 54 of Schedule 26 to FA 2002 (interpretation of Schedule) is amended as follows.U.K.

(2)In sub-paragraph (1), in the definition of “fair value”, in paragraphs (a) and (b), omit “in respect of amounts which at that time are not yet due and payable”.

(3)The amendment made by this paragraph has effect in relation to periods of account ending on or after 22nd March 2006.

(4)But, in relation to a period of account beginning before 22nd March 2006, the amendment made by this paragraph has effect only in relation to—

(a)disposals or acquisitions (in whole or in part) of rights or liabilities under a derivative contract, or

(b)anything treated for the purposes of Schedule 26 to FA 2002 as such a disposal or acquisition,

which were made (or treated as made) on or after that date.

Section 79

SCHEDULE 7U.K.Transfer of assets abroad

Income and Corporation Taxes Act 1988U.K.

Amendments of ICTA: introductoryU.K.

1ICTA is amended as follows.

Section 741: application subject to sections 741B and 741CU.K.

2(1)Section 741 (exemption from sections 739 and 740) is amended as follows.

(2)At the beginning of the section insert “ (1) ”.

(3)At the end of the section insert—

(2)This section is subject to sections 741B and 741C (application of this section and section 741A etc)..

(4)In consequence of amendments made by this Schedule, the heading of the section becomes “ Exemption from sections 739 and 740 (transactions before 5th December 2005) ”.

(5)The amendments made by this paragraph shall be taken to have come into force on 5th December 2005.

Exemption from sections 739 and 740: new provisionU.K.

3(1)After section 741 insert—

741AExemption from sections 739 and 740 (transactions on or after 5th December 2005)

741A(1)The individual is not liable to income tax by virtue of section 739 or 740 for the year of assessment by reference to the relevant transactions if he satisfies an officer of the Board—

(a)that Condition A is met, or

(b)in a case where Condition A is not met, that Condition B is met.

(2)Condition A is that it would not be reasonable to draw the conclusion, from all the circumstances of the case, that the purpose of avoiding liability to taxation was the purpose, or one of the purposes, for which the relevant transactions or any of them were effected.

(3)Condition B is that—

(a)all the relevant transactions were genuine commercial transactions, and

(b)it would not be reasonable to draw the conclusion, from all the circumstances of the case, that any one or more of those transactions was more than incidentally designed for the purpose of avoiding liability to taxation.

(4)The intentions and purposes of any person who, whether or not for consideration,—

(a)designs or effects the relevant transactions or any of them, or

(b)provides advice in relation to the relevant transactions or any of them,

are to be taken into account in determining the purposes for which those transactions or any of them were effected.

(5)A relevant transaction is a commercial transaction only if it is effected—

(a)in the course of a trade or business, or

(b)with a view to setting up and commencing a trade or business,

and, in either case, for the purposes of that trade or business.

(6)For that purpose, the making and managing of investments, or the making or managing of investments, is not a trade or business except to the extent that—

(a)the person by whom it is done, and

(b)the person for whom it is done,

are independent persons dealing at arm's length.

(7)In this section—

  • commercial transaction” does not include—

    (a)

    a transaction on terms other than those that would have been made between independent persons dealing at arm's length, or

    (b)

    a transaction that would not have been entered into between independent persons dealing at arm's length;

  • independent persons” means persons who are not connected with each other (within the meaning given by section 839);

  • relevant transactions” means—

    (a)

    the transfer, and

    (b)

    any associated operations;

  • revenue” includes taxes, duties and national insurance contributions;

  • taxation” includes any revenue for whose collection and management the Commissioners for Her Majesty's Revenue and Customs are responsible.

(8)Any associated operation that would not (apart from this subsection) fall to be taken into account for the purposes of this section must be taken into account for those purposes if, were it to be so taken into account, the conditions in subsection (1) above would be failed by reference to—

(a)that associated operation, or

(b)that associated operation taken together with the transfer or any one or more other associated operations.

(9)The jurisdiction of the Special Commissioners on any appeal includes jurisdiction to review any decision taken by an officer of the Board in exercise of the officer's functions under this section.

(10)This section is subject to sections 741B and 741C (application of section 741 and this section etc)..

(2)The amendment made by this paragraph shall be taken to have come into force on 5th December 2005.

Application of sections 741 and 741AU.K.

4(1)After section 741A insert—

741BApplication of sections 741 and 741A

741B(1)This section makes provision with respect to the application for the year of assessment of—

(a)section 741,

(b)section 741A, or

(c)section 741C,

in the case of the individual and the relevant transactions.

(2)In this section—

  • new transaction” means a relevant transaction effected on or after the relevant date;

  • old transaction” means a relevant transaction effected before the relevant date;

  • the relevant date” means 5th December 2005;

  • relevant transactions” means—

    (a)

    the transfer, and

    (b)

    any associated operations.

(3)If all the relevant transactions are old transactions, section 741 is the provision to be applied.

(4)If all the relevant transactions are new transactions, section 741A is the provision to be applied.

(5)If—

(a)any one or more of the relevant transactions are old transactions, and

(b)any one or more of the relevant transactions are new transactions,

section 741C is the provision to be applied.

741CCases where there are both old transactions and new transactions

741C(1)This section applies by virtue of section 741B if the case falls within subsection (5) of that section.

(2)Sections 739 and 740 do not apply, unless subsection (3) below applies.

(3)This subsection applies if—

(a)the conditions in section 741(1) are failed by reference to the old transactions or any of them, or

(b)the conditions in section 741A(1) are failed by reference to the new transactions or any of them.

(4)Where subsection (3) above applies, the general rule is that sections 739 and 740 apply as they would have applied apart from any exemption by virtue of sections 741 to 741C.

(5)In any case where subsection (3) above applies by virtue only of paragraph (b) of that subsection, the general rule has effect subject to, and in accordance with, the Rules in subsections (6) to (8) below.

(6)Rule 1 is that, for the purposes of section 739(2) or (3), any income arising before the relevant date must not be brought into account as income of the person resident or domiciled outside the United Kingdom.

(7)Rule 2 is that for the purposes of section 740, where—

(a)a benefit is received by the individual in a year of assessment ending after the relevant date, and

(b)relevant income of years of assessment up to and including that year falls to be determined,

the general rule requires years ending before the relevant date to be brought into account as well as years ending after that date.

(8)Rule 3 is that, for the purposes of section 740, a benefit received by the individual in the year 2005-06 is to be left out of account to the extent that, on a time apportionment basis, it fell to be enjoyed in any part of the year that falls before the relevant date.

(9)This section is to be read as one with section 741B..

(2)The amendment made by this paragraph shall be taken to have come into force on 5th December 2005.

Just and reasonable apportionment in certain casesU.K.

5(1)After section 741C insert—

741DSection 739: just and reasonable apportionment in certain cases

741D(1)This section applies where—

(a)an individual is liable to tax by virtue of section 739 for a year of assessment (the “taxable year”), but

(b)the conditions in subsections (2) to (4) below are met.

(2)Condition 1 is that since the making of the transfer there have been one or more years of assessment when the circumstances were such that, so far as relating to such of the relevant transactions as were effected before the end of the year, the individual—

(a)was not liable to tax by virtue of section 739, or

(b)would not have been liable to tax by virtue of section 739 if there had been any deemed income of his under that section,

because an appropriate exemption applied or, in a case falling within paragraph (b) above, would have applied.

(3)Condition 2 is that the individual is liable to tax under section 739 in the taxable year in consequence of Condition B in section 741A(3) not being met.

(4)Condition 3 is that the income by reference to which the individual is liable to tax for the taxable year is attributable—

(a)partly to relevant transactions by reference to which the appropriate exemption applied for the last exempt year of assessment, and

(b)partly to associated operations not falling within paragraph (a) above (“chargeable operations”).

(5)For the purposes of this section, a year of assessment is “exempt” if it is one of the years of assessment mentioned in subsection (2) and there is no earlier year of assessment for which—

(a)the individual was liable to tax by virtue of section 739, or

(b)the individual would have been liable to tax by virtue of section 739, if there had been any deemed income of his under that section.

(6)Where this section applies, the liability of the individual is to be reduced as if it fell to be determined by reference to only so much of the income as appears to an officer of the Board to be justly and reasonably attributable to chargeable operations in all the circumstances of the case.

(7)The facts and matters that may be taken into account in determining for the purposes of subsection (6) above whether income may be regarded as justly and reasonably attributable to chargeable operations include whether, and to what extent, the chargeable operations or any of them directly or indirectly affect any of the following—

(a)the character, description or amount of any income of any person,

(b)any person's power to enjoy any income,

(c)the character, description or amount of any income which a person has power to enjoy.

(8)The jurisdiction of the Special Commissioners on any appeal includes jurisdiction to review any decision taken by an officer of the Board in exercise of the officer's functions under this section.

(9)In this section—

  • appropriate exemption” means exemption by virtue of—

    (a)

    paragraph (b) of section 741(1), or

    (b)

    Condition B in section 741A(3);

  • relevant transactions” means—

    (a)

    the transfer, and

    (b)

    any associated operations..

(2)The amendment made by this paragraph shall be taken to have come into force on 5th December 2005.

Section 742: interpretation of the ChapterU.K.

6(1)Section 742 (interpretation of sections 739 to 741) is amended as follows.

(2)In subsection (1) (meaning of “associated operations”) for “sections 739 to 741” substitute “ this Chapter ”.

(3)At the end of subsection (1), insert— “ It is immaterial whether the operation is effected before, after, or at the same time as the transfer. ”.

(4)After subsection (1) insert—

(1A)The income that becomes payable to, or has become income of, a person resident or domiciled outside the United Kingdom that is referred to in section 739(1) or (3) or section 740(1) includes any income which becomes payable to, or has become income of, the person by virtue or in consequence of—

(a)the transfer,

(b)one or more associated operations, or

(c)the transfer and one or more associated operations.

(1B)The income which an individual has power to enjoy, as mentioned in section 739(2), includes any income which he has power to enjoy by virtue or in consequence of—

(a)the transfer,

(b)one or more associated operations, or

(c)the transfer and one or more associated operations..

(5)The heading to the section accordingly becomes “ Interpretation of this Chapter ”.

(6)The amendments made by this paragraph shall be taken to have come into force on 5th December 2005.

ITTOIA 2005U.K.

Gains from contracts for life insurance etcU.K.

7(1)In ITTOIA 2005, section 468 (gains from contracts of life insurance etc: non-UK resident trustees and foreign institutions) is amended as follows.U.K.

(2)In subsection (2) (section 740 of ICTA to apply with the modifications in subsection (3) or (4))—

(a)for “Section 740” substitute “ Sections 739 and 740 ”,

(b)for “prevents” substitute “ prevent ”,

(c)for “applies” substitute “ apply ”.

(3)In subsection (3) (cases within subsection (1)(a)) for “section 740 applies” substitute “ sections 739 and 740 apply ”.

(4)In subsection (4) (cases within subsection (1)(b)) for “section 740 applies” substitute “ sections 739 and 740 apply ”.

(5)The amendments made by this paragraph apply in relation to gains treated as arising on or after 5th December 2005.

Section 81

SCHEDULE 8U.K.Long funding leases of plant or machinery

Part 1 U.K.Capital allowances

IntroductoryU.K.

1CAA 2001 is amended as follows.

Use for other qualifying activity of plant or machinery previously used for long funding leasingU.K.

2After section 13 (use for qualifying activity of plant or machinery provided for other purposes) insert—

13AUse for other purposes of plant or machinery previously used for long funding leasing

(1)This section applies if a person who has been using plant or machinery for the purpose of leasing it under a long funding lease (see Chapter 6A)—

(a)ceases to use the plant or machinery for that purpose without ceasing to use it for the purposes of a qualifying activity carried on by him, and

(b)on the date of the cessation, owns the plant or machinery as a result of having incurred capital expenditure on its provision for the purposes of the qualifying activity.

(2)The person is to be treated—

(a)as having incurred capital expenditure (“notional expenditure”) on the provision of the plant or machinery for the purposes of the qualifying activity on the day after the cessation,

(b)as owning the plant or machinery as a result of having incurred that expenditure, and

(c)as if the plant or machinery on and after that day were different plant or machinery from the plant or machinery before that day.

(3)The amount of the notional expenditure is an amount equal to the termination amount, determined in accordance with section 70YG, in the case of the long funding lease under which the plant or machinery was last leased before the cessation..

Expenditure on plant or machinery for long funding leasing not to be qualifying expenditureU.K.

3After section 34 insert—

34AExpenditure on plant or machinery for long funding leasing not qualifying expenditure

Expenditure is not qualifying expenditure if it is incurred on the provision of plant or machinery for leasing under a long funding lease (see Chapter 6A)..

General exclusions applying to certain sectionsU.K.

4(1)Section 46 is amended as follows.U.K.

(2)In subsection (2) (the general exclusions) in general exclusion 8—

(a)for “Either” substitute Any

(b)after the entry relating to section 13 insert— “ section 13A (use for other purposes of plant or machinery provided for long funding leasing); ”.

Commencement of leasing under long funding lease: disposal events and disposal valuesU.K.

5(1)Section 61 (disposal events and disposal values) is amended as follows.U.K.

(2)In subsection (1) (disposal events) after paragraph (e) insert—

(ee)the plant or machinery begins to be leased under a long funding lease (see Chapter 6A);.

(3)In subsection (2) (disposal values) in the Table (disposal event, disposal value) after item 5 insert—

5A. Commencement of the term of a long funding finance lease of the plant or machinery.An amount equal to that which would fall to be recognised as the lessor's net investment in the lease if accounts were prepared in accordance with generally accepted accounting practice on the date on which the lessor's net investment in the lease is first recognised in the books or other financial records of the lessor.
5B. Commencement of the term of a long funding operating lease of the plant or machinery.An amount equal to the market value of the plant or machinery at the commencement of the term of the lease..

(4)In item 6 in that Table (which refers to the occurrence of an event within items 1 to 5) for “5” substitute “ 5B ”.

Lessee under long funding lease: capital allowances, disposal events and disposal valuesU.K.

6In Chapter 6 of Part 2 (hire-purchase etc and plant or machinery provided by lessee) after section 70 insert—

Lessees under long funding leasesU.K.
70AEntitlement to capital allowances

(1)This section applies if a person carrying on a qualifying activity incurs expenditure (whether or not of a capital nature) on the provision of plant or machinery for the purposes of the qualifying activity under a long funding lease.

(2)In the application of this Part in the case of that person, the plant or machinery is to be treated as owned by him at any time when he is the lessee under the long funding lease.

That is so whether or not the lease also falls to be regarded as a long funding lease in the application of this Part in the case of the lessor.

(3)The person is to be treated for the purposes of this Part as having incurred capital expenditure on the provision of the plant or machinery as follows.

(4)The capital expenditure is to be treated as incurred at the commencement of the term of the long funding lease.

(5)The amount of the capital expenditure varies, according to whether the long funding lease is—

(a)a long funding operating lease (subsection (6)), or

(b)a long funding finance lease (subsection (7)).

(6)If the long funding lease is a long funding operating lease, the amount of the capital expenditure is to be found in accordance with section 70B.

(7)If the long funding lease is a long funding finance lease, the amount of the capital expenditure is to be found in accordance with section 70C.

(8)See Chapter 6A for interpretation of this section.

70BLong funding operating lease: amount of capital expenditure

(1)This section applies by virtue of section 70A(6).

(2)If the long funding lease is a long funding operating lease, the amount of the capital expenditure is the market value of the plant or machinery at the later of—

(a)the commencement of the term of the lease;

(b)the date on which the plant or machinery is first brought into use for the purposes of the qualifying activity.

(3)This section is to be construed as one with section 70A.

70CLong funding finance lease: amount of capital expenditure

(1)This section has effect by virtue of section 70A(7) for the purpose of determining the amount of the capital expenditure in the case of a long funding finance lease.

(2)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan, this section applies as if the lease were one which, under generally accepted accounting practice, fell to be treated as a finance lease.

(3)The amount of the capital expenditure is the total of—

(a)commencement PVMLP (see subsection (4)), and

(b)if subsection (6) applies, the unrelievable pre-commencement rentals (“UPR”),

but subject, in a case falling within subsection (7), to the restriction imposed by subsection (8).

(4)Commencement PVMLP is the amount that would fall to be recognised as the present value, at the appropriate date, of the minimum lease payments (see section 70YE) if appropriate accounts were prepared by the person.

(5)For the purposes of subsection (4)—

  • “appropriate accounts” are accounts prepared in accordance with generally accepted accounting practice on the date on which that amount is first recognised in the books or other financial records of the person;

  • “the appropriate date” is the later of—

    (a)

    the commencement of the term of the lease;

    (b)

    the date on which the plant or machinery is first brought into use for the purposes of the qualifying activity.

(6)This subsection applies if—

(a)the person has paid rentals under the lease before the commencement of the term of the lease, and

(b)in the case of some or all of those rentals, relief otherwise than by virtue of this subsection—

(i)is not available, and

(ii)if the case is one where the plant or machinery was not used for the purposes of a qualifying activity in the period before the commencement of the term of the lease, would not have been available had the plant or machinery been used in that period for the purposes of a qualifying activity,

and in any such case UPR is the amount of the rentals for which relief is not, and (in a case falling within paragraph (b)(ii)) would not have been, so available.

(7)Subsection (8) applies if the main purpose, or one of the main purposes, of entering into—

(a)the lease,

(b)a series of transactions of which the lease is one, or

(c)any of the transactions in such a series,

is to obtain allowances under this Part in respect of an amount of capital expenditure that materially exceeds the market value of the leased asset at the commencement of the term of the lease.

(8)In any such case, the amount of the capital expenditure described in subsection (3) is to be restricted to an amount equal to the market value of the asset at the commencement of the term of the lease.

(9)In this section “relief” means relief by way of—

(a)an allowance under this Act,

(b)a deduction in computing profits for the purposes of income tax or corporation tax,

(c)a deduction from total profits or total income for the purposes of either of those taxes.

(10)This section is to be construed as one with section 70A.

70DLong funding finance lease: additional expenditure: allowances for lessee

(1)This section applies where the following conditions are met—

(a)a person is the lessee of plant or machinery under a long funding finance lease,

(b)as a result of section 70A, the person falls to be regarded as having incurred qualifying expenditure on the provision of the plant or machinery, and

(c)the lessor incurs expenditure in relation to the plant or machinery,

(d)as a result of the lessor incurring the expenditure, there is in the case of the lessee an increase (the “relevant increase”) in the present value of the minimum lease payments.

(2)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan, this section applies as if the lease were one which, under generally accepted accounting practice, fell to be treated as a finance lease.

(3)The person is to be treated for the purposes of this Part as having incurred further capital expenditure on the provision of the plant or machinery as follows.

(4)The person is to be treated as having incurred the expenditure on the date of first recognition.

(5)The amount of the expenditure is the amount that would fall to be recognised as the amount of the relevant increase if appropriate accounts were prepared by the person.

(6)For that purpose, “appropriate accounts” are accounts prepared in accordance with generally accepted accounting practice on the date of first recognition.

(7)For the purposes of this section, the “date of first recognition” is the date on which the relevant increase is first recognised in the books or other financial records of the person.

(8)This section is to be construed as one with section 70A.

70EDisposal events and disposal values

(1)This section applies where—

(a)a person is the lessee of plant or machinery under a long funding lease,

(b)as a result of section 70A, the person falls to be regarded as having incurred qualifying expenditure on the provision of the plant or machinery, and

(c)the lease terminates.

(2)In the case of that person—

(a)the termination of the lease is a disposal event, and

(b)the person is required to bring into account a disposal value for the chargeable period in which that disposal event occurs.

(3)The amount of the disposal value varies according to whether the lease is—

(a)a long funding operating lease (see subsections (4) to (6)), or

(b)a long funding finance lease (see subsections (7) and (8)).

(4)If the lease is a long funding operating lease, the disposal value is the sum of—

(a)element A (see subsection (5)), and

(b)element B (see subsection (6)).

(5)Element A is the amount (if any) by which—

(a)the market value of the plant or machinery at the later of—

(i)the commencement of the term of the lease,

(ii)the date on which the plant or machinery is first brought into use for the purposes of the qualifying activity,

exceeds

(b)the aggregate amount of the reductions that fell to be made under section 502K of ICTA or 148I of ITTOIA 2005 for periods of account in which the person was the lessee.

(6)Element B is the sum of any amounts payable to the person which are calculated by reference to the termination value.

(7)If, in the case of the person, the lease is a long funding finance lease, the amount of the disposal value is found by first finding the sum of—

(a)any amounts payable to the person which are calculated by reference to the termination value, and

(b)if the lease terminates before the end of the term, the amount that would fall to be recognised as the present value, immediately before the termination, of the balance of the minimum lease payments (see subsection (8)) if appropriate accounts were prepared by the person,

and then reducing that sum (but not below nil) by subtracting from it any amount payable by the person to the lessor for or in consequence of the termination.

(8)For the purposes of subsection (7)(b)—

(a)the balance of the minimum lease payments is the amount by which MLP exceeds TMLP, where—

  • MLP is the amount of the minimum lease payments, and

  • TMLP is the amount that would have been the minimum lease payments if the term of the lease had been such as to expire on the day of the termination, and

(b)“appropriate accounts” are accounts prepared in accordance with generally accepted accounting practice immediately before the termination of the lease.

(9)If the termination of the lease gives rise to a disposal event in the case of the person apart from this section, that disposal event is to be ignored.

(10)This section is to be construed as one with section 70A..

Interpretation of provisions relating to long funding leasesU.K.

7In Part 2, after Chapter 6 insert—

Chapter 6AU.K.Interpretation of provisions about long funding leases
IntroductoryU.K.
70FIntroductory

This Chapter makes provision for the interpretation of this Part so far as relating to long funding leases.

Meaning of “long funding lease” etcU.K.
70G“Long funding lease”

(1)A “long funding lease” is a funding lease (see section 70J) which meets the following conditions—

(a)it is not a short lease (see section 70I),

(b)it is not an excluded lease of background plant or machinery for a building (see section 70R),

(c)it not excluded by section 70U (plant or machinery leased with land: low percentage value).

(2)Where, at the commencement of the term of a plant or machinery lease, the plant or machinery—

(a)is not being used for the purposes of a qualifying activity carried on by the person concerned, but

(b)subsequently begins to be used for the purposes of a qualifying activity carried on by that person,

the plant or machinery lease is a long funding lease if the condition in subsection (3) is met.

(3)The condition is that (apart from section 70H) the plant or machinery lease would have been a long funding lease at its inception had the plant or machinery been used at that time for the purposes of a qualifying activity carried on by the person concerned.

(4)This section is subject, in the case of the lessee, to—

(a)section 70H (requirement for tax return treating lease as long funding lease);

(b)section 70Q (leases excluded by right of lessor etc to claim capital allowances).

(5)See also paragraph 91A of Schedule 22 to the Finance Act 2000 (tonnage tax: certain leases to be treated as not being long funding leases).

70HLessee: requirement for tax return treating lease as long funding lease

(1)A lease is not a long funding lease in the case of the lessee unless he makes a tax return for the initial period on the basis that he falls to be taxed in respect of the lease in accordance with the provisions of—

(a)Chapter 5A of Part 12 of ICTA (long funding leases: corporation tax), or

(b)Chapter 10A of Part 2 of ITTOIA 2005 (long funding leases: income tax).

(2)Where, in the case of a lease, a person has made a tax return for the initial period—

(a)on the basis that he falls to be taxed in respect of the lease in accordance with those provisions, or

(b)on the basis that he does not fall to be so taxed,

he may not make a claim for relief under the error or mistake provisions in respect of the tax return having been made on that basis.

(3)In this section—

  • the error or mistake provisions” means—

    (a)

    section 33 of the Taxes Management Act 1970; or

    (b)

    paragraph 51 of Schedule 18 to the Finance Act 1998;

  • “the initial period” is the first accounting period or, as the case may be, tax year in which there is a difference in the amount of the profits or losses falling to be shown in the return, according to whether the lease is a long funding lease or not;

  • tax return” means—

    (a)

    a company tax return under paragraph 3 of Schedule 18 to the Finance Act 1998, or

    (b)

    a return under section 8 of the Taxes Management Act 1970 (income tax: personal return).

70I“Short lease”

(1)Construe “short lease” in accordance with this section.

(2)A lease whose term is 5 years or less is a short lease.

(3)Where the term of a lease is—

(a)longer than 5 years, but

(b)not longer than 7 years,

the lease is a short lease if Conditions A, B and C are met.

(4)Condition A is that the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a finance lease.

(5)Condition B is that—

(a)the residual value of the plant or machinery which is implied in the terms of the lease,

is not more than

(b)5% of the market value of the plant or machinery at the commencement of the term of the lease, as estimated at the inception of the lease.

(6)Condition C is that under the terms of the lease—

(a)the total rentals falling due in the first reference year, if less than the total rentals falling due in the second reference year, are no more than 10% less than those rentals, and

(b)the total rentals falling due in the final year or in any reference year after the second reference year, if greater than the total rentals falling due in the second reference year, are no more than 10% greater than those rentals.

(7)For the purposes of Condition C—

(a)the first reference year is the period of 12 months beginning with the day next after the commencement of the term of the lease;

(b)the other reference years are successive periods of 12 months each beginning on an anniversary of that day and ending before the last day of the term of the lease;

(c)the final year is the period of 12 months ending with the last day of the term of the lease;

(d)any part of the final year, other than the last day, may accordingly also be part of a reference year.

(8)In determining whether Condition C is met, exclude any variation in the rentals that results from changes in a standard published base rate for interest.

(9)Where—

(a)a person leases an asset to another (“S”) under a lease that would, apart from this subsection, be a short lease,

(b)the inception of that lease is on or after 7th April 2006,

(c)at or about the time of the inception of that lease, arrangements are entered into for the asset to be leased to one or more other persons under one or more other leases, and

(d)in the aggregate, the term of the lease to S and the terms of the leases to such of those other persons as are connected with S exceed 5 years,

the lease to S is not a short lease.

70J“Funding lease”

(1)A “funding lease” is a plant or machinery lease (see section 70K) which at its inception meets one or more of the following tests—

(a)the finance lease test (see section 70N),

(b)the lease payments test (see section 70O),

(c)the useful economic life test (see section 70P).

(2)Subsection (1) is subject to the following provisions of this section.

(3)A plant or machinery lease is not a funding lease if—

(a)section 67 applies (plant or machinery treated as owned by person entitled to benefit of contract, etc), and

(b)the lease is the contract mentioned in that section.

(4)A plant or machinery lease is not a funding lease if—

(a)before the commencement of the term of the lease, the lessor has leased the plant or machinery under one or more other plant or machinery leases,

(b)in the aggregate, the terms of those other leases exceed 65% of the remaining useful economic life of the plant or machinery at the commencement of the term of the earliest of them, and

(c)none of those earlier leases was a funding lease.

(5)For the purposes of subsection (4), all persons who were lessors of the plant or machinery before 1st April 2006 are to be treated as if they were the same person as the first lessor of the plant or machinery on or after that date.

(6)A plant or machinery lease is not a funding lease in the case of the lessor if—

(a)before 1st April 2006, the plant or machinery had, for a period or periods totalling at least 10 years, been the subject of one or more leases, and

(b)the lessor under the plant or machinery lease was also lessor of the plant or machinery on the last day before 1st April 2006 on which the plant or machinery was the subject of a lease.

Meaning of “plant or machinery lease”U.K.
70K“Plant or machinery lease”

(1)A “plant or machinery lease” is any of the following—

(a)any agreement or arrangement to which subsection (2) applies,

(b)any other agreement or arrangement, to the extent that subsection (3) applies to it,

(c)where plant or machinery is the subject of a sale and finance leaseback, as defined in section 221, the finance lease mentioned in subsection (1)(c) of that section,

and “lease”, “lessor”, “lessee” and other related expressions are to be construed accordingly.

(2)This subsection applies to an agreement or arrangement—

(a)under which a person grants to another person the right to use plant or machinery for a period, and

(b)which, in accordance with generally accepted accounting practice, falls (or would fall) to be treated as a lease.

(3)This subsection applies to an agreement or arrangement to the extent that—

(a)in accordance with generally accepted accounting practice, it falls (or would fall) to be treated as a lease, and

(b)it meets the conditions in subsection (4).

(4)The conditions are that, for the purposes of generally accepted accounting practice,—

(a)the agreement or arrangement conveys, or falls (or would fall) to be regarded as conveying, the right to use an asset, and

(b)the asset is plant or machinery.

(5)In the case of an agreement or arrangement that falls (or would fall) within subsection (2) or (3) immediately after the commencement of the term of the lease, the condition in subsection (2)(b) or (3)(a) (as the case may be) is to be taken to be met as respects any time in the pre-commencement period.

(6)For the purposes of subsection (5), the “pre-commencement period” is the period that—

(a)begins with the inception of the lease, and

(b)ends with the commencement of the term of the lease.

70LPlant or machinery leased with other assets: separate derived leases

(1)This section applies in any case where an agreement or arrangement (the “mixed lease”) at any time relates, or is to relate, or has come to relate, to both—

(a)plant or machinery of any particular description (the “relevant plant or machinery”), and

(b)other assets (whether or not also plant or machinery).

(2)A mixed lease is an “eligible mixed lease” if—

(a)under generally accepted accounting practice, it falls (or would fall) to be treated as a lease, or

(b)the relevant plant or machinery is the subject of a sale and finance leaseback, as defined in section 221, and the mixed lease is or includes the finance lease mentioned in subsection (1)(c) of that section.

(3)In the case of an agreement or arrangement that falls (or would fall) within paragraph (a) of subsection (2) immediately after the commencement of the term of the lease, the condition in that paragraph is to be taken to be met as respects any time in the pre-commencement period.

(4)For the purposes of subsection (3), the “pre-commencement period” is the period that—

(a)begins with the inception of the lease, and

(b)ends with the commencement of the term of the lease.

(5)Where this section applies—

(a)the eligible mixed lease, so far as relating to the relevant plant or machinery, and

(b)the eligible mixed lease, so far as relating to other assets,

shall be treated for the purposes of this Part (other than this section) as if they were separate agreements or arrangements.

(6)Any such notional separate agreement or arrangement is referred to in this Part as a “derived lease”.

(7)Section 70M makes further provision with respect to derived leases of plant or machinery.

70MDerived leases of plant or machinery: term and rentals

(1)This section has effect in any case where, as a result of applying section 70L, there is a derived lease of the relevant plant or machinery.

(2)This section makes provision with respect to—

(a)determining whether the derived lease is a plant or machinery lease (see subsection (3)),

(b)the term of the derived lease (see subsection (4)),

(c)the rentals to be regarded as payable under the derived lease (see subsections (5) to (7)).

(3)Any question whether the derived lease—

(a)is a plant or machinery lease, or

(b)if it is such a lease, whether it is also a long funding lease,

is to be determined in accordance with the provisions of this Part.

(4)The term of the derived lease—

(a)is limited to the remaining useful economic life of the relevant plant or machinery at the commencement of the term of the derived lease, but

(b)subject to that, is to be determined in accordance with section 70YF (the “term” of a lease).

(5)The rentals that are to be regarded as payable under the derived lease shall be such rentals (the “deemed rentals”) as are just and reasonable in all the circumstances of the case.

(6)It shall be assumed that rentals under the derived lease are payable in equal instalments throughout the term of the lease, unless it is reasonable to draw a different conclusion from all the circumstances of the case.

(7)In determining the amount of any deemed rentals, regard shall be had to—

(a)all the provisions of the eligible mixed lease,

(b)the nature of the relevant plant or machinery,

(c)the value of the relevant plant or machinery at the commencement of the term of the derived lease,

(d)the amount which, at the commencement of the term of the derived lease, is expected to be the market value of the relevant plant or machinery at the end of the term of the derived lease,

(e)the remaining useful economic life of the relevant plant or machinery at the commencement of the term of the derived lease;

(f)the term of the derived lease.

(8)Expressions used in section 70L have the same meaning in this section.

The tests for being a funding leaseU.K.
70NThe finance lease test

(1)A lease meets the finance lease test in the case of any person if the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a finance lease or a loan in the accounts—

(a)of that person, or

(b)where that person is the lessor, of any person connected with him.

(2)In this section “accounts”, in relation to a company, includes any accounts which—

(a)relate to two or more companies of which that company is one, and

(b)are drawn up in accordance with generally accepted accounting practice.

(3)Where for any period—

(a)a person is not within the charge to income tax or corporation tax by reason of not being resident in the United Kingdom, and

(b)accounts are not prepared in accordance with international accounting standards or UK generally accepted accounting practice,

any question relating to generally accepted accounting practice is to be determined for the purposes of this section by reference to generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards.

70OThe lease payments test

(1)A lease meets the lease payments test if—

(a)the present value of the minimum lease payments (see section 70YE),

is equal to

(b)80% or more of the fair value of the leased plant or machinery.

(2)The present value of the minimum lease payments is to be calculated by using the interest rate implicit in the lease.

(3)In this section “fair value” means—

(a)the market value of the leased plant or machinery,

less

(b)any grants receivable towards the purchase or use of that plant or machinery.

(4)For the purposes of this section—

(a)the interest rate implicit in the lease is the interest rate that would apply in accordance with normal commercial criteria, including, in particular, generally accepted accounting practice (where applicable), but

(b)if the interest rate implicit in the lease cannot be determined in accordance with paragraph (a), it is the temporal discount rate for the purposes of section 70 of the Finance Act 2005 (companies: film relief: valuation of “rights to guaranteed income” and “disposed rights”).

70PThe useful economic life test

A lease meets the useful economic life test if the term of the lease is more than 65% of the remaining useful economic life of the leased plant or machinery.

Leases excluded by right of lessor etc to claim capital allowancesU.K.
70QLeases excluded by right of lessor etc to claim capital allowances

(1)A lease is not a long funding lease in the case of the lessee if it is excluded by virtue of subsection (2) (but see also subsection (5)).

(2)A lease is excluded if the lessor, or any superior lessor (see subsections (7) to (9)),—

(a)is entitled, at the commencement of the term of the lease, to claim a relevant allowance (see subsection (6)),

(b)would have been so entitled at that time, but for section 70V (tax avoidance involving international leasing),

(c)has at any earlier time been entitled to claim such an allowance, but has not been required to bring a disposal value into account in accordance with section 61(1)(ee), or

(d)would fall within any one or more of paragraphs (a) to (c), if he had been within the charge to income tax or corporation tax at the inception of the lease and any earlier times.

(3)Where for any period the lessor, or any superior lessor, is a person—

(a)who is not within the charge to income tax or corporation tax by reason of not being resident in the United Kingdom, and

(b)who does not prepare accounts in accordance with international accounting standards or UK generally accepted accounting practice,

subsection (4) applies.

(4)In determining whether the condition in subsection (2)(d) is met in any such case, any question relating to generally accepted accounting practice in relation to that person and that period is to be determined by reference to generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards.

(5)A lease is not excluded by virtue of subsection (2) if—

(a)the inception of the lease is before 28th June 2006, and

(b)by virtue only of section 70J(6), the lease is not a funding lease in the case of the lessor.

(6)A “relevant allowance” is an allowance under this Act in respect of the leased plant or machinery.

(7)There is a “superior lessor” only if the leased plant or machinery is the subject of a chain of superior leases.

(8)Leased plant or machinery is the subject of a chain of superior leases if—

(a)the lessor has his interest in relation to the plant or machinery under or by virtue of a lease from a third person (P), or

(b)the circumstances are as in paragraph (a), but P has his interest in relation to the plant or machinery under or by virtue of a lease from a fourth person (Q), or

(c)the circumstances are as in paragraph (b), but Q has his interest in relation to the plant or machinery under or by virtue of a lease from a fifth person (R),

and so on, where there is more than a fifth person involved.

(9)Where any leased plant or machinery is the subject of a chain of superior leases, the superior lessors are the persons described in subsection (8) as P, Q, R, and so on.

(10)Subsections (6) to (9) have effect for the interpretation of this section.

Excluded leases of background plant or machinery for a buildingU.K.
70RExcluded leases of background plant or machinery for a building

(1)Construe references to an excluded lease of background plant or machinery for a building in accordance with this section.

(2)This section applies where—

(a)plant or machinery is affixed to, or otherwise installed in or on, any land which consists of or includes a building,

(b)the plant or machinery is background plant or machinery for the building (see subsections (4) and (5)),

(c)the plant or machinery is leased with the land under a mixed lease, and

(d)none of the disqualifications set out in section 70S applies.

(3)In any such case, the derived lease of the plant or machinery is an excluded lease of background plant or machinery for a building.

(4)The background plant or machinery for a building is any plant or machinery—

(a)which is of such a description that plant or machinery of that description might reasonably be expected to be installed in, or in or on the sites of, a variety of buildings of different descriptions, and

(b)whose sole or main purpose is to contribute to the functionality of the building or its site as an environment within which activities can be carried on.

(5)Subsection (4) has effect subject to the provisions of any order under section 70T.

70SThe disqualifications

(1)This section sets out the disqualifications mentioned in subsection (2)(d) of section 70R and is to be construed as one with that section.

(2)Disqualification A is that the amounts payable—

(a)under the mixed lease, or

(b)under any other arrangement,

vary, or may be varied, by reference to the value from time to time to the lessor of allowances under this Act in respect of expenditure incurred by him in the provision of the background plant or machinery for the building.

(3)Disqualification B is that the main purpose, or one of the main purposes, of entering into—

(a)the mixed lease,

(b)a series of transactions of which the mixed lease is one, or

(c)any of the transactions in such a series,

is to secure that allowances under this Act are available to the lessor in respect of expenditure incurred in the provision of background plant or machinery for a building.

70TOrders relating to background plant or machinery for a building

(1)This section supplements section 70R and is to be construed as one with it.

(2)The Treasury may by order prescribe—

(a)descriptions of plant or machinery to be used as examples of the kinds of plant or machinery that may be regarded as falling within the definition of background plant or machinery for a building in determining whether any particular plant or machinery does or does not fall within that definition;

(b)descriptions of plant or machinery to be deemed to be background plant or machinery for a building;

(c)descriptions of plant or machinery to be deemed not to be background plant or machinery for a building.

(3)An order under this section—

(a)may make different provision for different cases (including different descriptions of building),

(b)may contain incidental, consequential, supplemental, or transitional provision or savings.

(4)The first order made under this section may include provisions having effect in relation to times before the making of the order (but not times earlier than 1st April 2006).

Exclusion for certain plant or machinery leased with landU.K.
70UPlant or machinery leased with land: low percentage value

(1)This section applies where—

(a)any plant or machinery (the “relevant plant or machinery”) is affixed to, or otherwise installed, in or on any land,

(b)the plant or machinery is not background plant or machinery for any building situated in or on the land,

(c)the plant or machinery is leased with the land under a mixed lease, and

(d)none of the relevant disqualifications applies.

(2)For the purposes of this section the “relevant disqualifications” are the disqualifications set out in section 70S, but for this purpose—

(a)take the reference in subsection (1) of that section to subsection (2)(d) of section 70R as a reference to this subsection (and, accordingly, construe the second reference to that section as a reference to this section), and

(b)take references in section 70S to background plant or machinery for a building as references to relevant plant or machinery.

(3)Where this section applies, the derived lease of the relevant plant or machinery is excluded by this section if the condition in subsection (4) is met at the commencement of the term of that lease.

(4)The condition is that AMV does not exceed both—

(a)10% of BMV; and

(b)5% of LMV.

(5)For that purpose—

  • AMV is the aggregate of—

    (a)

    the market value of the relevant plant or machinery, and

    (b)

    the market value of any other plant or machinery that falls within subsection (1) in the case of the leased land;

  • BMV is the aggregate market value of all the background plant or machinery leased with the land;

  • LMV is the market value of the land (including buildings and fixtures).

(6)For this purpose the market value of any land at any time is to be determined on the assumption of a sale by an absolute owner of the land free from all leases and other encumbrances.

AvoidanceU.K.
70VTax avoidance involving international leasing

(1)This section applies where matters are so arranged that there are plant or machinery leases such that—

(a)under a lease by a non-resident, an asset is provided directly or indirectly to a resident,

(b)the direct provision of the asset to the resident is by a lease which, in the case of the resident, is a long funding lease or a lease to which section 67 (hire purchase etc) applies,

(c)the asset is used by the resident for the purpose of leasing it under a lease (the “relevant lease”) that would not (apart from this section) be a long funding lease in the case of the resident, and

(d)under the relevant lease, the asset is provided directly or indirectly (but by a lease) to a non-resident.

(2)Subsection (3) applies if the sole or main purpose of arranging matters in that way is to obtain a tax advantage by securing that allowances under this Part are available to a resident by virtue of—

(a)section 67 (hire purchase), or

(b)section 70A (long funding leases).

(3)In any such case, the relevant lease is deemed to be a long funding lease in the case of the resident who is the lessor under it.

(4)The reference in this section to a person obtaining a tax advantage (see section 577(4)) also includes a reference to a person obtaining a tax advantage within the meaning of Chapter 1 of Part 17 of ICTA (see section 709 of that Act).

(5)In this section—

  • non-resident” means a person who—

    (a)

    is not resident in the United Kingdom, and

    (b)

    does not use the plant or machinery exclusively for earning profits chargeable to tax;

  • resident” means a person who—

    (a)

    is resident in the United Kingdom, or

    (b)

    uses the plant or machinery exclusively for earning profits chargeable to tax.

Transfers, assignments, novations, leaseback, variations etcU.K.
70WTransfers, assignments etc by lessor

(1)This section applies in any case where the following conditions are met—

(a)a person (the “old lessor”) is lessor of plant or machinery under a plant or machinery lease (the “old lease”),

(b)during the term of the lease, the old lessor transfers the plant or machinery to another person (the “new lessor”),

(c)the transfer is not the grant of a plant or machinery lease by the old lessor,

(d)immediately after the transfer, the new lessor is the lessor of the plant or machinery under a lease (“the new lease”) (whether or not the same lease as the old lease).

(2)If it is not otherwise the case,—

(a)the old lessor is to be treated as if the old lease terminated immediately before the transfer, and

(b)the new lessor is to be treated as if the new lease had been entered into immediately after the transfer.

(3)The new lessor is also to be treated as if the date of the transfer were the date of both—

(a)the inception of the new lease, and

(b)the commencement of the term of the new lease,

if it is not otherwise the case.

(4)If, immediately before the transfer, the old lease was (or was treated by virtue of this subsection as being) in the case of the old lessor a lease of either of the following descriptions—

(a)a long funding lease, or

(b)a lease which is not a long funding lease,

the new lease is to be treated in the case of the new lessor as being a lease of the same description, if the conditions in subsection (5) are met.

(5)The conditions are that—

(a)the term of the new lease is the unexpired portion of the term of the old lease, and

(b)the amounts receivable under the new lease are the same as would have been receivable under the old lease, assuming it to have continued in effect.

(6)If—

(a)it is not otherwise the case, and

(b)the conditions in subsection (5) are met,

the lessee is to be treated as if the old lease and the new lease were the same continuing lease.

(7)Any reference in this section to a transfer of plant or machinery by a person includes a reference to—

(a)any kind of disposal of, or of the person's interest in, the plant or machinery,

(b)any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes lessor of the plant or machinery,

(c)in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70XTransfers, assignments etc by lessee

(1)This section applies in any case where the following conditions are met—

(a)a person (the “old lessee”) is lessee of plant or machinery under a plant or machinery lease (the “old lease”),

(b)during the term of the lease, the old lessee transfers the plant or machinery to another person (the “new lessee”),

(c)the transfer is not the grant of a plant or machinery lease by the old lessee,

(d)immediately after the transfer, the new lessee is the lessee of the plant or machinery under a lease (“the new lease”) (whether or not the same lease as the old lease).

(2)If it is not otherwise the case,—

(a)the old lessee is to be treated as if the old lease terminated immediately before the transfer, and

(b)the new lessee is to be treated as if the new lease had been entered into immediately after the transfer.

(3)The new lessee is also to be treated as if the date of the transfer were the date of both—

(a)the inception of the new lease, and

(b)the commencement of the term of the new lease,

if it is not otherwise the case.

(4)If, immediately before the transfer, the old lease was (or was treated by virtue of this subsection as being) in the case of the old lessee a lease of one of the following descriptions—

(a)a long funding lease, or

(b)a lease which is not a long funding lease,

the new lease is to be treated in the case of the new lessee as being a lease of the same description, if the conditions in subsection (5) are met.

(5)The conditions are that—

(a)the term of the new lease is the unexpired portion of the term of the old lease, and

(b)the amounts payable under the new lease are the same as would have been payable under the old lease, assuming it to have continued in effect.

(6)If—

(a)it is not otherwise the case, and

(b)the conditions in subsection (5) are met,

the lessor is to be treated as if the old lease and the new lease were the same continuing lease.

(7)Any reference in this section to a transfer of plant or machinery by a person includes a reference to—

(a)any kind of disposal of, or of the person's interest in, the plant or machinery,

(b)any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes lessee of the plant or machinery,

(c)in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70YSale and leaseback, lease and leaseback etc: lessors

(1)Where—

(a)a person (B) transfers plant or machinery to another person (A),

(b)the plant or machinery is directly or indirectly leased back to B, and

(c)immediately before the commencement of the term of the lease back to B, B is the lessor of the plant or machinery to another person under a lease which is, in B's case, a long funding lease,

the lease back to B is, in the case of both A and B, a long funding lease.

(2)If, in any such case, the plant or machinery is leased back from A to B indirectly, any leases by means of which the indirect lease back from A to B is effected are also long funding leases in the case of each of the parties to them.

(3)Any reference in this section to a transfer of plant or machinery by a person includes a reference to—

(a)any kind of disposal of, or of the person's interest in, the plant or machinery (including the grant of a lease),

(b)any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes entitled to, or to an interest in, the plant or machinery,

(c)in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70YAChange in accountancy classification of long funding lease

(1)This section applies in any case where—

(a)a person is lessor or lessee under a long funding lease, and

(b)at any time after the inception of the lease, the accountancy classification of the lease as a finance lease or an operating lease changes in the relevant accounts.

(2)The person is to be treated as if—

(a)the lease had terminated immediately before the time of the change,

(b)another lease (the “new lease”) had been entered into immediately after the time of the change, and

(c)the new lease were a long funding lease in the case of the lessor.

(3)The person is also to be treated as if the date on which the change occurs were the date of both—

(a)the inception of the new lease, and

(b)the commencement of the term of the new lease.

(4)The cases where the accountancy classification of a long funding lease as a finance lease or an operating lease changes at any time (the “relevant time”) in the relevant accounts are those set out in subsections (5) and (6).

(5)Case 1 is where—

(a)immediately before the relevant time, the lease is one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as a finance lease for accounting purposes, and

(b)at the relevant time the lease becomes one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as not being a finance lease for accounting purposes.

(6)Case 2 is where—

(a)immediately before the relevant time, the lease is one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as not being a finance lease for accounting purposes, and

(b)at the relevant time the lease becomes one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as a finance lease for accounting purposes.

(7)The Treasury may by regulations make provision for or in connection with restricting the application or operation of this section.

(8)In this section, any reference to a finance lease includes a reference to a loan.

(9)In the application of this section in relation to any person, the “relevant accounts” are the accounts—

(a)of that person, or

(b)where that person is the lessor, of any person connected with that person,

but only to the extent that the treatment of the lease in those accounts as a finance lease or otherwise falls (or would fall) to be determined by reference to that person as the lessor or lessee under the lease.

(10)Subsections (2) and (3) of section 70N (finance lease test: group accounts, and generally accepted accounting practice for persons outside the charge to tax) also apply for the purposes of this section.

70YBLong funding operating lease: extension of term of lease

(1)This section applies in any case where—

(a)a person is lessor or lessee under a long funding operating lease (the “existing lease”),

(b)an event occurs which has the effect of extending the term of the lease (whether by variation of the provisions of the lease, the grant or exercise of an option or in any other way), and

(c)the event is not one by reason of which, within the meaning of section 70YA, the accountancy classification of the lease as an operating lease changes in the relevant accounts.

(2)For this purpose an event has the effect of extending the term of the lease if it meets any of the following conditions—

(a)it has the effect of making a further period a non-cancellable period;

(b)it is the grant of an option to the lessee to continue to lease the plant or machinery for a further period, where it is reasonably certain at the time the option is granted that the lessee will exercise it;

(c)it is the exercise by the lessee of an option to continue to lease the plant or machinery for a further period;

(d)it does not fall within the preceding paragraphs, but it has the effect that the lessee will continue, or is reasonably certain to continue, to lease the plant or machinery for a further period.

For this purpose “further period” means a period falling wholly or partly after the end of the pre-existing term.

(3)The person is to be treated as if—

(a)the existing lease terminated at the end of the day before the effective date,

(b)another lease (the “new lease”) were entered into on the effective date, and

(c)the term of the new lease were the unexpired portion of the term of the existing lease, as extended.

(4)The person is also to be treated as if the effective date were the date of both—

(a)the inception of the new lease, and

(b)the commencement of the term of the new lease.

(5)The new lease is to be taken to be a long funding operating lease.

(6)For the purposes of this section the “effective date” is the earlier of—

(a)the day after the end of the pre-existing term of the existing lease;

(b)if the rentals payable are varied as a result of or otherwise in connection with the event, the date on which the variation takes effect.

(7)In this section—

  • non-cancellable period” has the same meaning as in section 70YF (the “term” of a lease);

  • pre-existing term”, in relation to a lease, means the term of the lease apart from the extension in question.

70YCExtension of term of lease that is not a long funding lease

(1)This section applies where—

(a)a person is lessor under a plant or machinery lease (the “existing lease”) that is not a long funding lease, and

(b)an event occurs which has the effect of extending the term of the lease (whether by variation of the provisions of the lease, the grant or exercise of an option or in any other way).

(2)Subsection (2) of section 70YB (events having the effect of extending the term of a lease) also has effect for the purposes of this section.

(3)Make the following assumptions—

(a)the existing lease terminates immediately before the effective date,

(b)another lease (the “new lease”) is entered into on the effective date,

(c)the term of the new lease is the portion of the term of the existing lease, as extended, that remains unexpired as at the effective date;

(d)the effective date is the date of both—

(i)the inception of the new lease, and

(ii)the commencement of the term of the new lease.

(4)If, on those assumptions, the new lease would be a long funding lease, the person is to be treated on those assumptions.

(5)If subsection (4) does not apply, then, for the purposes of any subsequent application of this section or section 70YD in the case of the existing lease, the term of the existing lease is to be taken to be the term as extended (or further extended).

(6)For the purposes of this section the “effective date” is the earlier of—

(a)the day after the end of the pre-existing term of the existing lease;

(b)if the rentals payable are varied as a result of or otherwise in connection with the event, the date on which the variation takes effect.

(7)In this section “pre-existing term”, in relation to a lease, means the term of the lease apart from the extension in question.

70YDIncrease in proportion of residual amount guaranteed: review of status

(1)This section applies where—

(a)a person is lessor under a lease (the “existing lease”) that is not a long funding lease,

(b)the person enters into an arrangement which meets, or arrangements which (taken together) meet, the conditions in subsection (2).

(2)The conditions are that—

(a)as a result of the arrangement or arrangements, there is an increase, after the inception of the lease, in the proportion of the residual amount that is guaranteed as mentioned in section 70YE(1)(b), and

(b)had the arrangement or arrangements been entered into before the inception of the lease, the lease would have been a long funding lease.

(3)The person is to be treated as if—

(a)the existing lease had terminated immediately before the time of the relevant transaction,

(b)another lease (the “new lease”) had been entered into immediately after the time of the relevant transaction,

(c)the term of the new lease were the portion of the term of the existing lease that remains unexpired as at the date of the relevant transaction;

(d)the date of the relevant transaction were the date of both—

(i)the inception of the new lease, and

(ii)the commencement of the term of the new lease.

(4)For the purposes of this section, the “relevant transaction” is the arrangement or, where two or more arrangements have been entered into, the latest of them.

(5)The Treasury may by regulations make provision for or in connection with restricting the application or operation of this section.

InterpretationU.K.
70YE“Minimum lease payments”

(1)In the case of any lease, the minimum lease payments are the minimum payments under the lease over the term of the lease (including any initial payment) together with—

(a)in the case of the lessee, so much of any residual amount as is guaranteed by him or a person connected with him, or

(b)in the case of the lessor, so much of any residual amount as is guaranteed by the lessee or a person who is not connected with the lessor.

(2)In determining the minimum payments, exclude so much of any payment as represents—

(a)charges for services, or

(b)qualifying UK or foreign tax to be paid by the lessor.

(3)In this section—

  • qualifying UK or foreign tax” means any tax or duty chargeable under the law of any part of the United Kingdom, or under the law of any foreign country, other than—

    (a)

    income tax,

    (b)

    corporation tax,

    (c)

    any tax chargeable under the law of a foreign country which is similar to income tax or corporation tax,

    and here “foreign country” means any territory outside the United Kingdom;

  • residual amount” means so much of the fair value of the plant or machinery subject to the lease as cannot reasonably be expected to be recovered by the lessor from the payments under the lease.

(4)In the definition of “residual amount” in subsection (3), “fair value” means—

(a)the market value of the leased plant or machinery,

less

(b)any grants receivable towards the purchase or use of that plant or machinery.

70YFThe “term” of a lease

(1)The term of a lease is the period comprising—

(a)so much of the post-commencement period as is a non-cancellable period, and

(b)any subsequent periods which meet the conditions in subsection (2).

(2)The conditions are that—

(a)the lessee has an option to continue to lease the asset for the period (whether with or without further payment), and

(b)it is reasonably certain, at the inception of the lease, that the lessee will exercise that option.

(3)The “post-commencement period” is so much of the period of the lease as begins with the commencement of the term of the lease.

(4)A “non-cancellable period” is any period during which the lessee may terminate the lease only—

(a)upon the occurrence of some remote contingency, or

(b)upon payment by the lessee of such an additional amount that, at the inception of the lease, continuation of the lease is reasonably certain.

(5)If, at the commencement of the term of the lease,—

(a)the market value of the asset exceeds £1 million, and

(b)the estimated market value of the asset 5 years after the commencement of the term of the lease is more than half of the market value of the asset at the commencement of the term of the lease,

subsection (6) applies.

(6)If, in any such case, the term of the lease (apart from this subsection) would be 5 years or less, but—

(a)the lessee has one or more options to continue to lease the asset,

(b)on the assumption that it is reasonably certain, at the inception of the lease, that the lessee will exercise those options, the term of the lease would exceed 7 years, and

(c)on failing to exercise any one of those options, the lessee may be required to make a payment to the lessor,

it is to be assumed for the purposes of this section that any option to continue to lease the asset will be exercised, unless it is reasonably certain, at the inception of the lease, that the option will not be exercised.

(7)Subsection (6) does not apply if, leaving out of account any options that would, by virtue of that subsection, result in the term of the lease exceeding 7 years, Conditions A, B and C in section 70I (meaning of “short lease”) are met.

(8)See also section 70YC(5) (extension, for certain purposes, of term of lease that is not a long funding lease).

70YG“Termination amount”

(1)This section applies where plant or machinery is or has been, or is to be, leased under a long funding lease.

(2)Construe “termination amount”, in the case of a long funding lease, in accordance with the following provisions of this section.

(3)If—

(a)the lease terminates as a result of a plant or machinery disposal event, or

(b)a plant or machinery disposal event occurs as a result of, or otherwise in connection with, the termination of the lease,

the termination amount is the disposal value that would have fallen to be brought into account by the lessor by reason of the plant or machinery disposal event on the assumptions in subsection (4).

(4)Those assumptions are—

(a)that section 34A (which prevents the lessor's expenditure for long funding leasing from being qualifying expenditure) did not apply in the case of the lessor, and

(b)that the lessor had claimed all the capital allowances that would in consequence have been available to him.

(5)If—

(a)subsection (3) does not apply, and

(b)the lease is a long funding finance lease,

the termination amount is the value at which, immediately after the termination of the lease, the plant or machinery is recognised in the books or other financial records of the lessor.

(6)If—

(a)subsection (3) does not apply, and

(b)the lease is a long funding operating lease,

the termination amount is the market value of the plant or machinery immediately after the termination of the lease.

(7)For the purposes of this section a “plant or machinery disposal event” is an event that would have been a disposal event in relation to the plant or machinery in the case of the lessor on the assumptions in subsection (4).

70YH“Termination value”

(1)This section applies where plant or machinery is or has been, or is to be, leased under a long funding lease.

(2)Construe “termination value” in accordance with the following provisions of this section.

(3)The general rule is that the termination value of any plant or machinery is the value of the plant or machinery at or about the time when the lease terminates.

(4)Any reference to calculation by reference to the termination value includes a reference to calculation by reference to any one or more of—

(a)the proceeds of sale, if the plant or machinery is sold after the lease comes to an end,

(b)any insurance proceeds, compensation or similar sums in respect of the plant or machinery,

(c)an estimate of the market value of the plant or machinery.

(5)Any reference to calculation by reference to the termination value also includes a reference to—

(a)determination in a way which, or by reference to factors or criteria which, might reasonably be expected to produce a broadly similar result to calculation by reference to the termination value, or

(b)any other form of calculation indirectly by reference to the termination value.

70YIGeneral definitions

(1)Construe these expressions as follows—

  • “absolute owner”, in the application of this Chapter in relation to Scotland, means the owner;

  • arrangement” includes any transaction or series of transactions;

  • background plant or machinery for a building” is to be construed in accordance with sections 70R to 70T;

  • building” includes a reference to—

    (a)

    a structure,

    (b)

    part of a building or structure;

  • commencement”, in relation to the term of a lease, means the date on and after which the lessee is entitled to exercise his right to use the complete leased asset under the lease;

for this purpose an asset is to be regarded as complete if its construction is substantially complete;

  • derived lease” is to be construed in accordance with section 70L;

  • the finance lease test” means the finance lease test in section 70N;

  • “fixture”—

    (a)

    means any plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land, and

    (b)

    includes any boiler or water-filled radiator installed in a building as part of a space or water heating system;

  • funding lease” has the meaning given by section 70J;

  • inception”, in relation to a plant or machinery lease, means the earliest date on which the following conditions are met—

    (a)

    there is a contract in writing for the lease between the lessor and the lessee,

    (b)

    either—

    (i)

    the contract is unconditional, or

    (ii)

    if it is conditional, the conditions have been met,

    (c)

    no terms remain to be agreed;

  • “initial payment”, in the case of a plant or machinery lease, means a payment by the lessee—

    (a)

    at or before the time when the lease is entered into, and

    (b)

    in respect of the plant or machinery which is the subject of the lease;

  • lease” includes any agreement or arrangement which is or includes a plant or machinery lease (and “lessor”, “lessee” and other related expressions are to be construed accordingly);

  • lease”, in relation to land, includes—

    (a)

    an underlease, sublease or any tenancy,

    (b)

    in England and Wales or Northern Ireland, an agreement for a lease, underlease, sublease, or tenancy,

    (c)

    in Scotland, an agreement (including missives of let not constituting a lease) under which a lease, sublease or tenancy is to be executed,

    (d)

    in the case of land situated outside the United Kingdom, any interest corresponding to a lease as so defined,

    and “lessor”, “lessee” and other related expressions are to be construed accordingly;

  • lease”, in relation to plant or machinery, includes a sublease (and “lessor”, “lessee” and other related expressions are to be construed accordingly);

  • lessee”, in relation to a lease, includes any person entitled to the lessee's interest under the lease;

  • lessor”, in relation to a lease, includes any person entitled to the lessor's interest under the lease;

  • long funding lease” has the meaning given by section 70G;

  • long funding finance lease” means a long funding lease that meets the finance lease test by virtue of section 70N(1)(a);

  • long funding operating lease” means a long funding lease which is not a long funding finance lease;

  • market value”, in relation to plant or machinery, is to be construed in accordance with subsection (2);

  • minimum lease payments” has the meaning given by section 70YE;

  • mixed lease” is to be construed in accordance with section 70L;

  • plant or machinery lease” has the meaning given by section 70K (and see also sections 70L and 70M);

  • “remaining useful economic life”, in the case of any leased plant or machinery, is the period—

    (a)

    beginning with the commencement of the term of the lease, and

    (b)

    ending when the asset is no longer used, and no longer likely to be used, by any person for any purpose as a fixed asset of a business;

  • short lease” is to be construed in accordance with section 70I;

  • the term”, in relation to a lease, is to be construed in accordance with section 70YF (but see also section 70YC(5) (extension, for certain purposes, of term of lease that is not a long funding lease));

  • termination”, in relation to a lease,—

    (a)

    means the coming to an end of the lease, whether by effluxion of time or in any other way, and

    (b)

    includes in particular the bringing to an end of the lease by any person or by operation of law,

    and related expressions are to be construed accordingly;

  • termination amount” is to be construed in accordance with section 70YG;

  • termination value” is to be construed in accordance with section 70YH.

(2)The market value of any plant or machinery at any time is to be determined on the assumption of a disposal by an absolute owner free from all leases and other encumbrances.

(3)In relation to a lease, any reference to plant or machinery includes a reference to fixtures.

(4)Section 839 of ICTA (connected persons) applies.

(5)Any necessary apportionments under or by virtue of this Chapter are to be made on a just and reasonable basis.

70YJPower to vary the meaning of certain expressions

(1)The Treasury may by regulations make provision amending this Chapter so as to vary—

(a)the meaning of “plant or machinery lease”, or

(b)the finance lease test.

(2)A statutory instrument containing regulations under this section is not to be made unless a draft of the instrument has been laid before, and approved by a resolution of, the House of Commons..

Cases in which short-life asset treatment is ruled outU.K.

8(1)The Table in section 84 is amended as follows.U.K.

(2)In paragraph 1 after sub-paragraph (a) insert—

(aa)section 13A (use for other purposes of plant or machinery provided for long funding leasing), or 

FixturesU.K.

9(1)In section 172 (scope of Chapter 14 of Part 2 (fixtures)) after subsection (2) insert—U.K.

(2A)Subsections (1) and (2) are subject to section 172A..

(2)After section 172 insert—

172ALong funding leases etc: cases where this Chapter does not apply.

(1)This section applies where plant or machinery that is or becomes a fixture is the subject of a long funding lease (see Chapter 6A).

(2)This section also applies if, in any such case,—

(a)the lessee under the long funding lease is or becomes the lessor of some or all of the plant or machinery under a further lease, and

(b)the further lease is not itself a long funding lease within subsection (1).

(3)This Chapter does not apply to determine the entitlement of the lessor or the lessee (under either lease) to allowances under this Part in respect of expenditure on the plant or machinery.

(4)This Chapter does not apply to determine whether the lessor or the lessee (under either lease) is to be treated as the owner of the plant or machinery..

Part 2 U.K.Corporation tax

IntroductoryU.K.

10ICTA is amended as follows.

Special rules for long funding leasesU.K.

11In Part 12 (special classes of companies and businesses) after section 502 insert the following Chapter—

Chapter 5AU.K.Special rules for long funding leases of plant or machinery: corporation tax
IntroductoryU.K.
502AScope of Chapter 5A

This Chapter has effect for the purposes of corporation tax only.

Lessors under long funding finance leasesU.K.
502BLessor under long funding finance lease: rental earnings

(1)This section applies for determining for the purposes of corporation tax the profits of a company for any period of account in which it is the lessor of any plant or machinery under a long funding finance lease.

(2)The amount to be brought into account as the lessor's taxable income from the lease for the period of account is the amount of the rental earnings in respect of the lease for the period of account.

(3)The “rental earnings” for any period is the amount which, in accordance with generally accepted accounting practice, falls (or would fall) to be treated as the gross return on investment for that period in respect of the lease where it meets the finance lease test.

(4)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan in the accounts in question, so much of the rentals under the lease as fall (or would fall) to be treated as interest are to be treated for the purposes of this section as rental earnings.

502CLessor under long funding finance lease: exceptional items

(1)This section applies for determining for the purposes of corporation tax the profits of a company which is or has been the lessor under a long funding finance lease.

(2)This section has effect where a profit or loss (whether of an income or capital nature)—

(a)arises to the company in connection with the lease, and

(b)in accordance with generally accepted accounting practice falls to be recognised for accounting purposes in a period of account, but

(c)would not, apart from this section, be brought into account in computing the profits of the company for the purposes of corporation tax.

(3)The profit or loss is to be treated—

(a)in the case of a profit, as income of the company attributable to the lease,

(b)in the case of a loss, as a revenue expense incurred by the company in connection with the lease.

(4)Any reference in this section to an amount falling to be recognised for accounting purposes in a period of account is a reference to an amount falling to be recognised for accounting purposes—

(a)in the company's profit and loss account or income statement,

(b)in the company's statement of recognised gains and losses or statement of changes in equity, or

(c)in any other statement of items brought into account in computing the company's profits or losses for that period.

502DLessor under long funding finance lease making termination payment

(1)This section applies for determining the liability to corporation tax of a company which is or has been the lessor under a long funding finance lease.

(2)Where—

(a)the lease terminates, and

(b)a sum calculated by reference to the termination value is paid to the lessee,

no deduction in respect of the sum paid to the lessee is allowed in computing the profits of the company.

(3)This section does not prevent a deduction in respect of a sum to the extent that the sum is brought into account in determining the company's rental earnings.

Lessors under long funding operating leasesU.K.
502ELessor under long funding operating lease: periodic deduction

(1)This section applies for determining for the purposes of corporation tax the profits of a company for any period of account—

(a)for the whole of which, or

(b)for any part of which,

the company is the lessor of any plant or machinery under a long funding operating lease.

(2)A deduction is allowed in computing the profits of the company for the period of account.

(3)The amount of the deduction for any period of account is to be determined as follows.

(4)First, find the “relevant value” for the purposes of subsection (6)(a) below, which is—

(a)if the only use of the plant or machinery by the lessor has been the leasing of it under the long funding operating lease as a qualifying activity, cost;

(b)if the last previous use of the plant or machinery by the lessor was the leasing of it under another long funding operating lease as a qualifying activity, market value;

(c)if the last previous use of the plant or machinery by the lessor was the leasing of it under a long funding finance lease as a qualifying activity, the recognised value;

(d)if the last previous use of the plant or machinery by the lessor was for the purposes of a qualifying activity other than leasing under a long funding lease, the lower of cost and market value;

(e)if the lessor owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, but—

(i)the plant or machinery is brought into use by the lessor for the purposes of a qualifying activity on or after 1st April 2006, and

(ii)that qualifying activity is the leasing of the plant or machinery under the long funding operating lease,

the relevant value is the lower of first use market value and first use amortised value.

(5)In subsection (4) above—

  • cost” means the amount of the expenditure incurred by the lessor on the provision of the plant or machinery;

  • first use amortised value” means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity, on the assumption that—

    (a)

    the cost of acquiring the plant or machinery had been written off on a straight line basis over the remaining useful economic life of the plant or machinery, and

    (b)

    any further capital expenditure incurred had been written off on a straight line basis over so much of the remaining economic life of the plant or machinery as remains at the time when the expenditure is incurred;

  • first use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity;

  • market value” means the market value of the plant or machinery at the commencement of the term of the long funding operating lease;

  • recognised value” means the value at which the plant or machinery is recognised in the books or other financial records of the lessor at the commencement of the long funding operating lease.

(6)From—

(a)the relevant value determined in accordance with subsection (4) above,

subtract

(b)the amount which, at the commencement of the term of the lease, is (or, in a case falling within subsection (4)(e) above, would have been) expected to be the residual value of the plant or machinery,

to find the expected gross reduction in value over the term of the lease.

(7)Apportion the amount of that expected gross reduction in value to each period of account in which any part of the term of the lease falls.

(8)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each period of account.

(9)The amount of the deduction for any period of account is the amount so apportioned to that period.

502FLong funding operating lease: lessor's additional expenditure

(1)This section applies if in any period of account—

(a)a company is the lessor of any plant or machinery under a long funding operating lease,

(b)the company incurs capital expenditure in relation to the plant or machinery, and

(c)that capital expenditure (the “additional expenditure”) is not reflected in the market value of the plant or machinery at the commencement of the term of the lease.

(2)In a case falling within section 502E(4)(e) above, subsection (1)(c) above has effect as if the reference to the commencement of the term of the lease were a reference to the time when the plant or machinery is first brought into use by the lessor for the purposes of the qualifying activity.

(3)Where this section applies, an additional deduction is allowed in computing the profits of the company for each post-expenditure period of account in which the company is the lessor of the plant or machinery under the lease.

(4)The amount of the deduction for any such period of account is to be determined as follows.

(5)Find ARV, CRV, PRV, and TRV where—

  • “ARV” is the amount which, at the time when the additional expenditure is incurred, is expected to be the residual value of the plant or machinery;

  • “CRV” is the amount which, at the commencement of the term of the lease, is expected to be the residual value of the plant or machinery;

  • “PRV” is the sum of any amounts that fell to be taken into account as RRV (see subsection (6)) in the application of this section in relation to any previous additional expenditure incurred by the company in relation to the leased plant or machinery;

  • “TRV” is the total of CRV and PRV.

(6)Find RRV, where—

(a)if ARV exceeds TRV, RRV is the portion of the excess that is a result of the additional expenditure, but

(b)if ARV does not exceed TRV, RRV is nil.

(7)From—

(a)the amount of the additional expenditure,

subtract

(b)RRV,

to find the expected partial reduction in value over the remainder of the term of the lease.

(8)Apportion the amount of that expected partial reduction in value to each post-expenditure period of account in which any part of the term of the lease falls.

(9)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each post-expenditure period of account.

(10)The amount of the additional deduction for any period of account is the amount so apportioned to that period.

(11)In this section “post-expenditure period of account” means any period of account ending after the incurring of the additional expenditure.

502GLessor under long funding operating lease: termination of lease

(1)This section applies for determining the liability to corporation tax of a company which is the lessor immediately before the termination of a long funding operating lease.

(2)Step 1 is to find—

(a)the termination amount (TA);

(b)the total of any sums paid to the lessee that are calculated by reference to the termination value (LP).

(3)Step 2 is to find—

(a)the relevant value for the purposes of section 502E(6)(a) (RV);

(b)the total of the deductions allowable under section 502E for periods of account for the whole or part of which the company was the lessor before the termination of the lease (TD1);

(c)the amount, if any, (ERV) by which RV exceeds TD1.

(4)Step 3 is to find—

(a)the total of any amounts of capital expenditure incurred by the company which constitute additional expenditure for the purposes of section 502F in the case of the lease (TAE);

(b)the total of any deductions allowable under section 502F for periods of account for the whole or part of which the company was the lessor before the termination of the lease (TD2);

(c)the amount, if any, (EAE) by which TAE exceeds TD2.

(5)Step 4 is to find the total of ERV and EAE (T).

(6)If (TA – LP) exceeds T, treat a profit of an amount equal to the excess as arising to the company in the period of account in which the lease terminates.

(7)If T exceeds (TA – LP), treat a loss of an amount equal to the excess as arising to the company in that period of account.

(8)A profit or loss treated as arising to the company under subsection (6) or (7) above is to be treated—

(a)in the case of a profit, as income of the company attributable to the lease,

(b)in the case of a loss, as a revenue expense incurred by the company in connection with the lease.

(9)In computing the profits of the company, no deduction is allowed in respect of any sums paid to the lessee that are calculated by reference to the termination value.

Insurance company as lessorU.K.
502HInsurance company as lessor

(1)This section applies to a company carrying on life assurance business if it is the lessor under a long funding lease in a period of account.

(2)In this section—

(a)subsections (3) to (7) have effect in relation to—

(i)basic life assurance and general annuity business, and

(ii)long-term business which is not life assurance business, and

(b)subsections (8) to (10) have effect in relation to certain computations falling to be made in accordance with the provisions of this Act applicable to Case I of Schedule D.

(3)Subsection (4) below applies in the case of each of the following amounts—

(a)an amount of rental earnings which the company is required by section 502B (long funding finance lease) to bring into account as taxable income,

(b)an amount treated under section 502C(3)(a) (long funding finance lease: lessor's exceptional items) as a profit arising to the company,

(c)an amount of rental income arising to the company from a long funding operating lease,

(d)an amount treated under section 502G(8)(a) (long funding operating lease: lessor's excess termination amount) as a profit arising to the company,

but only if the leased asset is an asset of the company's long-term insurance fund.

(4)In determining for the purposes of the Corporation Tax Acts in any such case the extent to which any such amount is referable to—

(a)basic life assurance and general annuity business, or

(b)long-term business which is not life assurance business,

section 432A (apportionment of insurance companies' income) is to have effect in relation to the amount as it has effect in relation to the income arising from an asset.

This subsection is subject to subsections (5) and (6) below.

(5)Before applying subsection (4) above in a case where—

(a)that subsection applies by virtue of subsection (3)(a) above in relation to an amount of rental earnings, and

(b)there is an amount which is deductible as a revenue expense by virtue of section 502C(3)(b) (long funding finance lease: lessor's exceptional items),

the amount so deductible is to be given effect by applying it, so far as possible, in reducing the amount of the rental earnings.

(6)Before applying subsection (4) above by virtue of subsection (3)(c) above in relation to an amount of rental income,—

(a)any deduction falling to be made under section 502E, or

(b)any reduction falling to be made under section 502F,

is to be given effect by applying it, so far as possible, in reducing (or further reducing) the amount of the rental income.

(7)Where, after applying amounts in making reductions required by subsection (5) or (6) above, there remains unapplied an amount in respect of—

(a)a deduction falling to be made under section 502E,

(b)a reduction falling to be made under section 502F, or

(c)an amount deductible as a revenue expense by virtue of section 502C(3)(b),

the amount is to be apportioned under section 432A in the same way as income.

(8)Where—

(a)the leased asset is an asset of the company's long-term insurance fund, and

(b)a computation falling within subsection (9) below falls to be made,

subsection (10) below applies to the computation.

(9)A computation falls within this subsection if it is a computation of profits of—

(a)life assurance business carried on by the company, or

(b)any category of life assurance business carried on by the company,

and falls to be made in accordance with the provisions of this Act applicable to Case I of Schedule D.

(10)In making the computation, no amount shall be brought into account by virtue of any of the following provisions—

(a)section 502B (long funding finance lease: rental earnings),

(b)section 502C(3)(a) or (b) (long funding finance lease: profit or loss in respect of exceptional items),

(c)section 502E (long funding operating lease: periodic deduction),

(d)section 502F (long funding operating lease: lessor's additional expenditure),

(e)section 502G(8)(a) or (b) (long funding operating lease: lessor's profit or loss in respect of termination amount).

Lessees under long funding finance leasesU.K.
502ILessee under long funding finance lease: limit on deductions

(1)This section applies for determining for the purposes of corporation tax the profits of a company for any period of account in which it is the lessee of any plant or machinery under a long funding finance lease.

(2)In calculating the company's profits for the period of account,—

(a)the amount deducted in respect of amounts payable under the lease,

must not exceed

(b)the amounts which, in accordance with generally accepted accounting practice, fall (or would fall) to be shown in the company's accounts as finance charges in respect of the lease.

(3)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan, subsection (2) above applies as if the lease were one which, under generally accepted accounting practice, fell to be treated as a finance lease.

502JLessee under long funding finance lease: termination

(1)This section applies where—

(a)a company is or has been the lessee under a long funding finance lease, and

(b)in connection with the termination of the lease, a payment calculated by reference to the termination value falls to be made to the company.

(2)The payment is not to be brought into account in determining for the purposes of corporation tax the profits of the company for any period of account.

(3)Subsection (2) above does not affect the amount of any disposal value that falls to be brought into account by the company under the Capital Allowances Act.

Lessees under long funding operating leasesU.K.
502KLessee under long funding operating lease

(1)This section applies for determining for the purposes of corporation tax the profits of a company for any period of account in which it is the lessee of any plant or machinery under a long funding operating lease.

(2)The deductions that may be allowed in computing the profits of the company for the period of account are to be reduced in accordance with the following provisions of this section.

(3)The amount of the reduction for any period of account is to be determined as follows.

(4)First, find the “relevant value” for the purposes of subsection (6)(a) below, which is—

(a)the market value of the plant or machinery at the commencement of the term of the lease, unless paragraph (b) below applies;

(b)if the lessee—

(i)has the use of the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, but

(ii)brings the plant or machinery into use for the purposes of a qualifying activity on or after 1st April 2006,

the lower of first use market value and first use amortised market value.

(5)In subsection (4) above—

  • first use amortised market value” means the value that the plant or machinery would have—

    (a)

    at the time when it is first brought into use for the purposes of the qualifying activity, but

    (b)

    on the assumption that the market value of the plant or machinery at the commencement of the term of the lease had been written off on a straight line basis over the remaining useful economic life of the plant or machinery;

  • first use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity.

(6)From—

(a)the relevant value determined in accordance with subsection (4) above,

subtract

(b)the amount which, at the commencement of the term of the lease, is (or, in a case falling within subsection (4)(b) above, would have been) expected to be the market value of the plant or machinery at the end of the term of the lease,

to find the expected gross reduction over the term of the lease.

(7)Apportion the amount of that expected gross reduction to each period of account in which any part of the term of the lease falls.

(8)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each period of account.

(9)The amount of the reduction for any period of account is the amount so apportioned to that period.

Interpretation of ChapterU.K.
502LInterpretation of this Chapter

(1)This section has effect for the interpretation of this Chapter.

(2)In this Chapter—

  • qualifying activity” has the same meaning as in Part 2 of the Capital Allowances Act;

  • residual value”, in relation to any plant or machinery leased under a long funding operating lease, means—

    (a)

    the estimated market value of the plant or machinery on a disposal at the end of the term of the lease,

    less

    (b)

    the estimated costs of that disposal.

(3)Any reference in this Chapter to a sum being written off on a straight line basis over a period of time (the “writing-off period”) is a reference to—

(a)the sum being apportioned between each of the periods of account in which any part of the writing-off period falls,

(b)that apportionment being made on a time basis, according to the proportion of the writing-off period that falls in each of the periods of account, and

(c)the sum being written off accordingly.

(4)Chapter 6A of Part 2 of the Capital Allowances Act (interpretation of provisions about long funding leases) applies in relation to this Chapter as it applies in relation to that Part..

Part 3 U.K.Income tax

IntroductoryU.K.

12ITTOIA 2005 is amended as follows.

Special rules for long funding leasesU.K.

13In Part 2 (trading income) after Chapter 10 insert the following Chapter—

Chapter 10AU.K.Leases of plant or machinery: special rules for long funding leases
Lessors under long funding finance leasesU.K.
148ALessor under long funding finance lease: rental earnings

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade for a period of account in which he is the lessor of any plant or machinery under a long funding finance lease.

(2)The amount to be brought into account as the lessor's taxable income from the lease for the period of account is the amount of the rental earnings in respect of the lease for the period of account.

(3)The “rental earnings” for any period is the amount which, in accordance with generally accepted accounting practice, falls (or would fall) to be treated as the gross return on investment for that period in respect of the long funding lease where it meets the finance lease test.

(4)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan in the accounts in question, so much of the rentals under the lease as fall (or would fall) to be treated as interest are to be treated for the purposes of this section as rental earnings.

148BLessor under long funding finance lease: exceptional items

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade for a period of account if he is or has been the lessor under a long funding finance lease.

(2)This section has effect where a profit or loss (whether of an income or capital nature)—

(a)arises to the person in connection with the lease, and

(b)in accordance with generally accepted accounting practice falls to be recognised for accounting purposes in a period of account, but

(c)would not, apart from this section, be brought into account in calculating the profits of the person.

(3)The profit or loss is to be treated—

(a)in the case of a profit, as income of the person that is attributable to the lease,

(b)in the case of a loss, as a revenue expense incurred by the person in connection with the lease.

(4)Any reference in this section to an amount falling to be recognised for accounting purposes in a period of account is a reference to an amount falling to be recognised for accounting purposes—

(a)in the person's profit and loss account or income statement,

(b)in the person's statement of recognised gains and losses or statement of changes in equity, or

(c)in any other statement of items brought into account in computing the person's profits or losses for that period.

148CLessor under long funding finance lease making termination payment

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade for a period of account if he is or has been the lessor under a long funding finance lease.

(2)Where—

(a)the lease terminates, and

(b)a sum calculated by reference to the termination value is paid to the lessee,

no deduction in respect of the sum paid to the lessee is allowed in calculating the profits of the person.

(3)This section does not prevent a deduction in respect of a sum to the extent that the sum is brought into account in determining the person's rental earnings.

Lessors under long funding operating leasesU.K.
148DLessor under long funding operating lease: periodic deduction

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade in a period of account—

(a)for the whole of which, or

(b)for any part of which,

the person is the lessor of any plant or machinery under a long funding operating lease.

(2)A deduction is allowed in calculating the profits of the person for the period of account.

(3)The amount of the deduction for any period of account is determined as follows.

(4)First, find the “relevant value” for the purposes of subsection (6)(a), which is—

(a)if the only use of the plant or machinery by the lessor has been the leasing of it under the long funding operating lease as a qualifying activity, cost;

(b)if the last previous use of the plant or machinery by the lessor was the leasing of it under another long funding operating lease as a qualifying activity, market value;

(c)if the last previous use of the plant or machinery by the lessor was the leasing of it under a long funding finance lease as a qualifying activity, the recognised value;

(d)if the last previous use of the plant or machinery by the lessor was for the purposes of a qualifying activity other than leasing under a long funding lease, the lower of cost and market value;

(e)if the lessor owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, but—

(i)the plant or machinery is brought into use by the lessor for the purposes of a qualifying activity on or after 1st April 2006, and

(ii)that qualifying activity is the leasing of the plant or machinery under the long funding lease,

the relevant value is the lower of first use market value and first use amortised value.

(5)In subsection (4)—

  • cost” means the amount of the expenditure incurred by the lessor on the provision of the plant or machinery;

  • first use amortised value” means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity, on the assumption that—

    (a)

    the cost of acquiring the plant or machinery had been written off on a straight line basis over the remaining useful economic life of the plant or machinery, and

    (b)

    any further capital expenditure incurred had been written off on a straight line basis over so much of the remaining economic life of the plant or machinery as remains at the time when the expenditure is incurred;

  • first use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity;

  • market value” means the market value of the plant or machinery at the commencement of the term of the long funding operating lease;

  • recognised value” means the value at which the plant or machinery is recognised in the books or other financial records of the lessor at the commencement of the long funding operating lease.

(6)From—

(a)the relevant value determined in accordance with subsection (4),

subtract

(b)the amount which, at the commencement of the term of the lease, is (or, in a case falling within subsection (4)(e), would have been) expected to be the residual value of the plant or machinery,

to find the expected gross reduction in value over the term of the lease.

(7)Apportion the amount of that expected gross reduction in value to each period of account in which any part of the term of the lease falls.

(8)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each period of account.

(9)The amount of the deduction for any period of account is the amount so apportioned to that period.

148ELong funding operating lease: lessor's additional expenditure

(1)This section applies if, in a period of account,—

(a)a person carrying on a trade is the lessor of any plant or machinery under a long funding operating lease,

(b)the person incurs capital expenditure in relation to the plant or machinery, and

(c)that capital expenditure (the “additional expenditure”) is not reflected in the market value of the plant or machinery at the commencement of the term of the lease.

(2)In a case falling within section 148D(4)(e), subsection (1)(c) has effect as if the reference to the commencement of the term of the lease were a reference to the time when the plant or machinery is first brought into use by the lessor for the purposes of the qualifying activity.

(3)Where this section applies, an additional deduction is allowed in calculating the profits of the person for each post-expenditure period of account in which the person is the lessor of the plant or machinery under the lease.

(4)The amount of the deduction for any such period of account is to be determined as follows.

(5)Find ARV, CRV, PRV and TRV where—

  • “ARV” is the amount which, at the time when the additional expenditure is incurred, is expected to be the residual value of the plant or machinery;

  • “CRV” is the amount which, at the commencement of the term of the lease, is expected to be the residual value of the plant or machinery;

  • “PRV” is the sum of any amounts that fell to be taken into account as RRV (see subsection (6)) in the application of this section in relation to any previous additional expenditure incurred by the person in relation to the leased plant or machinery;

  • “TRV” is the total of CRV and PRV.

(6)Find RRV, where—

(a)if ARV exceeds CRV, RRV is the portion of the excess that is a result of the additional expenditure, but

(b)if ARV does not exceed CRV, RRV is nil.

(7)From—

(a)the amount of the additional expenditure,

subtract

(b)RRV,

to find the expected partial reduction in value over the remainder of the term of the lease.

(8)Apportion the amount of that expected partial reduction in value to each post-expenditure period of account in which any part of the term of the lease falls.

(9)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each post-expenditure period of account.

(10)The amount of the additional deduction for any period of account is the amount so apportioned to that period.

(11)In this section “post-expenditure period of account” means any period of account ending after the incurring of the additional expenditure.

148FLessor under long funding operating lease: termination of lease

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade in a period of account if—

(a)a long funding operating lease terminates in that period of account, and

(b)the person is the lessor under that lease immediately before the termination.

(2)Step 1 is to find—

(a)the termination amount (TA);

(b)the total of any sums paid to the lessee that are calculated by reference to the termination value (LP).

(3)Step 2 is to find—

(a)the relevant value for the purposes of section 148D(6)(a) (RV);

(b)the total of the deductions allowable under section 148D for periods of account for the whole or part of which the person was the lessor before the termination of the lease (TD1);

(c)the amount, if any, (ERV) by which RV exceeds TD1.

(4)Step 3 is to find—

(a)the total of any amounts of capital expenditure incurred by the person which constitute additional expenditure for the purposes of section 148E in the case of the lease (TAE);

(b)the total of any deductions allowable under section 148E for periods of account for the whole or part of which the person was the lessor before the termination of the lease (TD2);

(c)the amount, if any, (EAE) by which TAE exceeds TD2.

(5)Step 4 is to find the total of ERV and EAE (T).

(6)If (TA – LP) exceeds T, treat a profit of an amount equal to the excess as arising to the person in the period of account in which the lease terminates.

(7)If T exceeds (TA – LP), treat a loss of an amount equal to the excess as arising to the person in that period of account.

(8)A profit or loss treated as arising to the person under subsection (6) or (7) is to be treated—

(a)in the case of a profit, as income of the person attributable to the lease,

(b)in the case of a loss, as a revenue expense incurred by the person in connection with the lease.

(9)In calculating the profits of the person for the period, no deduction is allowed in respect of any sums paid to the lessee that are calculated by reference to the termination value.

Lessees under long funding finance leasesU.K.
148GLessee under long funding finance lease: limit on deductions

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade, profession or vocation for a period of account in which the person is the lessee of any plant or machinery under a long funding finance lease.

(2)In calculating the person's profits for the period of account,—

(a)the amount deducted in respect of amounts payable under the lease,

must not exceed

(b)the amounts which, in accordance with generally accepted accounting practice, fall (or would fall) to be shown in the person's accounts as finance charges in respect of the lease.

(3)If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan, subsection (2) applies as if the lease were one which, under generally accepted accounting practice, fell to be treated as a finance lease.

148HLessee under long funding finance lease: termination

(1)This section applies where—

(a)a person carrying on a trade, profession or vocation is or has been the lessee under a long funding finance lease, and

(b)in connection with the termination of the lease, a payment calculated by reference to the termination value falls to be made to the person.

(2)The payment is not to be brought into account in calculating the profits of the person for any period of account.

(3)Subsection (2) does not affect the amount of any disposal value that falls to be brought into account by the person under CAA 2001.

Lessees under long funding operating leasesU.K.
148ILessee under long funding operating lease

(1)This section applies for the purpose of calculating the profits of a person carrying on a trade, profession or vocation for a period of account in which the person is the lessee of any plant or machinery under a long funding operating lease.

(2)The deductions that may be allowed in calculating the profits of the person for the period of account are to be reduced in accordance with the following provisions of this section.

(3)The amount of the reduction for any period of account is to be determined as follows.

(4)First, find the “relevant value” for the purposes of subsection (6)(a), which is—

(a)the market value of the plant or machinery at the commencement of the term of the lease, unless paragraph (b) applies;

(b)if the lessee—

(i)owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, but

(ii)brings the plant or machinery into use for the purposes of a qualifying activity on or after 1st April 2006,

the lower of first use market value and first use amortised market value.

(5)In subsection (4)—

  • first use amortised market value” means the value that the plant or machinery would have—

    (a)

    at the time when it is first brought into use for the purposes of the qualifying activity, but

    (b)

    on the assumption that the market value of the plant or machinery at the commencement of the term of the lease had been written off on a straight line basis over the remaining useful economic life of the plant or machinery;

  • first use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity.

(6)From—

(a)the relevant value determined in accordance with subsection (4),

subtract

(b)the amount which, at the commencement of the term of the lease, is (or, in a case falling within subsection (4)(b), would have been) expected to be the market value of the plant or machinery at the end of the term of the lease,

to find the expected gross reduction over the term of the lease.

(7)Apportion the amount of that expected gross reduction to each period of account in which any part of the term of the lease falls.

(8)The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each period of account.

(9)The amount of the reduction for any period of account is the amount so apportioned to that period.

Interpretation of this ChapterU.K.
148JInterpretation of Chapter 10A

(1)This section has effect for the interpretation of this Chapter.

(2)In this Chapter—

  • qualifying activity” has the same meaning as in Part 2 of CAA 2001;

  • residual value”, in relation to any plant or machinery leased under a long funding operating lease, means—

    (a)

    the estimated market value of the plant or machinery on a disposal at the end of the term of the lease,

    less

    (b)

    the estimated costs of that disposal.

(3)Any reference in this Chapter to a sum being written off on a straight line basis over a period of time (the “writing-off period”) is a reference to—

(a)the sum being apportioned between each of the periods of account in which any part of the writing-off period falls,

(b)that apportionment being made on a time basis, according to the proportion of the writing-off period that falls in each of the periods of account, and

(c)the sum being written off accordingly.

(4)Chapter 6A of Part 2 of CAA 2001 (interpretation of that Part so far as relating to long funding leases) also applies for the purposes of this Chapter..

Application of Chapter 10A for calculating the profits of a property businessU.K.

14(1)Section 272 is amended as follows.U.K.

(2)In the Table in subsection (2), insert at the appropriate place—

In Chapter 10A (long funding leases)—
Sections 148A to 148JLeases of plant or machinery: special rules for long funding leases

Part 4 U.K.Commencement and transitional provisions

CommencementU.K.

15(1)The amendments made by this Schedule have effect in the case of a lease if—U.K.

(a)Condition A is met, or

(b)if Condition A is not met, Condition B is met,

unless the lease was finalised (see paragraph 23) before 21st July 2005 and on 17th May 2006 the lessor was within the charge to tax.

As respects any time before 18th May 2006, this sub-paragraph has effect with the omission of the words “and on 17th May 2006 the lessor was within the charge to tax”.

This sub-paragraph is subject to sub-paragraphs (5) and (6).

(2)Condition A is that—

(a)the lease is finalised on or after 1st April 2006, or

(b)the commencement of the term of the lease is on or after that date,

and the lease is not an excepted lease (see paragraph 17).

(3)Condition B is that—

(a)the commencement of the term of the lease was before 1st April 2006, but

(b)the plant or machinery is on or after that date brought into use for the purposes of a qualifying activity carried on by the person concerned.

(4)The amendments made by this Schedule also have effect in relation to a lease, in the case of the lessor, if—

(a)an election under paragraph 16 is in force in the case of the lease, and

(b)the election has effect in the case of the lessor.

(5)Where the amendments made by this Schedule do not have effect in relation to a lease in the case of the lessor but—

(a)there is a transfer of plant or machinery,

(b)immediately before the transfer, the lessor is within the charge to tax, and

(c)the transfer is in circumstances such that, if the amendments made by this Schedule did apply in relation to the lease, section 70W(4)(b) of CAA 2001 (transfers, assignments etc by lessor) would have effect in relation to the new lessor to treat the new lease as a lease which is not a long funding lease,

the amendments made by this Schedule do not have effect in relation to the new lease in the case of the new lessor.

In this sub-paragraph—

  • the new lease” means the lease that would be the new lease for the purposes of section 70W of CAA 2001, if that section applied;

  • the new lessor” means the person who would be the new lessor for the purposes of that section, if that section applied;

and section 70W(7) of CAA 2001 (construction of references to transfer of plant or machinery) also has effect for the purposes of this sub-paragraph.

(6)Where the amendments made by this Schedule do not have effect in relation to a lease in the case of the lessee but—

(a)there is a transfer of plant or machinery,

(b)immediately before the transfer, the lessee is within the charge to tax, and

(c)the transfer is in circumstances such that, if the amendments made by this Schedule did apply in relation to the lease, section 70X(4)(b) of CAA 2001 (transfers, assignments etc by lessee) would have effect in relation to the new lessee to treat the new lease as a lease which is not a long funding lease,

the amendments made by this Schedule do not have effect in relation to the new lease in the case of the new lessee.

In this sub-paragraph—

  • the new lease” means the lease that would be the new lease for the purposes of section 70X of CAA 2001, if that section applied;

  • the new lessee” means the person who would be the new lessee for the purposes of that section, if that section applied;

and section 70X(7) of CAA 2001 (construction of references to transfer of plant or machinery) also has effect for the purposes of this sub-paragraph.

(7)In the application of section 70W(4)(b) or 70X(4)(b) of CAA 2001 for the purposes of sub-paragraph (5) or (6), the lease mentioned in the opening words of the sub-paragraph in question is to be regarded as a lease which is not a long funding lease.

Election for lease to be treated as long funding lease for tax purposesU.K.

16(1)The Treasury may by regulations make provision enabling a person of a prescribed description who is, or is to be, the lessor under a plant or machinery lease of a prescribed description to make an election for the lease to be treated in his case as a long funding lease.U.K.

(2)The power to make regulations under this paragraph includes power to make provision for or in connection with any of the following—

(a)any conditions that must be met if an election is, or is to be, made;

(b)whether an election is irrevocable;

(c)the date on and after which an election has effect;

(d)the manner in which an election is to be made.

(3)The power to make regulations under this paragraph includes—

(a)power to make provision having effect in relation to times before the making of the regulations (but not before 1st April 2006),

(b)power to make different provision for different cases,

(c)power to make incidental, consequential, supplemental, or transitional provision or savings.

(4)In this paragraph—

  • election” means an election under this paragraph;

  • long funding lease” means a lease which is a long funding lease for the purposes of Part 2 of CAA 2001;

  • prescribed” means specified in, or determined in accordance with, regulations under this paragraph.

Excepted leasesU.K.

17(1)A lease is an excepted lease if the following conditions are met.U.K.

(2)Condition 1 is that before 21st July 2005 there was evidence in writing that there was agreement, or a common understanding, between the lessor's side and the lessee's side as to the principal terms of the lease (the “pre-existing heads of agreement”).

The definitions of “the lessor's side”, “the lessee's side” and “the principal terms” are in paragraph 27.

(3)Condition 2 is that the leased plant or machinery was under construction (see paragraph 24) before 1st April 2006.

(4)Condition 3 is that the lease has been finalised before 1st April 2007 (but see sub-paragraph (8)).

(5)Condition 4 is that the commencement of the term of the lease is before 1st April 2007 (but see sub-paragraph (8)).

(6)Condition 5 is that the lessee is the particular person or persons identified as such in the pre-existing heads of agreement.

(7)Condition 6 is that the principal terms of the lease are not (or, apart from section 70M of CAA 2001, would not be) materially different from those in the pre-existing heads of agreement.

(8)Sub-paragraphs (4) and (5) have effect with the substitution of “ 2009 ” for “2007” if the additional conditions in paragraph 18 are met.

Extended time limit: the additional conditionsU.K.

18(1)The additional conditions mentioned in paragraph 17(8) are as follows.U.K.

(2)Condition A is that the commencement of the term of the lease is before 1st April 2009.

(3)Condition B is that, at the latest, the commencement of the term of the lease is as soon as is reasonably practicable after construction of the asset is substantially complete.

(4)Condition C is that construction of the asset proceeded continuously on and after 1st April 2006.

(5)Condition D is that construction of the asset proceeded at the normal pace for an asset of its type.

For this purpose, “normal pace” is the pace required to construct the asset in a reasonable time without delays or interruptions and consistent with normal business practice.

(6)This paragraph is supplemented by paragraph 19.

Events beyond the control of the parties etcU.K.

19(1)Condition B, C or D in paragraph 18 is not failed by reason only of breaches due to events that meet the conditions in sub-paragraph (2).U.K.

(2)The conditions are that—

(a)the event is abnormal or unusual,

(b)the event is unforeseen, and could not reasonably have been foreseen, at the date when the main contract for the construction of the leased asset is entered into,

(c)the event is beyond the control of each of the principal parties,

(d)as respects the Condition in question, the consequences of the event could not have been avoided by the exercise of all due care, or the taking of all reasonable steps, by the principal parties or any of them.

(3)In this paragraph “the principal parties” are—

(a)the lessor's side,

(b)the lessee's side,

(c)the main constructor (see the definition in paragraph 27).

Pre-existing heads of agreement relating to two or more assetsU.K.

20(1)This paragraph has effect for the purposes of this Part in any case where the pre-existing heads of agreement relates to two or more assets.U.K.

(2)The treatment of any of the assets varies according to whether the asset—

(a)is for use individually (see sub-paragraph (3)), or

(b)is a constituent asset of a combined asset (see sub-paragraph (4)).

(3)Where any of the assets is for use individually, this Part has effect in relation to that asset separately, as if it were the subject of—

(a)its own separate pre-existing heads of agreement, and

(b)if there is a finalised lease, its own separate finalised lease.

See sub-paragraph (5) for the method of determining the terms.

(4)Where any of the assets are constituent assets of a combined asset—

(a)the combined asset is to be regarded as a single asset, and

(b)the constituent assets are to be regarded as if they were instead component parts of that single asset,

and sub-paragraph (3) applies accordingly.

(5)For the purposes of sub-paragraph (3), the principles in sections 70L and 70M of CAA 2001 are to be applied, with any necessary modifications, for the purpose of determining the terms of—

(a)the deemed separate pre-existing heads of agreement, and

(b)the deemed separate finalised lease (if any).

Expenditure incurred before passing of this Act where lease is not an excepted leaseU.K.

21(1)This paragraph applies where the following conditions are met—U.K.

(a)a person incurs expenditure on the provision of plant or machinery for leasing under a long funding lease,

(b)some or all of that expenditure was incurred before the day on which this Act is passed,

(c)the long funding lease is not an excepted lease,

(d)before 21st July 2005 there was a pre-existing heads of agreement in the case of the long funding lease.

(2)In this paragraph—

(a)the old expenditure” means so much of the expenditure as is expenditure incurred before the day on which this Act is passed, and

(b)the new expenditure” means so much of the expenditure as is expenditure incurred on or after that day.

(3)Treat the old expenditure—

(a)as if it had been incurred on the provision of a separate asset for leasing under a separate long funding lease, and

(b)as if that separate long funding lease were an excepted lease.

(4)Treat the new expenditure as if it had been incurred on the provision of a separate asset for leasing under a separate long funding lease in relation to which the amendments made by this Schedule have effect.

That is without prejudice to the application of any provisions of this Part which treat that deemed separate long funding lease as if it were two or more leases.

(5)The rentals under the actual long funding lease are to be apportioned between the two deemed leases in such manner as is just and reasonable.

(6)This paragraph has effect for the purpose of determining liability to income tax or corporation tax in the case of any person who is or has been the lessor or the lessee under the actual long funding lease.

(7)Paragraph 22 has effect for determining when an amount of expenditure is to be treated for the purposes of this paragraph as incurred by the person mentioned in sub-paragraph (1).

When expenditure is incurred for the purposes of paragraph 21U.K.

22(1)This paragraph has effect for determining, for the purposes of paragraph 21, when an amount of expenditure is to be treated as incurred by the person mentioned in sub-paragraph (1) of that paragraph.U.K.

(2)The general rule is that an amount of expenditure is to be treated as incurred as soon as there is an unconditional obligation to pay it.

(3)The general rule applies even if the whole or a part of the expenditure is not required to be paid until a later date.

(4)There are the following exceptions to the general rule.

(5)If, under an agreement,—

(a)an unconditional obligation to pay an amount of expenditure comes into being as a result of the giving of a certificate or any other event, and

(b)the giving of the certificate, or other event, occurs before the day that falls one month after the passing of this Act,

the expenditure is to be treated as incurred on the day before the passing of this Act.

(6)If, under an agreement,—

(a)there is an unconditional obligation to pay an amount of expenditure on a date earlier than accords with normal commercial usage, and

(b)the sole or main benefit which might have been expected to be obtained thereby is that the amount would be treated, under the general rule, as incurred at an earlier time,

the amount is to be treated as incurred on the date on or before which it is required to be paid.

(7)If the terms of an agreement are varied on or after 22nd March 2006 with respect to the times for payment and—

(a)apart from the variation, an unconditional obligation to pay an amount of expenditure would have come into being on or after the day on which this Act is passed, but

(b)as a result of the variation, the unconditional obligation to pay the amount comes into being before that day,

the amount is to be treated as incurred on the date on which it would have been treated as incurred apart from the variation.

(8)Sub-paragraph (7) does not apply if the long funding lease mentioned in paragraph 21 was finalised before 22nd March 2006.

When a lease is “finalised”U.K.

23(1)For the purposes of this Part, a lease is “finalised” on the earliest day on which the following conditions are met.U.K.

(2)Condition 1 is that there is a contract in writing for the lease between the lessor and the lessee.

(3)Condition 2 is that either—

(a)the contract is unconditional, or

(b)if it is conditional, the conditions have been met.

(4)Condition 3 is that no terms remain to be agreed.

When an asset is “under construction”U.K.

24(1)An asset is “under construction” at any time in the period which—U.K.

(a)begins when construction of the asset begins, and

(b)ends when construction of the asset is completed.

(2)An asset consisting of two or more component parts is to be taken to be under construction at any time after the start of construction of any of those component parts which meets the condition in subsection (3).

(3)The condition is that the component part has been identified as a component part of the particular asset before construction of the component part begins.

(4)Sub-paragraphs (1) and (2) are subject to sub-paragraph (5).

(5)The leased asset is not to be regarded as under construction at any time after the commencement of the term of the lease.

(6)This paragraph has effect for the purposes of this Part.

Combined assets and constituent assetsU.K.

25(1)A “combined asset” is an asset which meets the conditions in sub-paragraph (2).U.K.

(2)The conditions are that—

(a)the asset is for use individually,

(b)it consists of two or more items of plant or machinery (“constituent assets”),

(c)each of the constituent assets is constructed with a view to its use in conjunction with the others as a single asset (namely, the combined asset).

(3)Plant or machinery that can be used individually is not a constituent asset just because—

(a)it is one of a number of assets of the same or a similar description,

(b)each of those assets is intended for use individually, and

(c)the use individually of those assets is to be co-ordinated to any extent.

(4)This paragraph has effect for the purposes of this Part.

Mixed leasesU.K.

26(1)This paragraph applies in any case where there is a mixed lease (see section 70L of CAA 2001).U.K.

(2)In any such case, determine whether the mixed lease is an excepted lease.

(3)If the mixed lease is an excepted lease, section 70L of CAA 2001 and the amendments made by this Schedule accordingly do not have effect in relation to it.

(4)If the mixed lease is not an excepted lease, then apply sections 70L and 70M of CAA 2001 and determine separately in the case of each derived lease whether that derived lease is an excepted lease.

Interpretation of this PartU.K.

27(1)In this Part—

  • combined asset” is to be construed in accordance with paragraph 25;

  • constituent asset” is to be construed in accordance with paragraph 25;

  • finalise”, in relation to a lease, is to be construed in accordance with paragraph 23;

  • lease” includes—

    (a)

    a plant or machinery lease, and

    (b)

    a mixed lease,

    and “lessor”, “lessee” and other related expressions are to be construed accordingly;

  • the lessee's side” means any of the following—

    (a)

    the lessee,

    (b)

    a person who controls (or is to control) the lessee,

    (c)

    any two or more persons who together control (or are to control) the lessee,

    and for this purpose “control” has the meaning given by section 840 of ICTA;

  • the lessor's side” means any of the following—

    (a)

    the lessor,

    (b)

    a person who controls (or is to control) the lessor,

    (c)

    any two or more persons who together control (or are to control) the lessor,

    and for this purpose “control” has the meaning given by section 840 of ICTA;

  • the main constructor” means the contractor under the main contract for the construction of the plant or machinery;

  • pre-existing heads of agreement” is to be construed in accordance with paragraph 17(2);

  • the principal terms”, in relation to a lease, are the following—

    (a)

    the identity of the lessee;

    (b)

    the identity or description of the asset to be leased;

    (c)

    particulars, or a description, of the rentals payable under the lease;

    (d)

    particulars, or a description, of the term of the lease;

  • qualifying activity” has the same meaning as in Part 2 of CAA 2001;

  • “under construction”, in the case of an asset, is to be construed in accordance with paragraph 24.

(2)Chapter 6A of Part 2 of CAA 2001 (interpretation of that Part so far as relating to long funding leases) also applies for the purposes of this Part.

Section 81

SCHEDULE 9U.K.Leases of plant or machinery: miscellaneous amendments

Income and Corporation Taxes Act 1988U.K.

Petroleum extraction activities: sale and leasebackU.K.

1(1)Section 494AA of ICTA is amended as follows.U.K.

(2)In subsection (2), at the end of paragraph (a) insert “ or ”.

(3)At the end of subsection (2) insert—

(c)falls, if the case is one where the lease is a long funding operating lease, to be deductible in computing the profits of the lessee for the purposes of corporation tax (after first making against any such expenditure any reductions falling to be made by virtue of section 502K)..

(4)In subsection (6) (definition of “lease”) after “In this section” insert

long funding operating lease” means a long funding operating lease for the purposes of Part 2 of the Capital Allowances Act (see section 70YI(1) of that Act);.

(5)The amendments made by this paragraph have effect in relation to expenditure incurred on or after 1st April 2006.

Supplementary charge in respect of ring fence tradesU.K.

2(1)Section 501A of ICTA is amended as follows.U.K.

(2)In subsection (5), for the word “and” at the end of paragraph (d) substitute the following paragraph—

(dd)where the company is the lessee under a long funding operating lease, the amount deductible in respect of payments under the lease in computing the profits of the lessee for the purposes of corporation tax (after first making against any such amount any reductions falling to be made by virtue of section 502K); and.

(3)At the end of the section insert—

(11)In this section “long funding operating lease” means a long funding operating lease for the purposes of Part 2 of the Capital Allowances Act (see section 70YI(1) of that Act)..

(4)The amendments made by this paragraph have effect in relation to payments due on or after 1st April 2006.

Leased assets: special casesU.K.

3(1)Section 782 of ICTA is amended as follows.U.K.

(2)After subsection (1) (application of section to payments under certain leases) insert—

(1A)This section does not apply to a payment if or to the extent that, in the case of the lessee, it falls to be regarded in accordance with Chapter 6A of Part 2 of the Capital Allowances Act as a payment under a lease which is a long funding finance lease for the purposes of that Part..

(3)The amendment made by this paragraph has effect in relation to payments due on or after 1st April 2006.

Taxation of Chargeable Gains Act 1992U.K.

Long funding leases: deemed disposals and re-acquisitionsU.K.

4(1)After section 25 of TCGA 1992 (non-residents: deemed disposals) insert—U.K.

25ALong funding leases of plant or machinery: deemed disposals

(1)This section applies where plant or machinery is used for the purpose of leasing under a long funding lease.

(2)The lessor shall be deemed for all purposes of this Act—

(a)to have disposed of the plant or machinery at the commencement of the term of the lease at the value described in subsection (4)(a) or (b), and

(b)to have immediately reacquired it at the same value.

(3)The lessor shall also be deemed for all purposes of this Act—

(a)to have disposed of the plant or machinery on the termination of the lease for a consideration equal to the termination amount, and

(b)to have immediately reacquired it for the same consideration.

(4)The value mentioned in subsection (2)(a) is—

(a)where the lease is a long funding finance lease, an amount equal to that which would fall to be recognised as the lessor's net investment in the lease if accounts were prepared in accordance with generally accepted accounting practice on the date on which the lessor's net investment in the lease is first recognised in the books or other financial records of the lessor, or

(b)where the lease is a long funding operating lease, an amount equal to the market value of the plant or machinery at the commencement of the term of the lease.

(5)For the purposes of this section, the following expressions have the meaning given in Chapter 6A of Part 2 of the Capital Allowances Act (interpretation of provisions about long funding leases)—

  • commencement”, in relation to the term of a lease,

  • “lessor”,

  • “long funding lease”,

  • “long funding finance lease”,

  • “long funding operating lease”,

  • “market value”,

  • the term”, in relation to a lease,

  • “termination”,

  • “termination amount”.

(2)The amendment made by this paragraph has effect where the commencement of the term of the lease is on or after 1st April 2006.

Restriction of losses: long funding leases of plant or machineryU.K.

5(1)After section 41 of TCGA 1992 (restriction of losses by reference to capital allowances and renewals allowances) insert—U.K.

41ARestriction of losses: long funding leases of plant or machinery

(1)This section applies where a person disposes of an asset—

(a)which includes plant or machinery which is a fixture for the purposes of Chapter 6A of Part 2 of the Capital Allowances Act, and

(b)which he has used for the purpose of leasing under one or more long funding leases.

(2)In the computation of the amount of a loss accruing to the person on the disposal there shall be excluded from the sums allowable as a deduction by virtue of section 38(1)(a) and (b) (acquisition and enhancement costs) an amount determined in accordance with subsection (3) or (4).

(3)Where the person has used the plant or machinery for the purpose of leasing under one long funding lease, the amount is equal to the fall in value of the plant or machinery during the period of the lease.

(4)Where the person has used the plant or machinery for the purpose of leasing under more than one long funding lease, the amount is equal to the sum of the fall in value of the plant or machinery during the period of each lease.

(5)In this section, references to the fall in value of plant or machinery during the period of a lease are references to the amount (if any) by which—

(a)the market value of the plant or machinery at the commencement of the term of the lease,

exceeds

(b)its market value at the termination of the lease.

(6)For the purposes of this section, the following expressions have the meaning given in Chapter 6A of Part 2 of the Capital Allowances Act (interpretation of provisions about long funding leases)—

  • commencement”, in relation to the term of a lease,

  • “long funding lease”,

  • “market value”,

  • the term”, in relation to a lease,

  • “termination”.

(2)The amendment made by this paragraph has effect in relation to disposals on or after 1st April 2006.

Definition of market valueU.K.

6(1)Section 272 of TCGA 1992 (valuation: general) is amended as follows.U.K.

(2)In subsection (6) (subjection to other provisions) after “subject to” insert “ sections 25A and 41A and ”.

Finance Act 1997U.K.

Leasing arrangementsU.K.

7(1)Schedule 12 to FA 1997 (leasing arrangements: finance leases and loans) is amended as follows.U.K.

(2)In paragraph 2 (application of Part 1 in relation to leasing arrangements where any of the return on investment is in the form of capital) after sub-paragraph (1) insert—

(1A)This Part of this Schedule does not apply if or to the extent that, in the case of the current lessor, the lease falls to be regarded in accordance with Chapter 6A of Part 2 of the Capital Allowances Act 2001 as a long funding lease for the purposes of that Part..

(3)In paragraph 16 (application of Part 2 in relation to other finance leases) after sub-paragraph (1) insert—

(1A)This Part of this Schedule does not apply if or to the extent that, in the case of the current lessor, the lease falls to be regarded in accordance with Chapter 6A of Part 2 of the Capital Allowances Act 2001 as a long funding lease for the purposes of that Part..

(4)Paragraph 15 of Schedule 8 (commencement) also has effect in relation to the amendments made by this paragraph.

Finance Act 2000U.K.

Tonnage tax: introductoryU.K.

8Schedule 22 to FA 2000 (tonnage tax) is amended as follows.

Meaning of “finance costs”U.K.

9(1)In Part 7 (the ring fence: general provisions) paragraph 63 (meaning of finance costs) is amended as follows.U.K.

(2)In sub-paragraph (2), for the word “and” at the end of paragraph (d) substitute the following paragraph—

(dd)where the tonnage tax company is the lessee under a long funding operating lease, the amount deductible (or the total amount that could, if there were no tonnage tax election, be deductible) in respect of payments under the lease in computing the profits of the lessee for the purposes of corporation tax (after first making against any such amount any reductions falling to be made by virtue of section 502K of the Taxes Act 1988); and.

(3)At the end of the paragraph insert—

(4)In this paragraph “long funding operating lease” means a long funding operating lease for the purposes of Part 2 of the Capital Allowances Act (see section 70YI(1) of that Act)..

(4)The amendments made by this paragraph have effect in relation to payments due on or after 1st April 2006.

Capital allowances: ship leasingU.K.

10(1)Part 10 (the ring fence: capital allowances: ship leasing) is amended as follows.U.K.

(2)In paragraph 89 (introduction), in sub-paragraph (1), after the paragraph relating to paragraphs 90 and 91 (defeased leasing) insert— “ paragraphs 91A to 91F (long funding leases), ”.

(3)After paragraph 91 (defeased leasing: excepted forms of security) insert—

Long funding leases: conditions for alternative treatmentU.K.

91A(1)This paragraph applies if the lease would fall to be regarded as a long funding lease for the purposes of Part 2 of the Capital Allowances Act 2001, apart from this paragraph.

(2)The lease is to be treated for tax purposes as not being a long funding lease at any time when the lease—

(a)meets the conditions in sub-paragraph (3), or

(b)is expected to meet those conditions when the ship is first brought into use under the lease,

but this is subject to the qualification in sub-paragraph (4) and the exception in sub-paragraph (5).

(3)The conditions are—

(a)that the lease falls within paragraph 91B (lease to tonnage tax company or group),

(b)that the lease falls within paragraph 91C (tonnage tax company to operate and manage qualifying ship),

(c)that the lease falls within paragraph 91D (period and rate of sublease of qualifying ship).

(4)The condition in paragraph (c) of sub-paragraph (3) has to be met, or be expected to be met, only at times when the company within tonnage tax is leasing the ship to a company not within tonnage tax.

(5)The conditions in paragraphs (b) and (c) of sub-paragraph (3) do not have to be met, or be expected to be met, if the lease was finalised (within the meaning of Part 4 of Schedule 8 to the Finance Act 2006) before 1st April 2006.

(6)Sub-paragraph (2) is subject to paragraph 91E (anti-avoidance).

Lease to tonnage tax company or groupU.K.

91B(1)A lease falls within this paragraph if—

(a)it is a lease of a qualifying ship provided directly to a company within tonnage tax, or

(b)it is a lease of a qualifying ship provided indirectly to a company within tonnage tax (“T”) and sub-paragraph (2) applies.

(2)This sub-paragraph applies where—

(a)the owner of the qualifying ship provides it directly to a company (“C”) under a lease,

(b)C provides the qualifying ship directly to T under a lease, and

(c)C and T are in the same group.

Tonnage tax company to operate and manage qualifying shipU.K.

91C(1)A lease of a qualifying ship provided, directly or indirectly, to a company within tonnage tax (“T”) falls within this paragraph if T is responsible—

(a)for the operation of the ship, including the appointment of the master and those members of the crew engaged in navigation, and

(b)for defraying all expenses in connection with the ship, or substantially all such expenses other than those directly incidental to a particular voyage or to the employment of the ship during any period for which the ship is leased by T to another person.

(2)For the purposes of this paragraph, T is “responsible” if—

(a)he is responsible as principal, or

(b)he appoints another person (“P”) to be responsible in his place and the condition in sub-paragraph (3) is met.

(3)The condition is that—

(a)P is not a person to whom the ship is leased by T and is not connected with such a person, or

(b)P is a company within tonnage tax.

(4)Any reference in this paragraph to a lease by T includes a reference to a contract of affreightment entered into by T that provides for the carriage of goods by the qualifying ship.

(5)Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this paragraph.

Period and rate of sublease of qualifying shipU.K.

91D(1)A lease of a qualifying ship provided, directly or indirectly, to a company within tonnage tax (“T”) falls within this paragraph if each lease of the ship by T (a “sublease”) to a company not within tonnage tax meets the conditions in sub-paragraph (2).

(2)The conditions are—

(a)that the amount payable under the sublease is the market rate, and

(b)that the period of the sublease does not exceed 7 years.

(3)For the purposes of this paragraph the market rate is the rate at which the qualifying ship could reasonably be expected to be leased, taking into account all the circumstances of the lease including the period of the lease, the date at which the lease commences and the size and description of the qualifying ship.

(4)For the purposes of this paragraph the period of a sublease is the period comprising—

(a)the term specified in the sublease, and

(b)any subsequent periods which meet the conditions in sub-paragraph (5).

(5)The conditions are that—

(a)there is an option to continue the sublease for that period, and

(b)the amount payable under the sublease for that period is not the market rate applicable at the start of that period.

(6)Where—

(a)an option to continue a sublease for a period is exercised, and

(b)the amount payable under the sublease for that period is the market rate applicable at the start of that period,

the parties to the sublease are to be treated for the purposes of this paragraph as if the sublease had terminated immediately before the commencement of the period and a new sublease had immediately been entered into.

(7)Where a sublease is for an indefinite period, the period of the sublease is to be taken for the purposes of this paragraph to be a period of more than 7 years, unless the condition in sub-paragraph (8) is met.

(8)The condition is that—

(a)the amount payable under the sublease must be reviewed at least once every 7 years, and

(b)if the amount payable under the sublease is found on such a review not to be the market rate applicable at the time of the review, it must be changed to the market rate applicable at that time.

(9)Where there is an option to continue a sublease for an indefinite period, the period of the sublease is to be taken for the purposes of this paragraph to be a period of more than 7 years, unless the condition in sub-paragraph (10) is met.

(10)The condition is that the amount payable under the sublease for any period for which the option may be exercised is the market rate applicable at the start of that period, except that—

(a)the amount for the time being payable under the sublease may subsequently be changed at any time to the market rate applicable at that time,

(b)the amount payable under the sublease must be reviewed at least once every 7 years, and

(c)if the amount payable under the sublease is found on such a review not to be the market rate applicable at the time of the review, it must be changed to the market rate applicable at that time.

(11)Any reference in this paragraph to a lease by T includes a reference to a contract of affreightment entered into by T that provides for the carriage of goods by the qualifying ship.

Anti-avoidanceU.K.

91EParagraph 91A(2) does not have effect in the case of the lease if the main purpose, or one of the main purposes—

(a)of the leasing of the ship,

(b)of a series of transactions of which the leasing of the ship is one, or

(c)of any of the transactions in such a series,

was to obtain a writing down allowance determined without regard to any of paragraphs 90, 92 and 94 to 102 in respect of expenditure incurred by any person on the provision of the ship.

Consequences of paragraph 91A(2) ceasing to have effectU.K.

91F(1)This paragraph applies if sub-paragraph (2) of paragraph 91A ceases to have effect in relation to a lease (the “existing lease”) because one or more of the conditions in sub-paragraph (3) of that paragraph cease to be met.

(2)In any such case it is to be assumed for tax purposes that—

(a)the existing lease terminates at the time of the cessation;

(b)another lease (the “new lease”) is entered into immediately after the cessation;

(c)the term of the new lease is the portion of the term of the existing lease that remains unexpired at the time of the cessation;

(d)the date on which the cessation occurs is the date of both—

(i)the inception of the new lease, and

(ii)the commencement of the term of the new lease.

(3)Where this paragraph applies, subsection (4) of section 70X of the Capital Allowances Act 2001 (transfers, assignments etc by lessee) does not.

(4)For the purposes of this paragraph, the following expressions have the meaning given in Chapter 6A of Part 2 of the Capital Allowances Act 2001 (interpretation of provisions about long funding leases)—

  • commencement”, in relation to the term of a lease;

  • inception”, in relation to a lease;

  • term”, in relation to a lease;

  • “terminate”..

(4)In paragraph 93 (certificates required to support claim by lessor), in sub-paragraph (1)(b) after “in relation to the lease” insert “ and, if the lease is one that would (apart from paragraph 91A) fall to be regarded as a long funding lease for the purposes of Part 2 of the Capital Allowances Act 2001, that paragraph 91A(2) has effect in relation to the lease. ”

(5)Paragraph 15 of Schedule 8 (commencement) also has effect in relation to the amendments made by this paragraph.

Capital Allowances Act 2001U.K.

Withdrawal of first year allowances for lessors of certain plant or machineryU.K.

11(1)Section 46 of CAA 2001 (general exclusions applying to certain sections) is amended as follows.U.K.

(2)For subsection (5) (exception of sections 45A, 45D, 45E and 45H from general exclusion 6 (leasing)) substitute—

(5)General exclusion 6 does not prevent expenditure being first-year qualifying expenditure under any of the following provisions—

  • section 45A, if the condition in subsection (6) is met,

  • section 45D,

  • section 45H, if the condition in subsection (6) is met.

(6)The condition is that the plant or machinery is provided for leasing under an excluded lease of background plant or machinery for a building, within the meaning given by section 70R..

(3)The amendment made by this paragraph has effect in relation to expenditure incurred on or after 1st April 2006.

Plant or machinery treated as owned by person entitled to benefit of contract etcU.K.

12(1)Section 67 of CAA 2001 is amended as follows.U.K.

(2)After “qualifying activity”, in each place where those words occur in the section, insert “ or corresponding overseas activity ”.

(3)In subsection (2), insert at the end— “ This subsection has effect subject to, and in accordance with, subsections (2A) to (2C). ”.

(4)After subsection (2) insert—

(2A)If the contract is one which, in accordance with generally accepted accounting practice, falls (or would fall) to be treated as a lease, subsection (2B) applies.

(2B)Where that is the case, the plant or machinery is to be treated under subsection (2) as owned by the person at any time only if the contract falls (or would fall) to be treated by that person in accordance with generally accepted accounting practice as a finance lease.

(2C)Where at any time the plant or machinery—

(a)is not treated under subsection (2) as owned by the person, but

(b)would be treated under that subsection as owned by the person, but for subsection (2B),

the plant or machinery is nevertheless to be treated under subsection (2) as not owned by any other person at that time..

(5)Renumber subsection (5) as subsection (7).

(6)Before that subsection, as so renumbered, insert—

(6)If—

(a)a person enters into two or more agreements, and

(b)those agreements are such that, if they together constituted a single contract, the condition in subsection (1)(b) would be met in relation to that person and that contract,

the agreements are to be treated for the purposes of this section as parts of a single contract.

In this subsection, any reference to an agreement includes a reference to an undertaking, whether or not legally enforceable..

(7)At the end of the section insert—

(8)In this section “corresponding overseas activity” means an activity that would be a qualifying activity if the person carrying it on were resident in the United Kingdom..

(8)The amendments made by this paragraph have effect in relation to contracts that are finalised (within the meaning of Part 4 of Schedule 8) on or after 1st April 2006.

Phasing out of overseas leasing rulesU.K.

13(1)Section 105 of CAA 2001 (basic terms: “leasing”, “overseas leasing” etc) is amended as follows.U.K.

(2)After subsection (2) (“overseas leasing”) insert—

(2A)In determining whether plant or machinery is used for overseas leasing, no account shall be taken of any lease finalised, within the meaning of Part 4 of Schedule 8 to the Finance Act 2006, on or after 1st April 2006..

Anti-avoidance: meaning of “finance lease”U.K.

14(1)Section 219 of CAA 2001 (meaning of “finance lease” in Chapter 17 of Part 2) is amended as follows.U.K.

(2)In subsection (1)(b), after sub-paragraph (ii) insert— “ and which are not a long funding lease in the case of the lessor. ”.

(3)Paragraph 15 of Schedule 8 (commencement) also has effect in relation to the amendment made by this paragraph.

Capital allowances: allocation of expenditure to a chargeable periodU.K.

15(1)Section 220 of CAA 2001 is amended as follows.U.K.

(2)Before subsection (1) insert—

(A1)Subsection (1) applies to a company for a chargeable period if—

(a)at the end of the ICTA period of account which is the basis period for the chargeable period, the company is a member of a group, and

(b)the last day of that ICTA period of account is not also the last day of an ICTA period of account of the principal company of the group..

(3)In subsection (1)—

(a)for “a person” substitute “ the company ”,

(b)for “a chargeable period” substitute “ the chargeable period ”,

(c)after “under a finance lease” insert “ or under a qualifying operating lease (see subsection (4)) ”, and

(d)for “person's”, in both places, substitute “ company's ”.

(4)After subsection (2) insert—

(3)The following provisions have effect for the interpretation of this section.

(4)A “qualifying operating lease” is a plant or machinery lease that meets the following conditions—

(a)it is not a finance lease,

(b)it is a funding lease,

(c)its term is longer than 4 years but not longer than 5 years.

(5)An ICTA period of account is the basis period for a chargeable period if the chargeable period coincides with, or falls within, the ICTA period of account.

(6)An “ICTA period of account” is a period of account as defined in section 832(1) of ICTA.

(7)The provisions of section 170(3) to (6) of TCGA 1992 apply to determine for the purposes of this section—

(a)whether a company is member of a group, and

(b)which company is the principal company of the group.

(8)But, in applying those provisions for the purposes of this section, a company (“the subsidiary company”) that does not have ordinary share capital is to be treated as being a qualifying 75% subsidiary of another company (“the parent company”) if the parent company—

(a)has control of the subsidiary company, within the meaning of section 840 of ICTA, and

(b)is beneficially entitled to the appropriate proportion of profits and assets.

(9)The parent company is beneficially entitled to the appropriate proportion of profits and assets if (and only if) it—

(a)is beneficially entitled to at least 75% of any profits available for distribution to equity holders of the subsidiary company, and

(b)would be beneficially entitled to at least 75% of any assets of the subsidiary company available for distribution to its equity holders on a winding-up.

(10)The provisions of Schedule 18 to ICTA (equity holders and profits or assets etc) also apply for the purposes of this section.

(11)In this section, the following expressions have the same meaning as in Chapter 6A of Part 2 (interpretation of provisions about long funding leases)—

  • “funding lease”,

  • “plant or machinery lease”,

  • term”, in relation to a lease..

(5)In consequence of the amendments made by this paragraph, the italic cross-heading preceding section 219 becomes “ Finance leases and certain operating leases ”.

(6)The amendments made by this paragraph have effect in relation to expenditure incurred on or after 1st April 2006.

Section 82

SCHEDULE 10U.K.Sale etc of lessor companies etc

Part 1 U.K.Introduction

Contents of ScheduleU.K.

1(1)This Schedule makes provision for corporation tax purposes in relation to any company which is within the charge to corporation tax in respect of a business of leasing plant or machinery (within the meaning of Part 2 or 3).

(2)Part 2 deals with the case of a qualifying change of ownership in relation to the company where it carries on the business otherwise than in partnership.

(3)Part 3 deals with—

(a)the case of a qualifying change in the company's interest in the business where it carries on the business in partnership with other persons, and

(b)the case of a qualifying change of ownership in relation to any such company.

(4)Part 4 contains an anti-avoidance provision and other supplementary provisions.

CommencementU.K.

2This Schedule has effect in relation to—

(a)any qualifying change of ownership in relation to a company which occurs on or after 5th December 2005, and

(b)any qualifying change in a company's interest in a business which occurs on or after that date.

Part 2 U.K.Leasing business carried on by a company alone

Income and matching expense in different accounting periodsU.K.

3(1)This paragraph applies for corporation tax purposes if—U.K.

(a)on any day (“the relevant day”) a company carries on a business of leasing plant or machinery otherwise than in partnership (see paragraphs 6 to 8),

(b)the company is within the charge to corporation tax in respect of the business, and

(c)there is a qualifying change of ownership in relation to the company on the relevant day (see paragraphs 10 to 13).

(2)On the relevant day—

(a)the company is treated as receiving an amount of income, and

(b)the accounting period of the company ends.

(3)The income—

(a)is treated as a receipt of the business, and

(b)is brought into account in calculating for corporation tax purposes the profits of the business for that accounting period.

(4)On the day following the relevant day—

(a)the company is treated as incurring an expense, and

(b)a new accounting period of the company begins.

(5)The expense—

(a)is treated as an expense of the business, and

(b)is allowed as a deduction in calculating for corporation tax purposes the profits of the business for that new accounting period.

(6)This paragraph is supplemented by paragraphs 4 and 5.

Amount of income and expenseU.K.

4(1)The amount of the income is calculated in accordance with paragraphs 16 to 21.U.K.

(2)The amount of the expense is the same as the amount of the income.

No carry back of the expenseU.K.

5(1)This paragraph applies if the business carried on by the company is a trade the profits of which are chargeable to corporation tax under Case I of Schedule D.U.K.

(2)No relief is to be given by virtue of section 393A(1)(b) of ICTA (set off of trading losses against profits of earlier accounting periods) in respect of so much of any loss as derives from the expense.

(3)For the purpose of determining how much of a loss derives from the expense, the loss is to be calculated on the basis that the expense is the final amount to be deducted.

Meaning of “business of leasing plant or machinery”U.K.

6(1)This paragraph determines for the purposes of this Part of this Schedule whether, on any day (“the relevant day”), a company (“the relevant company”) carries on a business of leasing plant or machinery.U.K.

(2)A business carried on by the relevant company is a business of leasing plant or machinery on the relevant day if condition A or B is met.

(3)Condition A is that at least half of the accounting value of the plant or machinery owned by the relevant company on the relevant day relates to qualifying leased plant or machinery.

(4)Condition B is that at least half of the relevant company's income in the period of 12 months ending with the relevant day derives from qualifying leased plant or machinery.

(5)For the purposes of this Part of this Schedule, plant or machinery is “qualifying leased plant or machinery”, in relation to any company, if—

(a)expenditure is incurred (or treated as incurred) by the company on the provision of the plant or machinery wholly or partly for the purposes of the business,

(b)the company is (or has at any time been) entitled, on the relevant assumptions, to an allowance under Part 2 of CAA 2001 in respect of that expenditure, and

(c)at any time in the period of 12 months ending with the relevant day the plant or machinery has been subject to a plant or machinery lease which is not an excluded lease of background plant or machinery for a building (see paragraph 41).

(6)“The relevant assumptions” are—

(a)that sections 34A and 70A of CAA 2001 (lessees, and not lessors, under long funding leases to be entitled to capital allowances) are ignored, and

(b)that any claim that could be made for an allowance under Part 2 of that Act is made.

Provision for the purposes of condition A in paragraph 6U.K.

7(1)This paragraph applies for the purposes of condition A in paragraph 6.

(2)The accounting value of the plant or machinery owned by the relevant company on the relevant day is taken to be the amount found by adding together the following amounts.

(3)The amounts are—

(a)the amounts (if any) shown in the appropriate balance sheet of the relevant company in respect of plant or machinery which it owns at the start of the relevant day, and

(b)the amounts (if any) shown in the appropriate balance sheet of each associated company in respect of plant or machinery which it transfers to the relevant company on the relevant day,

and the reference here to an associated company is to a company which is an associated company of the relevant company on the relevant day (as to which, see paragraph 9).

(4)For this purpose the amounts shown in the appropriate balance sheet of any company in respect of any plant or machinery are—

(a)the amounts shown in that balance sheet as the net book value (or carrying amount) in respect of the plant or machinery, and

(b)the amounts shown in that balance sheet as the net investment in respect of finance leases of the plant or machinery.

(5)If—

(a)any of the plant or machinery is a fixture in any land, and

(b)the amount which falls (or would fall) to be shown in an appropriate balance sheet as the net book value (or carrying amount) of the land includes (or would include) an amount in respect of the fixture,

the amount of the net book value (or carrying amount) in respect of the fixture is determined on a just and reasonable basis.

(6)If—

(a)any of the plant or machinery is subject to a finance lease, and

(b)any land or other asset which is not plant or machinery is subject to that lease,

the amount of the net investment in respect of the finance lease of that plant or machinery is determined on a just and reasonable basis.

(7)In this paragraph any reference to any amount shown in the appropriate balance sheet of a company is to the amount which, on the following assumptions, falls (or would fall) to be shown in a balance sheet of the company.

(8)The assumptions are—

(a)that the balance sheet is drawn up as at the start of the relevant day in accordance with generally accepted accounting practice, and

(b)that, if the company acquires any plant or machinery directly or indirectly from a person who is connected with the company, the plant or machinery had been acquired for an amount equal to its market value as at the relevant day.

(9)Sub-paragraph (8)(b) does not apply if the relevant day falls before 22nd March 2006.

Provision for the purposes of condition B in paragraph 6U.K.

8(1)This paragraph applies for the purposes of condition B in paragraph 6.U.K.

(2)The reference to the relevant company's income is to its income as calculated for corporation tax purposes.

(3)Any apportionment necessary to determine the amount of the relevant company's income attributable to the period of 12 months ending with the relevant day is to be made on a time basis.

(4)But—

(a)that basis does not apply if it would work in an unjust or unreasonable manner in relation to any person, and

(b)in that case the apportionment is to be made instead on a just and reasonable basis.

(5)The proportion of the income that derives from qualifying leased plant or machinery is to be determined on a just and reasonable basis.

Meaning of “associated company”U.K.

9(1)A company is an “associated company” of another company on any day if, at the start of that day,—U.K.

(a)one of the two has control of the other, or

(b)both are under the control of the same person or persons,

and for this purpose “control” is to be read in accordance with section 416 of ICTA.

(2)If, at the start of any day, a company (“the consortium company”) is owned by a consortium or is a qualifying 90% subsidiary of a company owned by a consortium, references to an associated company of the consortium company on that day include—

(a)any relevant member of the consortium on that day, and

(b)any company which is an associated company of any relevant member of the consortium on that day.

(3)For this purpose a member of the consortium is a “relevant” member on any day if—

(a)it is a member of the consortium at the start of the day,

(b)one or more qualifying changes of ownership occur in relation to the consortium company on that day, and

(c)any of those changes occur in a case where the member of the consortium is regarded as “company E” for the purposes of paragraph 12 (consortium relationships).

(4)This paragraph applies for the purposes of this Part of this Schedule.

Meaning of “a qualifying change of ownership” in relation to a companyU.K.

10(1)For the purposes of this Schedule, there is a qualifying change of ownership in relation to a company (“company A”) on any day if there is a relevant change in the relationship on that day between—U.K.

(a)company A, and

(b)a principal company of company A,

but see paragraph 13 for an exception (no qualifying change of ownership in the case of certain intra-group reorganisations).

(2)For the purposes of this Schedule, there is a relevant change in the relationship between company A and a principal company of company A on any day in any of the circumstances in paragraphs 11 and 12 (qualifying 75% subsidiaries and consortium relationships).

Qualifying 75% subsidiariesU.K.

11(1)A company (“company B”) is a principal company of company A if—U.K.

(a)company A is a qualifying 75% subsidiary of company B, and

(b)company B is not a qualifying 75% subsidiary of another company.

(2)There is a relevant change in the relationship between company A and company B (as a principal company) on any day if company A ceases to be a qualifying 75% subsidiary of company B on that day.