Schedule 2: Alternative finance arrangements
Overview
747.This Schedule, introduced by section 365, rewrites the income tax and capital gains tax provisions in Chapter 5 of Part 2 of FA 2005 dealing with alternative finance arrangements. These provisions tax and relieve alternative finance return under certain types of financial arrangement in the same way as interest. This includes financial arrangements that comply with Shari’a law, which prohibits transactions that involve interest. The rules are not limited to Shari’a compliant products but also apply to any finance arrangement that falls within their terms.
748.The overall approach is in line with that used for the corresponding corporation tax provisions in Chapter 6 of Part 6 of CTA 2009. As far as possible the provisions have been kept together so that users can see the overall scheme of the legislation. Signposts have been inserted into appropriate places in other parts of the tax code that are affected by these provisions.
749.The regulatory power in section 98 of FA 2006, rewritten for corporation tax in section 521 of CTA 2009, has proved difficult to rewrite separately in a way that ensures that it continues to operate satisfactorily and in an unchanged way. This Act therefore rewrites the regulatory power as section 366 of this Act and repeals section 521 of CTA 2009.
750.Part 1 of the Schedule inserts a new Part 10A into ITA to deal with the income tax aspects of the legislation. Part 2 of the Schedule inserts a new Chapter 4 into Part 4 of TCGA to deal with the capital gains tax aspects.
751.Part 3 of the Schedule makes a number of amendments to other enactments, including inserting new sections in Chapter 7 of Part 7 of ITA dealing with the interaction between alternative finance arrangements and Community Investment Tax Relief.
Part 1: New Part 10A of ITA 2007
752.Part 1 inserts new Part 10A into ITA containing sections 564A to 564Y.
Section 564A: Introduction
753.This section sets out what is included in the Chapter and provides signposts to the location of certain definitions. It is based on sections 46(1) and 57 of FA 2005.
Section 564B: Meaning of “financial institution”
754.This section provides the meaning of “financial institution” for the purposes of the alternative finance rules. It is based on section 46(2) and (3) of FA 2005. The corresponding rule for corporation tax is section 502 of CTA 2009.
755.It is a requirement that at least one party to the arrangements must be a financial institution.
Section 564C: Purchase and resale arrangements
756.This section deals with an arrangement whereby an asset is purchased by a financial institution and then sold to another person with the payment by that second person left on credit. It is based on section 47(1) to (3) of FA 2005. The corresponding rule for corporation tax is section 503 of CTA 2009.
757.The price paid by that second person exceeds the price paid by the financial institution. The difference between the two prices equates to the return from an investment at interest and is treated as alternative finance return (see new section 564I of ITA).
Section 564D: Diminishing shared ownership arrangements
758.This section deals with a second type of alternative finance arrangement. It is based on section 47A(1) to (4) of FA 2005. The corresponding rule for corporation tax is section 504 of CTA 2009.
759.Two persons, at least one of them a financial institution, acquire an interest in an asset. The financial institution receives payments from the other party for that party’s use of the financial institution’s share as well as payments to acquire the financial institution’s share, with the ownership of the asset passing by degrees to the other party. The other party to the arrangement has full use of the asset being acquired and may grant rights in the asset. Payments made by the other party in excess of the payments for the beneficial interest being acquired are treated as alternative finance return.
Section 564E: Deposit arrangements
760.This section deals with an arrangement whereby deposits are made with a financial institution and payments are made to the depositor out of profits earned by the use of the money. It is based on section 49(1) of FA 2005. The corresponding rule for corporation tax is section 505 of CTA 2009.
761.The payments must equate to a return from an investment at interest. The return is treated as alternative finance return.
Section 564F: Profit share agency arrangements
762.This section deals with an arrangement where the investor appoints an agent to whom a sum of money is given to be invested at a specified return. It is based on section 49A(1) of FA 2005. The corresponding rule for corporation tax is section 506 of CTA 2009.
763.Any additional sum above the specified return is retained by the agent as an incentive fee.
Section 564G: Investment bond arrangements
764.This section sets out the conditions that must be present for arrangements to be treated as an investment bond arrangement. It is based on section 48A(1) and (2) of FA 2005. The corresponding rule for corporation tax is section 507 of CTA 2009.
765.An investment bond arrangement exists where the bond-issuer uses the subscription proceeds to acquire assets, which are specified in the arrangement, and are held for the benefit of the bond-holder. Income generated from the assets is distributed to the bond-holder and, on maturity of the bond, the assets are sold under pre-existing arrangements and the proceeds returned to the bond-holder.
Section 564H: Provision not at arm’s length: exclusion of arrangements from sections 564C to 564G
766.This section excludes arrangements from sections 564C to 564G where the parties are connected persons within the transfer pricing legislation in Part 4 of this Act, the arrangements are not at arm’s length and the recipient of the alternative finance return is not subject to income tax or corporation tax or a similar non-United Kingdom tax. It is based on section 52(1) to (3) of FA 2005. The corresponding rule for corporation tax is section 508 of CTA 2009.
Section 564I: Purchase and resale arrangements
767.This section explains the meaning of “alternative finance return” in relation to the purchase and resale arrangements in section 564C. It is based on section 47(4), (6), (7) and (8) of FA 2005. The corresponding rule for corporation tax is section 511 of CTA 2009.
768.It provides for circumstances where the second purchase price is paid either immediately or in instalments.
Section 564J: Purchase and resale arrangements where return in foreign currency
769.This section sets out how to deal with purchase and resale arrangements in currencies other than sterling. It is based on section 48(1) of FA 2005. There is no explicit equivalent for corporation tax as currency matters are dealt with as an integral element of Parts 5 and 6 of CTA 2009.
Section 564K: Diminishing shared ownership arrangements
770.This section explains the meaning of “alternative finance return” in relation to the diminishing shared ownership arrangements set out in section 564D. It is based on section 47A(5) of FA 2005. The corresponding rule for corporation tax is section 512 of CTA 2009.
771.The phrase “costs and expenses” in section 47A(5) of FA 2005 has been reduced to “expenses” in subsection (3) as the additional words appear to be unnecessary.
Section 564L: Other arrangements
772.This section explains the meaning of “alternative finance return” in relation to deposit arrangements, profit share agency arrangements and investment bond arrangements. It is based on sections 48B(1), 49(2), 49A(2) and 51A(1) and (2) of FA 2005. The corresponding rule for corporation tax is section 513 of CTA 2009.
Section 564M: Treatment of alternative finance return as interest for ITTOIA 2005
773.This section directs that, for all purposes of ITTOIA, alternative finance return is to be taxed and relieved in the same way as interest. It is based on section 51(1) of, and paragraph 10 of Schedule 2 to, FA 2005.
Section 564N: Alternative finance return under arrangements for trade or property business purposes
774.This section directs that, where a person is party to an alternative finance arrangement for the purposes of a trade or property business, then any alternative finance return paid is treated as an expense of that trade or business. It is based on section 51(3) to (5) of FA 2005.
775.Specific provision is made to permit the deductibility of the incidental costs of raising loan finance via alternative finance arrangements under section 58 of ITTOIA.
Section 564O: Relief for some alternative finance return under Chapter 1 of Part 8 etc
776.This section ensures that alternative finance return under purchase and resale arrangements can be relieved in the same way as interest under provisions in ITA. It is based on section 51(2) of FA 2005.
Section 564P: Tax relief schemes and arrangements
777.This section ensures that relief for alternative finance return is subject to possible restriction under section 809ZG of ITA (which rewrites section 787 of ICTA). It is based on paragraph 8 of Schedule 2 to FA 2005.
Section 564Q: Deduction of income tax at source under Part 15
778.This section ensures that the provisions requiring the deduction of income tax at source from payments of interest also apply to payments of alternative finance return in equivalent circumstances. It is based on paragraphs 1, 11, 12 and 13 of Schedule 2 to FA 2005.
Section 564R: Treatment of discount
779.This section ensures that where part of the return equates in substance to a discount, then that part is dealt with in accordance with the rules for discounts in section 381 of ITTOIA, but not where the arrangements equate to a deeply discounted security. It is based on section 51A(1) and (3) of FA 2005.
780.Subsection (3) ensures that where any part of the return equates to the return on a deeply discounted security, then that part of the return is dealt with under the rules in ITTOIA that deal with deeply discounted securities.
Section 564S: Treatment of bond-holder and bond-issuer
781.This section sets out a number of consequences for bond-holders and bond-issuers under investment bond arrangements. It is based on section 48B(2) of FA 2005. The corresponding rule for corporation tax is section 517 of CTA 2009.
Section 564T: Treatment as securities
782.This section ensures that investment bond arrangements are treated as securities for income tax purposes. It is based on section 48B(3) of FA 2005. The corresponding rule for corporation tax is section 518 of CTA 2009.
Section 564U: Arrangements not unit trust scheme or offshore fund
783.This section ensures that investment bond arrangements are not treated as a unit trust scheme or an offshore fund. It is based on section 48B(5) of FA 2005.
Section 564V: Exclusion of alternative finance return from consideration for sale of assets
784.This section ensures that where assets are sold under certain types of alternative finance arrangement, the alternative finance return is excluded from the consideration for the sale and purchase. It is based on section 53 of FA 2005. The corresponding provision for corporation tax is section 514 of CTA 2009.
Section 564W: Diminishing shared ownership arrangements not partnerships
785.This section provides that diminishing shared ownership arrangements are not treated as a partnership for income tax purposes. It is based on section 47A(6) of FA 2005. The corresponding rule for corporation tax is section 515 of CTA 2009.
Section 564X: Treatment of principal under profit share agency arrangements
786.This section ensures that in the case of profit sharing arrangements the deposit-taker is taxable in respect of all of the profit resulting from the use of the money – both the depositor’s share of profit made under the arrangements and also the amount that the deposit-taker can retain. It is based on section 49A(3) of FA 2005. The corresponding rule for corporation tax is section 516 of CTA 2009.
787.The deposit-taker is entitled to relief for the depositor’s share of profit.
Section 564Y: Provision not at arm’s length: relevant return
788.This section prevents any deduction in calculating profits for income tax purposes as a result of alternative finance arrangements where the rules about arrangements not at arm’s length in section 564H apply. It is based on section 52(4) and (5) of FA 2005. The corresponding rule for corporation tax is section 520 of CTA 2009.
Part 2: New Chapter 4 of Part 4 of TCGA 1992
789.This Part of the Schedule inserts the necessary rules for capital gains tax as Chapter 4 of Part 4 of TCGA.
Sections 151H to 151S: Meaning of alternative finance arrangements etc
790.The inserted sections 151H to 151S of TCGA, containing the definitions of alternative finance arrangements and alternative finance return, perform the same function for the purposes of TCGA as the inserted sections 564A to 564L of ITA do for income tax.
Section 151T: Investment bond arrangements are qualifying corporate bonds
791.This section ensures that investment bond arrangements are treated as qualifying corporate bonds for the purposes of TCGA. It is based on section 48B(4) of FA 2005.
792.CTA 2009 inserted a reference in section 117(6D) of TCGA to add a reference to section 507 of CTA 2009 alongside the reference to section 48A of FA 2005. Part 7 of Schedule 8 rewrites section 117(6D) of TCGA to conform to the new structure.
Sections 151U to 151Y: Rules for investment bond arrangements and other rules
793.The inserted sections 151U to 151Y of TCGA set out a number of consequences for the purposes of TCGA, equivalent to the inserted sections 564S to 564W of ITA for income tax.
Part 3: Other amendments
794.This Part inserts new section 367A into ICTA, new section 173A into ITEPA and new sections 372A to 372D into ITA and amends section 1005 of ITA.
Section 367A of ICTA: Alternative finance arrangements
795.This section brings alternative finance arrangements within the scope of sections 353 and 365 of ICTA, which provide for relief for interest payment in certain limited circumstances. It is based on section 51(2) of FA 2005.
796.The section has been inserted here because the legislation only affects a defined group of people and will eventually be spent when there are no longer any eligible claimants.
Section 173A of ITEPA: Alternative finance arrangements
797.This section brings the effect of the alternative finance provisions into the rules for the taxation of employee benefits. It is based on section 97 of FA 2006.
Sections 372A to 372D of ITA: Community investment tax relief: alternative finance arrangements
798.These new sections modify Part 7 of ITA (community investment tax relief: income tax relief) to enable the range of permitted investments in, and by, community development finance institutions to include various Sharia’a-compliant financial products that in substance, but not in form, are equivalent to interest-bearing loans. Such products are to be treated as loans for the purposes of that Part. They correspond to sections 256 to 259 of CTA 2010 which have effect for the purposes of Part 7 of that Act (community investment tax relief: corporation tax relief).
Section 372A: Meaning of “loan” and “interest”
799.This section extends the meaning of the term “loan” in Part 7 of ITA to include purchase and resale arrangements, deposit arrangements and profit share agency arrangements and the meaning of the term “interest” to include alternative finance return under those alternative finance arrangements. It is based on section 54A(1) and (2) of FA 2005.
Section 372B: Purchase and resale arrangements
800.This section sets out how Part 7 of ITA has effect in relation to purchase and resale arrangements. It is based on section 54A(3) and (4) of FA 2005.
Section 372C: Deposit arrangements
801.This section sets out how Part 7 of ITA has effect in relation to deposit arrangements. It is based on section 54A(5) of FA 2005.
Section 372D: Profit share agency arrangements
802.This section sets out how Part 7 of ITA has effect in relation to profit share agency arrangements. It is based on section 54A(6) of FA 2005.
