Finance Act 2002 (c. 23)

(The document as of February, 2008)

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(3) In section 31(6), paragraph (c) shall not apply to a revaluation where the profit on the revaluation is wholly taken into account as a credit under that Schedule (see paragraph 15 of that Schedule).

(4) None of the conditions in section 31(9) shall be treated as satisfied if the asset with enhanced value is a chargeable intangible asset within the meaning of that Schedule.

(5) The reference in section 32(2)(b) to the cost of the underlying asset shall be read, in the case of a chargeable intangible asset, as a reference to the capitalised value of the asset recognised for accounting purposes. " .

Section 85

SCHEDULE 31 Gains of insurance company from venture capital investment partnership

The following Schedule is inserted after Schedule 7AC to the Taxation of Chargeable Gains Act 1992 (c. 12)--

" SCHEDULE 7AD Gains of insurance company from venture capital investment partnership

Introduction

1 This Schedule applies where the assets of the long-term insurance fund of an insurance company ("the company") include assets held by the company as a limited partner in a venture capital investment partnership ("the partnership").

Meaning of "venture capital investment partnership"

2 (1) A "venture capital investment partnership" means a partnership in relation to which the following conditions are met.

(2) The first condition is that the sole or main purpose of the partnership is to invest in unquoted shares or securities.

This condition shall not be regarded as met unless it appears from--
(a)
the agreement constituting the partnership, or
(b)
any prospectus issued to prospective partners,

that that is the sole or main purpose of the partnership.

(3) The second condition is that the partnership does not carry on a trade.

(4) The third condition is that not less than 90% of the book value of the partnership's investments is attributable to investments that are either--

(a) shares or securities that were unquoted at the time of their acquisition by the partnership, or

(b) shares that were quoted at the time of their acquisition by the partnership but which it was reasonable to believe would cease to be quoted within the next twelve months.

(5) For the purposes of the third condition--

(a) the following shall be disregarded--

(i) any holding of cash, including cash deposited in a bank account or similar account but not cash acquired wholly or partly for the purpose of realising a gain on its disposal;

(ii) any holding of quoted shares or securities acquired by the partnership in exchange for unquoted shares or securities;

(b) whether the 90% test is met shall be determined by reference to the values shown in the partnership's accounts at the end of a period of account of the partnership.

(6) Where a partnership ceases to meet the above conditions, the company shall be treated as if the partnership had continued to be a venture capital investment partnership until the end of the period of account of the partnership during which it ceased to meet the conditions.

(7) A partnership that ceases to meet those conditions cannot qualify again as a venture capital investment partnership.

For this purpose a partnership is treated as the same partnership notwithstanding a change in membership if any person who was a member before the change remains a member.

Interest in relevant assets of partnership treated as single asset

3 (1) Where this Schedule applies section 59 (partnerships) does not have effect to make the company chargeable on its share of gains accruing on each disposal of relevant assets of the partnership.

(2) Instead--

(a) the company's interest in relevant assets of the partnership is treated as a single asset ("the single asset") acquired by the company when it became a member of the partnership, and

(b) the following provisions of this Schedule have effect.

(3) For the purposes of this Schedule the "relevant assets" of the partnership are the shares and securities held by the partnership, other than qualifying corporate bonds.

(4) Nothing in this Schedule shall be read--

(a) as affecting the operation of section 59 in relation to partners who are not insurance companies carrying on long-term business or are not limited partners, or

(b) as imposing any liability on the partnership as such.

The cost of the single asset

4 (1) The company is treated as having given, wholly and exclusively for the acquisition of the single asset, consideration equal to the amount of capital contributed by it on becoming a member of the partnership.

(2) Any further amounts of capital contributed by it to the partnership are treated on a disposal of the single asset as expenditure incurred wholly and exclusively on the asset for the purpose of enhancing its value and reflected in its state or nature at the time of the disposal.

(3) Where the investments of the partnership include qualifying corporate bonds, the amount to be taken into account under sub-paragraph (1) or (2) is proportionately reduced.

(4) The reduction is made by applying to that amount the fraction:

---

where--

A is the book value of all shares and securities held by the partnership at the end of the period of account of the partnership in which the amount of capital in question is fully invested by the partnership, and
B is the book value of all qualifying corporate bonds held by the partnership at the end of that period of account.

(5) For the purposes of sub-paragraph (4) the "book value" means the value shown in the partnership's accounts at the end of the period of account.

Deemed disposal of single asset in case of distribution

5 (1) There is a disposal of the single asset on each occasion on which the company receives a distribution from the partnership that does not consist entirely of income or the proceeds of sale or redemption of assets that are not relevant assets.

(2) The disposal is taken to be for a consideration equal to the amount of the distribution or of so much of it as does not consist of income or the proceeds of sale or redemption of assets that are not relevant assets.

(3) Where--

(a) the partnership disposes of relevant assets on which a chargeable gain or allowable loss would accrue if they were held by the company alone, and

(b) no distribution of the proceeds of the disposal is made within twelve months of the disposal,

the company is treated as having received its share of the proceeds as a distribution at the end of the period of account of the partnership following that in which the disposal took place, or at the end of the period of six months after the date of the disposal, whichever is the later.

(4) The operation of sub-paragraph (3) is not affected by the partnership having ceased to be a venture capital investment partnership before the time at which the distribution is treated as received by the company.

(5) Where sub-paragraph (3) applies, any subsequent actual distribution of the proceeds is disregarded.

Apportionment in case of part disposal

6 (1) For the purposes of section 42 (apportionment of cost etc in case of part disposal) the market value of the property remaining undisposed of on a part disposal of the single asset shall be determined as follows.

(2) If there is no further disposal of that asset in the period of account in which the part disposal in question takes place, the market value of the property remaining undisposed of shall be taken to be equal to the company's share of the book value of the relevant assets of the partnership as shown in the partnership's accounts at the end of that period of account.

(3) If there is a further disposal of that asset in the period of account in which the part disposal in question takes place, or more than one, the market value of the property remaining undisposed of shall be taken to be equal to the sum of--

(a) the amount or value of the consideration on the further disposal or, as the case may be, the total amount or value of the consideration on the further disposals, and

(b) the amount (if any) of the company's share of the book value of the relevant assets of the partnership as shown in the partnership's accounts at the end of that period of account.

Disposal of partnership asset giving rise to offshore income gain

7 (1) Nothing in this Schedule shall be read as affecting the operation of Chapter 5 of Part 17 of the Taxes Act (offshore funds).

(2) Where an offshore income gain accrues to the company under that Chapter from the disposal of any relevant asset of the partnership, the amount of any distribution received or treated as received by the company from the partnership that represents the whole or part of the proceeds of disposal of that asset is treated for the purposes of this Schedule as reduced by the amount of the whole or a corresponding part of the offshore income gain.

Exclusion of negligible value claim

8 No claim may be made in respect of the single asset under section 24(2) (assets that have become of negligible value).

Investment in other venture capital investment partnerships

9 (1) For the purposes of paragraph 2 (meaning of "venture capital investment partnership") an investment by way of capital contribution to another venture capital investment partnership shall be treated as an investment in unquoted shares or securities.

(2) The Treasury may by regulations make provision, in place of but corresponding to that made by paragraphs 3 to 8, in relation to gains accruing on a disposal of relevant assets by such a partnership.

(3) The regulations may make provision for any period of account to which, in accordance with paragraphs 11 to 13, this Schedule applies.

Interpretation

10 (1) In this Schedule--

"insurance company", "long-term business" and "long-term insurance fund" have the same meaning as in Chapter 1 of Part 12 of the Taxes Act (see section 431(2) of that Act);
"limited partner" means--
(a)
a person carrying on a business as a limited partner in a partnership registered under the Limited Partnership Act 1907, or
(b)
a person carrying on a business jointly with others who, under the law of a country or territory outside the United Kingdom, is not entitled to take part in the management of the business and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the business;
"relevant assets" has the meaning given by paragraph 3(3);
"securities" has the same meaning as in section 132 and also includes any debentures;
"unquoted" and "quoted", in relation to shares or securities, refer to listing on a recognised stock exchange.

(2) References in this Schedule to the partnership's accounts are to accounts drawn up in accordance with generally accepted accounting practice.

If no such accounts are drawn up, the references to the treatment of any matter, or the amounts shown, in the accounts of the partnership are to what would have appeared if accounts had been drawn up in accordance with generally accepted accounting practice.

(3) References in this Schedule to capital contributed to a limited partnership include amounts purporting to be provided by way of loan if--

(a) the loan carries no interest,

(b) all the limited partners are required to make such loans, and

(4) For the purposes of this Schedule the assets of--

(a) a Scottish partnership, or

(b) a partnership under the law of any other country or territory under which assets of a partnership are regarded as held by or on behalf of the partnership as such,

shall be treated as held by the members of the partnership in the proportions in which they are entitled to share in the profits of the partnership.

References in this Schedule to the company's interest in, or share of, the partnership's assets shall be construed accordingly.

General commencement and transitional provisions

11 (1) Subject to paragraph 12 (election to remain outside Schedule), this Schedule applies--

(a) to periods of account of the partnership beginning on or after 1st January 2002, and

(b) to a period of account of the partnership beginning before that date and ending on or after it, unless the company elects that it shall not do so.

(2) Where the company became a member of the partnership before the beginning of the first period of account of the partnership to which this Schedule applies, the cost of the single asset at the beginning of that period of account shall be taken to be equal to the total of the relevant indexed base costs.

(3) For the purposes of sub-paragraph (2)--

(a) the "indexed base cost" means--

(i) in relation to a holding that by virtue of section 104 is to be treated as a single asset, what would be the indexed pool of expenditure within the meaning of section 110 if the holding were disposed of, and

(ii) in relation to any other asset, the amount of expenditure together with the indexation allowance that would be fall to be deducted if the asset were disposed of; and

(b) the "relevant indexed base costs" means the indexed base costs that would be taken into account in computing in accordance with section 59 the gain or loss of the company if all the shares and securities (other than qualifying corporate bonds) held by the partnership were disposed of on the last day of the company's accounting period immediately preceding its first accounting period beginning on or after 1st January 2002.

(4) No account shall be taken under this Schedule of a distribution by the partnership in a period of account to which this Schedule applies to the extent that it represents a chargeable gain accruing in an earlier period to which this Schedule does not apply.

Election to remain outside Schedule

12 If the company--

(a) became a member of the partnership before the beginning of the first period of account of the partnership to which this Schedule would otherwise apply, or

(b) made its first contribution of capital to the partnership before 17th April 2002,

it may elect that the provisions of this Schedule shall not apply to it in relation to that partnership.

How and when election to be made

13 Any election under paragraph 11 or 12 must be made--

(a) by notice to an officer of the Board,

(b) not later than the end of the period of two years after the end of the company's first accounting period beginning on or after 1st January 2002. " .

Section 86

SCHEDULE 32 Lloyd's underwriters

Individuals

1 Chapter 3 of Part 2 of the Finance Act 1993 (c. 34) (Lloyd's underwriters, etc) is amended as follows.

2 In section 178(stop loss and quota share insurance), in subsection (1) (deductions), for paragraph (c) substitute--

" (c) where an amount is payable by him under a quota share contract--

(i) so much of that amount as exceeds the amount of transferred losses that are declared on or before the date the contract takes effect ("the declared amount"), or

(ii) if the contract does not take effect, the amount so payable under the contract. " .

3 After subsection (3) of that section insert--

" (3A) Where the amount payable by a member under a quota share contract is less than the declared amount, the difference between the two amounts shall be treated as a trading receipt in computing the profits arising from the member's underwriting business in the year of assessment which corresponds to the underwriting year in which the contract takes effect.

(3B) Where a member has entered a quota share contract, any amount paid by him to cover a cash call in respect of transferred losses that are not declared at the time the contract takes effect shall be treated--

(a) for the purposes of subsection (1)(c)(i) and (3A) above, as an amount payable under the contract, and

(b) for the purposes of section 172, as a payment made at the time the contract takes effect. " .

4 For subsection (4) of that section substitute--

" (4) For the purposes of this section--

"cash call" has the same meaning as in Part 1 of Schedule 20 to this Act;
"quota share contract" means any contract between a member and another person which--
(a)
is made in accordance with the rules or practice of Lloyd's, and
(b)
provides for that other person to take over any rights and liabilities of the member under any of the syndicates of which he is a member;

and where the taking over of a member's rights and liabilities is conditional upon the occurrence of any event, the contract does not take effect until that event occurs; and
"transferred loss", in relation to such a contract, means a loss for which that other person takes over liability under the contract (disregarding, in the case of a loss that has been declared at the time it is taken over, any part of it in respect of which the member has paid a cash call before that time). " .

5 In section 184(1) (interpretation), in the definition of "stop-loss insurance", after "business" insert ", except insurance taken out by entering a quota share contract (within the meaning of section 178 above)".

Corporate bodies

6 Chapter 5 of Part 4 of the Finance Act 1994 (c. 9) (Lloyd's underwriters: corporations etc) is amended as follows.

7 In section 225 (stop loss and quota share insurance), in subsection (1) (deductions), for paragraph (b) substitute--

" b) where an amount is payable by it under a quota share contract--

(i) so much of that amount as exceeds the amount of transferred losses that are declared on or before the date the contract takes effect ("the declared amount"), or

(ii) if the contract does not take effect, the amount so payable under the contract. " .

8 After subsection (3) of that section insert--

" (3A) Where the amount payable by a corporate member under a quota share contract is less than the declared amount--

(a) if the underwriting year in which the contract takes effect falls within a single accounting period, the difference between the two amounts ("the surplus") shall be treated as a trading receipt in computing the profits arising from the member's underwriting business for that period, and

(b) if that underwriting year falls within two or more accounting periods, the apportioned part of the surplus shall be treated as a trading receipt in computing the profits arising from the member's underwriting business for each of those periods.

(3B) Where a corporate member has entered a quota share contract, any amount paid by it to cover a cash call in respect of transferred losses that are not declared at the time the contract takes effect shall be treated, for the purposes of subsections (1)(b)(i) and (3A) above, as an amount payable under the contract at that time. " .

9 For subsection (4) of that section substitute--

" (4) In this section--

"apportioned part", in relation to any insurance money or other amount, means a part apportioned under section 72 of the Taxes Act 1988;
"cash call" means a request for funds which, in pursuance of a contract made in accordance with the rules and practices of Lloyd's, is made to a corporate member by the agent of a syndicate of which it is a member;
"quota share contract" means any contract between a corporate member and another person which--
(a)
is made in accordance with the rules or practice of Lloyd's; and
(b)
provides for that other person to take over any rights and liabilities of the member under any of the syndicates of which it is a member;

and where the taking over of a member's rights and liabilities is conditional upon the occurrence of any event, the contract does not take effect until that event occurs; and
"transferred loss", in relation to such a contract, means a loss for which that other person takes over liability under the contract (disregarding, in the case of a loss that has been declared at the time it is taken over, any part of it in respect of which the member has paid a cash call before that time). " .

10 In section 230(1) (interpretation), in the definition of "stop-loss insurance", after "business" insert ", except insurance taken out by entering a quota share contract (within the meaning of section 225 above)".

Section 109

SCHEDULE 33 Venture capital trusts

Part 1 Venture capital trusts: winding up

Meaning of "VCT-in-liquidation"

1 (1) In this Part of this Schedule "VCT-in-liquidation" means a company--

(a) that is being wound up (whether or not under the law of a part of the United Kingdom and whether under the law of one, or more than one, territory),

(b) that was a venture capital trust immediately before the commencement of its winding-up, and

(c) whose winding up is for bona fide commercial reasons and is not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

(2) Regulations may, for purposes of this Part of this Schedule, make provision as to when a company's winding up is to be treated as commencing or ending in a case where it is wound up otherwise than under the law of a part of the United Kingdom or otherwise than under the law of a single territory.

Power to treat VCT-in-liquidation as VCT

2 (1) Regulations may make provision for tax enactments specified by the regulations to have effect as if--

(a) a VCT-in-liquidation that is not a venture capital trust were, or were during any prescribed period of its winding-up, a venture capital trust;

(b) VCT approval withdrawn from a company--

(i) at any time during the period when it is a VCT-in-liquidation, or

(ii) at any time during a prescribed part of that period,

were withdrawn at a prescribed time (and not at the time at which it is actually withdrawn).

(2) In this paragraph "prescribed" means specified by, or determined under, regulations.

Power to treat conditions for VCT approval as fulfilled with respect to VCT-in-liquidation

3 (1) Regulations may make provision for conditions specified in section 842AA(2) of the Taxes Act 1988 (conditions for approval as a VCT) to be treated for purposes of section 842AA(2) and (3) of that Act as fulfilled, or as conditions that will be fulfilled, with respect to a VCT-in-liquidation.

(2) Provision under sub-paragraph (1) may be made so as to apply in relation to a VCT-in-liquidation--

(a) throughout its winding-up, or

(b) during prescribed periods of its winding-up.

(3) Regulations may, for purposes of tax enactments specified by the regulations, make provision for VCT approval to be treated as having been withdrawn, with effect as from a time specified by or determined under the regulations, from a VCT-in-liquidation from whom the Board would have power to withdraw such approval but for provision made under sub-paragraph (1).

Power to make provision about distributions by VCT-in-liquidation

4 (1) Regulations may make provision for tax enactments specified by the regulations--

(a) to apply in relation to distributions from a VCT-in-liquidation (including, in particular, distributions in the course of dissolving it or winding it up);

(b) not to apply in relation to such distributions;

(2) Provision under sub-paragraph (1) may be made so as to apply in relation to distributions from a VCT-in-liquidation made--

(a) at any time during its winding-up, or

(b) during periods of its winding-up specified by, or determined under, regulations.

Power to facilitate disposals to VCT by VCT-in-liquidation

5 (1) Regulations may make provision authorised by sub-paragraph (2) for cases where shares in or securities of a company are acquired by a venture capital trust ("the trust company") from a VCT-in-liquidation.

(2) The provision that may be made under sub-paragraph (1) for such a case is--

(a) provision for conditions specified in section 842AA(2) of the Taxes Act 1988 (conditions for approval as a VCT) to be treated for purposes of section 842AA(2) and (3) of that Act as fulfilled, or as conditions that will be fulfilled, with respect to the trust company in relation to periods ending after the acquisition;

(b) provision for the shares or securities acquired to be treated, at times after the acquisition when they are held by the trust company, as meeting requirements of Schedule 28B to the Taxes Act 1988 (provisions for determining whether shares or securities held by a venture capital trust form part of its qualifying holdings);

(c) provision for shares in the trust company issued in connection with the acquisition of the shares or securities from the VCT-in-liquidation and either--

(i) issued to a person who is a member of the VCT-in-liquidation, or

(ii) issued to the VCT-in-liquidation and distributed by it in the course of its winding-up or dissolution to a person who is one of its members,

to be treated, for purposes of Schedule 5C to the Taxation of Chargeable Gains Act 1992 (c. 12), as representing shares in the VCT-in-liquidation held by that person.

(3) Provision under sub-paragraph (1) may be made so as to apply in relation to shares or securities acquired from a VCT-in-liquidation--

(a) at any time during its winding-up, or

(b) during periods of its winding-up specified by, or determined under, regulations.

(4) In this paragraph "securities" means any securities and includes any liability that is a security in relation to a company by reason of section 842AA(12)(a) of the Taxes Act 1988.

Provision in respect of periods before and after winding-up

6 (1) Any power under paragraphs 2 to 5 to make provision in relation to a VCT-in-liquidation includes power to make corresponding or similar provision in relation to--

(a) a company for whose winding up an application has been made to a court and which is not a VCT-in-liquidation but would be if, at the time that application was made, the court had ordered the company's winding-up to commence at that time;

(b) a company that has been a VCT-in-liquidation but is no longer a VCT-in-liquidation because it has been wound up.

(2) For the purposes of making provision in reliance on sub-paragraph (1), references in paragraphs 2 to 5 (however expressed) to a VCT-in-liquidation's winding-up, or to the commencement or ending of its winding-up, may be taken to be references to, or to the commencement or ending of, the extension period for a company to which sub-paragraph (1) applies.

(3) In this paragraph--

"the extension period"--
(a)
in relation to a company to which sub-paragraph (1)(a) applies, means the period beginning with the making of the application and ending with the earlier of its final determination and the company becoming a company that is being wound up, and
(b)
in relation to company to which sub-paragraph (1)(b) applies, means the period between the end of the company's winding-up and the company's dissolution;
"prescribed" means specified by, or determined under, regulations.

Part 1: supplementary provisions and interpretation

7 (1) Provision made by regulations under paragraphs 2 to 6 applies in cases, and subject to conditions, specified by regulations.

(2) Such provision may (but need not) be made so as to have effect in a particular case only for such period as may be specified by, or determined under, regulations.

(3) Such provision may be made in relation to any--

(a) VCT-in-liquidation, or

(b) company such as is mentioned in paragraph 6(1),

whose winding-up commences on or after 17th April 2002.

(4) In this Part of this Schedule "VCT approval" means approval for the purposes of section 842AA of the Taxes Act 1988 (approval as a VCT).

(5) References in this Part of this Schedule to things done by a VCT-in-liquidation include things done by a liquidator of a VCT-in-liquidation.

Part 2 Venture capital trusts: mergers

Power to facilitate mergers of VCTs

8 (1) The Treasury may by regulations make provision authorised by paragraph 9 for cases where--

(a) there is a merger of two or more companies each of which is a venture capital trust immediately before the merger begins to be effected, and

(b) the merger is for bona fide commercial reasons and is not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

(2) Provision made by regulations under sub-paragraph (1) applies--

(a) in cases, and

(b) subject to conditions (including conditions requiring approvals to be obtained),

specified by the regulations.

(3) Provision made by regulations under sub-paragraph (1) may apply in relation to any merger where the transactions for effecting the merger take place on or after 17th April 2002.

Provision that may be made by regulations under paragraph 8(1)

9 (1) The provision that may be made under paragraph 8(1) for a case where there is a merger of two or more companies ("the merging companies") is--

(a) provision for the successor company, or any of the merging companies, to be treated (whether at times before, during or after the merger) as a venture capital trust for purposes of tax enactments specified by regulations;

(b) provision for paragraph 3 of Schedule 15B to the Taxes Act 1988 (loss of relief on disposal of VCT shares within three years of their issue) not to apply in the case of disposals of shares in a merging company made in the course of effecting the merger;

(c) provision for such disposals not to be chargeable events for the purposes of Schedule 5C to the Taxation of Chargeable Gains Act 1992 (c. 12) (VCTs: deferred charge on re-investment);

(d) provision for conditions specified in section 842AA(2) of the Taxes Act 1988 (conditions for approval as a VCT) to be treated (whether at times before, during or after the merger) for purposes of section 842AA(2) and (3) of that Act as fulfilled, or as conditions that will be fulfilled, with respect to the successor company or any of the merging companies;

(e) provision for shares in or securities of a company that are acquired (whether at times before, during or after the merger) by the successor company from a merging company to be treated, at times after the acquisition when they are held by the successor company, as meeting requirements of Schedule 28B to the Taxes Act 1988 (provisions for determining whether shares or securities held by a venture capital trust form part of its qualifying holdings);

(f) provision for tax enactments specified by regulations to apply, with or without adaptations, in relation to the merger or transactions taking place (whether before, during or after the merger) in connection with the merger;

(g) provision authorising disclosure for tax purposes connected with the merger--

(i) by the Board or officers of the Board,

(ii) to any of the merging companies or the successor company,

(iii) of any information provided to the Board, or any officer of the Board, by or on behalf of any of the merging companies or the successor company.

(2) In this paragraph "securities" has the same meaning as in section 842AA of the Taxes Act 1988.

Meaning of "merger" and "successor company"

10 (1) For the purposes of this Part of this Schedule there is a merger of two or more companies ("the merging companies") if--

(a) shares in one of the merging companies ("company A") are issued to members of the other merging company or companies, and

(b) the shares issued to members of the other merging company or, in the case of each of the other merging companies, the shares issued to members of that other company, are issued--

(i) in exchange for their shares in that other company, or

(ii) by way of consideration for a transfer to company A of the whole or part of the business of that other company.

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