Finance Act 2006 (c. 25)

(The document as of February, 2008)

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(i) in order to reflect the coming into force of the direction mentioned in paragraph (a), or

(ii) in consequence of the variation or removal of a limit on the NDA's financial responsibility under section 21 imposed by a capping agreement. "

(3) For subsection (3) substitute--

" (3) In computing the profits, gains or losses of the NDA for the purposes of corporation tax, no amount shall be brought into account in connection with--

(a) the recognition made in the accounts of the NDA of--

(i) the relevant provision, or

(ii) an asset that, in accordance with generally accepted accounting practice, is recognised in order to reflect a limit on the NDA's financial responsibility under section 21 imposed by a capping agreement;

(b) any adjustment made in those accounts (including the removal from the accounts of an asset falling within paragraph (a)(ii)) in consequence of a variation or removal of the limit mentioned in paragraph (a)(ii). "

(4) In subsection (4), for the words after "in connection with" substitute "an adjustment not falling within paragraph (b) of that subsection".

(5) In subsection (5), after the definition of "BNFL company" insert--

" "capping agreement" has the same meaning as in section 29; " .

(6) The amendments made by this section have effect in relation to accounting periods of the Nuclear Decommissioning Authority ending on or after 22nd March 2006.

Accounting practice

101 Securitisation companies

(1) Section 83 of FA 2005 (application of accounting standards to securitisation companies) is amended as follows.

(2) In subsection (1)(b) (periods of account in relation to which old UK GAAP is to apply) for "1st January 2007" substitute "1st January 2008".

(3) In subsection (3) (meaning of "note-issuing company")--

(a) omit "and" at the end of paragraph (c);

(b) after paragraph (d) insert-- " , and

(e) if it has any business apart from the activity mentioned in paragraph (a) (and any incidental activities) it consists in one or both of the following--

(i) acquiring, holding and managing assets forming the whole or part of the security for the capital market arrangement;

(ii) acting as guarantor in respect of loan relationships, derivative contracts, finance leases or other liabilities of other companies where the whole, or substantially the whole, of the company's rights in respect of the guarantee (including any right of subrogation) form the whole or part of the security for the capital market arrangement. " .

(4) In subsection (5) (meaning of "intermediate borrowing company")--

(a) in paragraph (a) after "asset-holding company", and

(b) in paragraph (b) after "note-issuing company",

insert "(or another intermediate borrowing company)".

(5) In section 84 of that Act (power to make provision as to application of Corporation Tax Acts in relation to securitisation companies)--

(a) in subsection (3)(d)--

(i) at the end of sub-paragraph (i) insert ", and", and

(ii) omit sub-paragraph (ii) and the word "and" following it;

(b) in subsection (5), omit paragraph (a).

(6) The amendments in this section shall be deemed always to have had effect, subject as follows.

(7) A company that would have been a securitisation company for the purposes of section 83 of FA 2005 if the amendments in this section had not been made, being either--

(a) a note-issuing company that--

(i) had become party as debtor to the capital market investment before 22nd March 2006, or

(ii) had before that date entered into a binding arrangement to become a party as debtor to the capital market investment, or

(b) another description of securitisation company by virtue of its connection with a company within paragraph (a),

may elect to be taxed as if the amendments in subsection (3) had not been made.

(8) Any such election must be made not later than 31st March 2007 and has effect for all relevant periods of account.

102 Accountancy change: spreading of adjustment

(1) Schedule 15 to this Act (accountancy change: spreading of adjustment) has effect.

(2) In that Schedule--

Part 1 makes provision for income tax purposes, and
Part 2 makes provision for corporation tax purposes.

(3) In section 21B of ICTA (corporation tax: application to Schedule A business of other rules applicable to Case 1 of Schedule D) for "section 44 of and Schedule 6 to the Finance Act 1998" substitute "section 64 of and Schedule 22 to the Finance Act 2002".

Part 4 Real Estate Investment Trusts

Introduction

103 Real Estate Investment Trusts

(1) This Part enables a company which carries on property rental business (within the meaning of section 104) and which satisfies the requirements of sections 106 to 108 to opt to--

(a) benefit from exemptions from corporation tax on profits and gains in accordance with sections 119 and 124, and

(b) have liabilities to tax imposed on the company and the recipients of distributions made by the company in accordance with sections 112, 121 and 122.

(2) This Part makes similar provision in relation to groups of companies (sections 134 to 136 and Schedule 17).

(3) A company or group to which this Part applies may be referred to as a Real Estate Investment Trust.

104 Property rental business

(1) In this Part "property rental business" means business that is or forms part of--

(a) a Schedule A business (within the meaning of section 832(1) of ICTA), or

(b) an overseas property business (within the meaning of section 70A(4) of ICTA).

(2) But--

(a) business of a kind listed in Part 1 of Schedule 16 is not property rental business, and

(b) business is not property rental business if or in so far as it gives rise to income or profits of a kind listed in Part 2 of that Schedule.

105 Other key concepts

(1) In this Part "entry" means the time when this Part begins to apply to a company.

(2) In this Part "cessation" means the time when this Part ceases to apply to a company.

(3) In this Part, in relation to a company--

(a) "C (pre-entry)" means the company before this Part begins to apply to it,

(b) "C (tax-exempt)" means the company in so far as it carries on tax-exempt business (within the meaning of section 107(2)) while this Part applies to it,

(c) "C (residual)" means the company in so far as it carries on non-tax-exempt business while this Part applies to it, and

(d) "C (post-cessation)" means the company after this Part has ceased to apply to it.

106 Conditions for company

(1) A company may give notice for this Part to apply to it in accordance with section 109 only if it satisfies Conditions 1 to 3 below.

(2) In order for this Part to apply to a company in respect of an accounting period, Conditions 1 to 6 below must be satisfied in relation to the company throughout the accounting period.

(3) Condition 1 is that the company--

(a) is resident in the United Kingdom, and

(b) is not resident in another place in accordance with the law of that place relating to taxation.

(4) Condition 2 is that section 236 of the Financial Services and Markets Act 2000 Financial Services and Markets Act 2000 (c. 8) (open-ended investment companies) does not apply to the company.

(5) Condition 3 is that the shares forming the company's ordinary share capital are listed on a recognised stock exchange.

(6) Condition 4 is that the company--

(a) is not a close company (within the meaning of section 414 of ICTA), or

(b) is a close company only by virtue of having as a participator (within the meaning of section 417 of ICTA) a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000;

and for the purposes of paragraph (a) a company shall be treated as a close company if it is prevented from being a close company only by section 414(5) or 415(4)(a) of ICTA.

(7) Condition 5 is that--

(a) each share issued by the company either--

(i) forms part of the company's ordinary share capital, or

(ii) is a non-voting fixed-rate preference share (within the meaning of paragraph 2 of Schedule 25 to ICTA (acceptable distribution policy)), and

(b) there is no more than one class of ordinary share issued by the company.

(8) Condition 6 is that in the case of any loan to which the company is party--

(a) the loan creditor is not entitled to an amount by way of interest which depends to any extent on the results of all or part of the company's business or on the value of any of the company's assets,

(b) the loan creditor is not entitled to an amount by way of interest which exceeds a reasonable commercial return on the consideration lent, and

(c) the loan creditor is entitled on repayment to an amount which either does not exceed the consideration lent or is reasonably comparable with the amount generally repayable (in respect of an equal amount of consideration) under the terms of issue of securities listed on a recognised stock exchange.

107 Conditions for tax-exempt business

(1) In order to be a company to which this Part applies in respect of an accounting period--

(a) the company must throughout the accounting period have a property rental business in respect of which Conditions 1 to 3 below are satisfied (whether or not it also has other business), and

(b) Condition 4 below must be satisfied in relation to that property rental business in respect of that accounting period.

(2) Property rental business of a company is "tax-exempt business" for the purposes of this Part in respect of an accounting period if--

(a) Conditions 1 to 3 are satisfied throughout the accounting period in relation to the business, and

(b) Condition 4 is satisfied in respect of the accounting period in relation to the business.

(3) Condition 1 is that the property rental business involves at least three properties.

(4) Condition 2 is that no one property represents more than 40% of the total value of the properties involved in the property rental business.

(5) Condition 3 is that the property rental business must not involve property that would fall in accordance with generally accepted accounting practice to be described as owner-occupied.

(6) For the purposes of Conditions 1 to 3--

(a) a reference to a property involved in a business is a reference to an estate, interest or right by the exploitation of which the business is conducted,

(b) a property is a single property if it is designed, fitted or equipped for the purpose of being rented, and it is rented or available for rent, as a commercial or residential unit (separate from any other commercial or residential unit),

(c) assets must be valued in accordance with international accounting standards (within the meaning of section 50(2) of FA 2004),

(d) where international accounting standards offer a choice of valuation between cost basis and fair value, fair value must be used, and

(e) no account shall be taken of liabilities secured against or otherwise relating to assets (whether generally or specifically).

(7) For the purpose of Condition 3--

(a) no account shall be taken of the fact that a property may fall to be described as owner-occupied by reason only of the provision by the company of services to an occupant who is in exclusive occupation of the property and is not connected with the company (within the meaning given by section 839 of ICTA),

(b) if the shares of one company are stapled to the shares of another, the two shall be treated as a single company, and

(c) for this purpose shares of one company are stapled to shares of another if in consequence of the nature of the rights attaching to the shares of the one company (including any terms or conditions attaching to the right to transfer the shares) it is necessary or advantageous for a person who has, disposes of or acquires shares of that company also to have, to dispose of or to acquire a holding of shares of the other company.

(8) Condition 4 is that at least 90% of the profits of the property rental business arising in the accounting period are distributed--

(a) by way of dividend, and

(b) on or before the filing date for the company's tax return for the accounting period (see paragraph 14 of Schedule 18 to FA 1998).

(9) But--

(a) Condition 4 shall be disregarded if and in so far as compliance with it would be unlawful by virtue of--

(i) an enactment (including Northern Ireland legislation and an Act of the Scottish Parliament), or

(ii) an enactment of a jurisdiction outside the United Kingdom where the enactment is prescribed, or is of a kind prescribed, for the purposes of this paragraph in regulations made by the Commissioners for Her Majesty's Revenue and Customs, and

(b) a distribution that is withheld in order to prevent or reduce a charge to tax arising under regulations under section 114 shall be treated for the purposes of Condition 4 as having been made.

108 Conditions for balance of business

(1) In order to be a company to which this Part applies in respect of an accounting period Conditions 1 and 2 below must be satisfied in respect of the company.

(2) Condition 1 is that in the accounting period the profits arising from tax-exempt business are at least 75% of the company's total profits; and for that purpose--

(a) "total profits" means profits arising from tax-exempt business plus profits arising from non-tax-exempt business, and

(b) "profits" means profits before deduction of tax and excluding realised and unrealised gains and losses on the disposal of property, calculated in accordance with international accounting standards.

(3) Condition 2 is that at the beginning of the accounting period the value of the assets involved in tax-exempt business is at least 75% of the total value of assets held by the company; and for that purpose--

(a) an asset is involved in tax-exempt business if it is property involved in the relevant property rental business within the meaning given by section 107(6)(a),

(b) assets must be valued in accordance with international accounting standards,

(c) where international accounting standards offer a choice of valuation between cost basis and fair value, fair value must be used, and

(d) no account shall be taken of liabilities secured against or otherwise relating to assets (whether generally or specifically).

Entering Real Estate Investment Trust Regime

109 Notice

(1) If a company (which satisfies the requirement in section 106(1)) gives a notice under this section specifying an accounting period from the beginning of which this Part is to apply to the company, this Part shall apply to the company from the beginning of that accounting period.

(2) A notice--

(a) must be given in writing to the Commissioners for Her Majesty's Revenue and Customs,

(b) must be given before the beginning of the specified accounting period,

(c) must be accompanied by a statement by the company that Conditions 1 to 6 in section 106 are reasonably expected to be satisfied in respect of the company throughout the specified accounting period, and

(d) must contain such other information, and be accompanied by such other documents, as may be prescribed by regulations made by the Commissioners for Her Majesty's Revenue and Customs.

110 Duration

Once this Part has begun to apply to a company, it shall continue to apply unless and until it ceases to apply in accordance with any of sections 128 to 130.

111 Effects of entry

(1) Property rental business of C (pre-entry) shall be treated for the purposes of corporation tax as ceasing at entry.

(2) Assets which immediately before entry are involved in property rental business of C (pre-entry) shall be treated for the purposes of corporation tax as being sold by C (pre-entry) immediately before entry and re-acquired by C (tax-exempt) immediately after entry.

(3) The sale and re-acquisition deemed under subsection (2) shall be treated as being for a consideration equal to the market value of the assets.

(4) For the purposes of CAA 2001--

(a) the sale and re-acquisition deemed under subsection (2)--

(i) shall not give rise to allowances or charges, and

(ii) shall not make it possible to make an election under section 198 or 199 of that Act (apportionment),

(b) subsection (3) above shall not apply, and

(c) anything done by or to C (pre-entry) before entry in relation to an asset which is deemed under subsection (2) to be sold and re-acquired shall be treated after entry as having been done by or to C (tax-exempt).

(5) For the purposes of corporation tax, on entry one accounting period of the company shall end and another shall begin.

(6) For the purposes of subsection (2) an asset is involved in property rental business if it is property involved in the business within the meaning given by section 107(6)(a).

(7) A gain accruing by reason of this section shall not be a chargeable gain.

112 Entry charge

(1) A company to which this Part applies shall be chargeable to corporation tax under Case VI of Schedule D on an amount of notional income calculated in accordance with subsection (3).

(2) The notional income shall be treated as arising to C (residual) on entry.

(3) The notional income is--

---

where--

(a) Market Value means the aggregate market value of assets treated as sold and re-acquired under section 111(2) (ignoring any asset of negative market value), and
(b) Tax Rate means the percentage rate at which C (residual) is chargeable to tax on profits.

(4) No loss, deficit, expense or allowance may be set off against notional income or tax arising under this section.

(5) The company may elect to have the notional income treated as arising in four instalments, the first on the date of entry and the other three on the first three anniversaries of that date; and for this purpose subsection (3) shall apply as if the percentage referred to were--

(a) 0.50% for the first instalment,

(b) 0.53% for the second instalment,

(d) 0.60% for the fourth instalment.

(6) If a company makes an election under subsection (5)--

(a) notice of the election must be given to the Commissioners for Her Majesty's Revenue and Customs with the notice under section 109,

(b) the election is irrevocable, and

(c) if this Part ceases to apply to a company before the third anniversary of entry, any remaining instalments shall become chargeable immediately.

(7) The Treasury may by regulations amend a percentage specified in subsection (5) in order to reflect a change in interest rates; but regulations under this subsection shall not have effect in relation to elections made before the regulations come into force.

Assets etc

113 Ring-fencing of tax-exempt business

(1) For the purposes of corporation tax, the business of C (tax-exempt) shall be treated as a separate business (distinct from--

(a) any business carried on by C (pre-entry),

(b) any business carried on by C (residual), and

(2) For the purposes of corporation tax C (tax-exempt) shall be treated as a separate company (distinct from--

(a) C (pre-entry),

(b) C (residual), and

(3) In particular--

(a) a loss incurred by C (tax-exempt) may not be set off against profits of C (residual),

(b) a loss incurred in respect of C (residual) may not be set off against profits of C (tax-exempt),

(c) a loss incurred in respect of C (pre-entry) may not be set off against profits of C (tax-exempt) (but this section does not prevent a loss of that kind from being set off against profits of C (residual)),

(d) a loss incurred by C (tax-exempt) may not be set off against profits arising to C (post-cessation) (in respect of business of any kind), and

(e) receipts accruing after entry but relating to business of C (pre-entry) shall not be treated as receipts of C (tax-exempt).

(4) In subsection (3) a reference to a loss includes a reference to a deficit, expense, charge or allowance.

(5) Section 392B of ICTA (ring-fencing of losses from overseas property business) shall not apply to business of C (tax-exempt).

(6) Paragraphs 5B and 5C of Schedule 28AA to ICTA (transfer pricing: exemption for small and medium enterprises) shall not apply to a company to which this Part applies (whether to C (tax-exempt) or to C (residual)).

114 Maximum shareholding

(1) The Treasury may make regulations that apply to a company to which this Part applies if it makes a distribution to or in respect of a person who--

(a) is beneficially entitled (directly or indirectly) to 10% or more of the dividends paid by the company,

(b) is beneficially entitled (directly or indirectly) to 10% or more of the company's share capital, or

(2) The regulations may, in particular--

(a) cause a sum to be charged to tax, in accordance with the regulations, (whether by reference to a person's interest, to a rate of tax or otherwise);

(b) provide that a charge does not arise, or is reduced, if the company takes or does not take action of a specified kind.

115 Profit: financing-cost ratio

(1) The Treasury may make regulations that apply to a company to which this Part applies where the result of the sum specified in subsection (2) is less than 1.25 in respect of an accounting period.

(2) That sum is--

---

where--

(a) Profits means the amount of the profits of C (tax-exempt) arising in the accounting period (before the offset of capital allowances), and
(b) Financing Costs means the amount of the financing costs incurred in that period in respect of the business of C (tax-exempt).

(3) The regulations may cause a sum to be charged to tax, in accordance with the regulations, by reference to that part of the financing costs as a result of which the result of the sum specified in subsection (2) is less than 1.25.

(4) In subsections (2)(b) and (3) "financing costs" means the cost of debt finance; and in calculating the costs of debt finance in respect of an accounting period the matters to be taken into account include--

(a) costs giving rise to debits in respect of debtor relationships of the company under Chapter 2 of Part 4 of FA 1996 (loan relationships), other than debits in respect of exchange losses from such relationships (within the meaning of section 103(1A) and (1B) of that Act),

(b) any exchange gain or loss from a debtor relationship within the meaning of that Chapter in relation to debt finance,

(c) any credit or debit falling to be brought into account under Schedule 26 to FA 2002 (derivative contracts) in relation to debt finance,

(d) the financing cost implicit in a payment under a finance lease, and

(e) any other costs arising from what would be considered, in accordance with generally accepted accounting practice, to be a financing transaction.

116 Minor or inadvertent breach

(1) The Treasury may make regulations about the application of this Part to a company if a requirement in section 106(5) or (6), 107 or 108 is not satisfied (whether generally or in respect of an accounting period).

(2) A company which gave a notice under section 109 shall notify the Commissioners for Her Majesty's Revenue and Customs as soon as reasonably practicable if a requirement in section 106(5) or (6), 107 or 108 ceases to be satisfied in relation to the company.

(3) The regulations may, in particular--

(a) provide for this Part to cease to apply to a company at a time specified by or determined in accordance with the regulations (which may be before the breach of a requirement);

(b) provide for this Part to continue to apply to a company with specified modifications;

(d) make provision by reference to the extent of a failure to satisfy a requirement;

(e) make provision by reference to the number of requirements not satisfied;

(f) limit the number of occasions on which a provision of the regulations may be relied upon by a company in respect of a specified period;

(g) include other provision for preventing tax avoidance;

(h) confer a discretion on the Commissioners.

(4) This section is subject to section 129.

117 Cancellation of tax advantage

(1) This section applies if the Commissioners for Her Majesty's Revenue and Customs think that a company to which this Part applies has tried to obtain a tax advantage for itself or another person.

(2) The Commissioners may give a notice to the company specifying the tax advantage.

(3) If the Commissioners give a notice to the company under subsection (2)--

(a) a tax advantage obtained by the company shall be counteracted, in accordance with the notice, by an adjustment by way of--

(i) an assessment;

(ii) the cancellation of a right of repayment;

(iii) a requirement to return a repayment already made;

(iv) the computation or recomputation of profits or gains, or liability to tax, on a basis specified by the Commissioners in the notice, and

(b) the Commissioners may (in addition to the adjustment under paragraph (a)) assess the company to such additional amount of corporation tax under Case VI of Schedule D as they think is equivalent to the value of the tax advantage.

(4) For the purposes of this section "tax advantage" has the meaning given by section 709 of ICTA (and includes, in particular, entering into arrangements the sole or main purpose of which is to avoid or reduce a charge to tax under section 112).

(5) But a company does not obtain a tax advantage by reason only of this Part applying to it, unless it does anything (whether before or during the application of this Part) which in the Commissioners' opinion is wholly or principally designed--

(a) to create or inflate or apply a loss, deduction or expense (whether or not suffered or incurred by the company), or

(b) to have another effect of a kind specified for the purposes of this subsection by regulations made by the Treasury.

(6) Where a notice is given to a company under subsection (2), the company may appeal to the Special Commissioners.

(7) An appeal must be instituted by notice given in writing to the Commissioners for Her Majesty's Revenue and Customs during the period of 30 days beginning with the date on which the notice under subsection (2) is given to the company.

118 Funds awaiting re-investment

(1) This section applies where a company to which this Part applies--

(a) disposes of an asset used wholly and exclusively for the purposes of tax-exempt business, and

(b) holds the proceeds in cash.

(2) Profits or losses arising from a loan relationship entered into in connection with the proceeds--

(a) shall be disregarded for the purposes of section 120, and

(b) shall be treated for all tax purposes as arising from a loan relationship entered into in connection with business of C (residual).

(3) For the purposes of section 108--

(a) the proceeds shall, during the period of 24 months beginning with the date of the disposal, be treated for the purposes of Condition 2 as assets held in connection with the tax-exempt business, but

(b) any income derived from the proceeds is income from non-tax-exempt business.

(4) For the purposes of this section proceeds are held in cash if--

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