Finance Act 1996 (c. 8)

(The document as of February, 2008)

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" (b) a foreign dividend (as defined by section 18(3D)), or

Other amendments

29 In the Table in section 98 of the [1970 c. 9.] Taxes Management Act 1970 (penalties in respect of certain information provisions)--

(a) in the first column, the entry relating to paragraph 13(1) of Schedule 3 to the Taxes Act 1988, and

(b) in the second column, the entry relating to paragraph 6C of that Schedule,

shall be omitted.

30 In section 178(2)(m) of the [1989 c. 26.] Finance Act 1989 (provisions to which power to set rates of interest applies), the words "and paragraph 6B of Schedule 3 to" shall be omitted.

31 In section 128 of the [1995 c. 4.] Finance Act 1995 (limit on income chargeable on non-residents: income tax), in subsection (3)(a), the words "Schedule C," shall be omitted.

Commencement, etc.

32 Subject to paragraphs 33 and 34 below, this Schedule has effect--

(a) for the purposes of income tax, for the year 1996-97 and subsequent years of assessment;

(b) for the purposes of corporation tax, for accounting periods ending after 31st March 1996.

Position of paying and collecting agents

33 (1) Subject to the following provisions of this paragraph and paragraph 34 below--

(a) nothing in section 79 of this Act or this Schedule shall affect the obligations of any person under Schedule 3, in relation to times to which this paragraph applies, to set apart, retain or pay any amount of tax; and

(b) Schedule 3 shall have effect accordingly in relation to amounts set apart, retained or paid in pursuance of those obligations.

(2) The repeal of Schedule 3 shall not affect the operation of paragraph 6B of that Schedule in relation to any amount--

(a) which became due and payable in relation to a transaction occurring before the day on which this Act was passed; but

(b) which remains unpaid at any time on or after that day.

(3) The Board may by regulations make provision with respect to returns to be made for the quarter which includes both times before the day on which this Act was passed and times on and after that day.

(4) Regulations under sub-paragraph (3) above may, in particular, provide that section 98 of the [1970 c. 9.] Taxes Management Act 1970 shall have effect as if it included a reference in the second column of the Table to any specified provision of the regulations.

(5) In this paragraph "Schedule 3" means Schedule 3 to the Taxes Act 1988.

Position of taxpayers

34 (1) Transitional payments of tax made on a person's behalf in relation to times to which this paragraph applies shall be treated as made only for the purpose of being applied in the discharge of that person's liability to tax charged under Schedule D.

(2) If a transitional payment of tax has been made on a person's behalf, but it appears to the Board that--

(a) that person was not liable to tax, or

(b) the sum paid exceeded his liability,

the Board shall make or allow such repayments, adjustments or set-offs against unpaid tax as they think appropriate.

(3) In this paragraph "transitional payment of tax" means a payment to which paragraph 33 above applies.

Times to which paragraphs 33 and 34 apply

35 Paragraphs 33 and 34 above apply in relation to times falling--

(a) within a year of assessment or an accounting period mentioned in paragraph 32 above, but

(b) before the day on which this Act was passed.

Section 83.

SCHEDULE 8 Loan relationships: claims relating to deficits

Claim to set off deficit against other profits for the deficit period

1 (1) This paragraph applies where a claim is made under section 83(2)(a) of this Act for the whole or any part of the deficit to be set off against profits of any description for the deficit period.

(2) Subject to the following provisions of this paragraph--

(a) the amount to which the claim relates shall be set off against the profits of the company for the deficit period that are identified in the claim; and

(b) those profits shall be treated as reduced accordingly.

(3) Any reduction by virtue of sub-paragraph (2) above shall be made--

(a) after relief has been given for any loss incurred in a trade in an earlier accounting period; and

(b) before any relief is given against profits for that period either--

(i) under section 393A(1) of the Taxes Act 1988 (trading losses set against profits for the same or preceding accounting periods); or

(ii) by virtue of any claim made, in respect of a deficit for a subsequent period, under section 83(2)(c) of this Act.

(4) Relief shall not be given by virtue of a claim under section 83(2)(a) of this Act against any ring fence profits of the company within the meaning of Chapter V of Part XII of the Taxes Act 1988 (petroleum extraction activities).

Claim to treat deficit as eligible for group relief

2 (1) This paragraph applies where the company makes a claim under section 83(2)(b) of this Act for the whole or any part of the deficit to be treated as eligible for group relief.

(2) The amount to which the claim relates shall be treated as if, for the purposes of subsection (1) of section 403 of the Taxes Act 1988 (group relief for trades)--

(a) it were a loss incurred in the deficit period by a company carrying on a trade; and

(b) the exclusions in subsection (2) of that section did not apply.

Claim to carry back deficit to previous accounting periods

3 (1) This paragraph applies where a claim is made under section 83(2)(c) of this Act for the whole or any part of the deficit to be carried back to be set off against profits for earlier accounting periods.

(2) The claim shall have effect only if it relates to an amount that is equal to whichever is smaller of the following amounts, that is to say--

(a) so much of that deficit as is neither--

(i) an amount in relation to which a claim is made under subsection (2)(a) or (b) of section 83 of this Act, nor

(ii) an amount excluded by virtue of subsection (4) of that section from the amounts in relation to which claims may be made under subsection (2) of that section;

(b) the total amount of the profits available for relief under this paragraph.

(3) Where the claim has effect, the amount to which the claim relates shall be set off against the profits available for relief under this paragraph--

(a) by treating those profits as reduced accordingly; and

(b) to the extent that those profits are profits for more than one accounting period, by applying the relief to profits for a later period before setting off any remainder of the amount to which the claim relates against profits for an earlier period.

(4) Subject to sub-paragraph (5) below, the profits available for relief under this paragraph are the amounts which, for accounting periods ending within the permitted period, would be taken--

(a) apart from any relief under this paragraph, and

(b) after the giving of every relief which under sub-paragraph (6) below falls to be given in priority to relief under this paragraph,

to be chargeable under Case III of Schedule D as profits and gains arising from the company's loan relationships.

(5) Where any accounting period begins before the beginning of the permitted period but ends in the course of it--

(a) any amount chargeable in respect of that accounting period under Case III of Schedule D as profits and gains of the company's loan relationships shall be apportioned according to the proportions of the accounting period falling before and after the beginning of the permitted period; and

(b) the amount attributable, on that apportionment, to before the beginning of the permitted period shall not be available for relief under this paragraph.

(6) The reliefs which fall to be given in priority to relief under this paragraph in respect of any loss are--

(a) any relief in respect of a loss or deficit incurred or treated as incurred in an accounting period before the deficit period;

(b) any relief under section 338 of the Taxes Act 1988 (charges on income) in respect of payments made wholly and exclusively for the purposes of a trade;

(i) any allowance under section 28 of the [1990 c. 1.] Capital Allowances Act 1990 (machinery and plant of investment companies);

(ii) any deduction in respect of management expenses under section 75 of the Taxes Act 1988; and

(iii) any relief under section 338 of the Taxes Act 1988 in respect of payments made wholly and exclusively for the purposes of its business;

(d) any relief under section 393A of the Taxes Act 1988 (trading losses set against profits of the same or any preceding accounting periods); and

(e) any relief in pursuance of a claim under section 83(2)(a) or (b) of this Act.

(7) In this paragraph "the permitted period" means the period of three years immediately preceding the beginning of the deficit period so far as that three year period falls after 31st March 1996.

Claim to carry forward deficit to next accounting period

4 (1) This paragraph applies where a claim is made under section 83(2)(d) of this Act for the whole or any part of the deficit to be carried forward and set against non-trading profits for the next accounting period.

(2) The amount to which the claim relates shall be set off against the non-trading profits of the company for the accounting period immediately following the deficit period, and those profits shall be treated as reduced accordingly.

(3) In this paragraph "non-trading profits", in relation to a company, means so much of any profits of the company (of whatever description) as do not consist in trading income for the purposes of section 393A of the Taxes Act 1988 (setting-off of trading losses against profits of the same or an earlier period).

Construction of Schedule

5 In this Schedule "the deficit" and "the deficit period" shall be construed by reference to section 83(1) of this Act.

Section 84.

SCHEDULE 9 Loan relationships: special computational provisions

Distributions

1 The credits and debits to be brought into account for the purposes of this Chapter shall not include any credits or debits relating to any amount falling, when paid, to be treated as a distribution.

Late interest

2 (1) This paragraph applies for the purpose of bringing debits into account for the purposes of this Chapter in respect of a debtor relationship of a company where an authorised accruals basis of accounting is used as respects that relationship in pursuance of section 87 of this Act.

(2) If--

(a) interest payable under that relationship is not paid within the period of twelve months following the end of the accounting period in which it would (apart from this paragraph) be treated as accruing, and

(b) credits representing the full amount of the interest are not for any accounting period brought into account for the purposes of this Chapter in respect of the corresponding creditor relationship,

then debits relating to that interest shall be brought into account on the assumption that the interest does not accrue until it is paid.

Options etc.

3 (1) This paragraph applies for determining the credits and debits to be brought into account for any accounting period in accordance with an authorised accruals basis of accounting, where--

(a) the answer to the question whether any amount will become due under a loan relationship after the end of that period,

(b) the amount which will become due under a loan relationship after the end of that period, or

depends on the exercise of an option by a party to the relationship or an associate of his, or is otherwise under the control of such a party or an associate of his.

(2) It shall be assumed that the party or his associate will exercise his power to determine whether and on what date any amount will become due in the manner which (apart from taxation) appears, as at the end of the accounting period in question, to be the most advantageous to that party.

(3) In this paragraph "associate" has the meaning given for the purposes of Part XI of the Taxes Act 1988 by section 417(3) and (4) of that Act.

Foreign exchange gains and losses

4 (1) The credits and debits to be brought into account for the purposes of this Chapter shall be computed disregarding so much of any authorised accounting method as, by requiring the translation or conversion of amounts from one currency into another, has the effect that credits and debits produced by that method include sums in which profits, gains or losses arising from fluctuations in the value of a currency are to any extent represented.

(2) This paragraph is without prejudice to the provisions of Chapter II of Part II of the [1993 c. 34.] Finance Act 1993 (exchange gains and losses).

Bad debt etc.

5 (1) In determining the credits and debits to be brought into account in accordance with an accruals basis of accounting, a departure from the assumption in the case of the creditor relationships of a company that every amount payable under those relationships will be paid in full as it becomes due shall be allowed (subject to paragraph 6 below) to the extent only that--

(a) a debt is a bad debt;

(b) a doubtful debt is estimated to be bad; or

(2) Such a departure shall be made only where the accounting arrangements allowing the departure also require appropriate adjustments, in the form of credits, to be made if the whole or any part of an amount taken or estimated to represent an amount of bad debt is paid or otherwise ceases to be an amount in respect of which such a departure is allowed.

(3) Where--

(a) a liability to pay any amount under a debtor relationship of a company is released, and

(b) the release takes place in an accounting period for which an authorised accruals basis of accounting is used as respects that relationship,

no credit in respect of the release shall be required to be brought into account in the case of that company if the release is part of a relevant arrangement or compromise (within the meaning given by section 74(2) of the Taxes Act 1988) or the relationship is one as respects which section 87 of this Act requires the use of an authorised accruals basis of accounting.

Bad debt etc. where parties have a connection

6 (1) This paragraph applies where for any accounting period section 87 of this Act requires an authorised accruals basis of accounting to be used as respects a creditor relationship of a company.

(2) The credits and debits which for that period are to be brought into account for the purposes of this Chapter in accordance with that accounting method shall be computed subject to sub-paragraphs (3) to (6) below.

(3) The assumption that every amount payable under the relationship will be paid in full shall be applied as if no departure from that assumption were authorised by virtue of paragraph 5 above except where it is allowed by sub-paragraph (4) below.

(4) A departure from that assumption shall be allowed in relation to a liability to pay any amount to the company ("the creditor company") under the creditor relationship where--

(a) in consideration of, or of any entitlement to, any shares forming part of the ordinary share capital of the company on whom the liability would otherwise have fallen, the creditor company treats the liability as discharged; and

(b) the condition specified in sub-paragraph (5) below is satisfied.

(5) That condition is that there would be no connection between the two companies for the accounting period in which that consideration is given if the question whether there is such a connection for that period fell to be determined, in accordance with section 87 of this Act, by reference only to times before the creditor company acquired possession of, or any entitlement to, the shares in question.

(6) Where the company ceases in the accounting period in question to be a party to the relationship--

(a) the debits brought into account for that period in respect of that relationship shall not (subject to sub-paragraph (7) below) be more than they would have been had the company not ceased to be a party to the relationship; and

(b) the credits brought into account for that period in respect of the relationship shall not (subject to that sub-paragraph) be less than they would have been in those circumstances.

(7) In determining for the purposes of sub-paragraph (6) above the debits and credits that would have been brought into account if a company had not ceased to be a party to a loan relationship, no account shall be taken of any amounts that would have accrued at times after it ceased to be a party to the relationship.

Writing-off of government investments

7 (1) Where any government investment in a company is written off by the release of a liability to pay any amount under a debtor relationship of the company, no credit shall be required, in the case of that company, to be brought into account for the purposes of this Chapter in respect of that release.

(2) Subsections (7) and (8) of section 400 of the Taxes Act 1988 shall apply, as they apply for the purposes of that section, for construing the reference in sub-paragraph (1) above to the writing-off of a government investment.

Restriction on writing off overseas sovereign debt etc.

8 (1) This paragraph applies for the purposes of the use, as respects any loan relationship of a company and in conformity with paragraph 5 above, of an authorised accruals basis of accounting.

(2) Where the company is one to which a relevant overseas debt is owed, the debits and credits to be brought into account on that basis for the purposes of this Chapter shall be determined, for any accounting period of the company, on the assumption that it is not permissible for more than the relevant percentage of the debt to be estimated to be bad.

(3) For the purposes of this paragraph the relevant percentage of a debt for any accounting period of a company is (subject to sub-paragraph (4) below) such percentage (which may be zero) as may be determined, by reference to the position at the end of the relevant period of account, in accordance with regulations made by the Treasury.

(4) Where, apart from this sub-paragraph, the relevant percentage of a debt for any accounting period is more than the adjusted base percentage of that debt for that period, the relevant percentage of the debt for that period shall be taken to be equal to its adjusted base percentage for that period.

(5) For the purposes of this paragraph the adjusted base percentage of a debt for any accounting period shall be calculated by--

(a) taking the percentage which, in accordance with section 88B of the Taxes Act 1988 and any regulations made under that section, was or (assuming the debt to have been a debt of the company at the end of the base period) would have been the base percentage for that debt; and

(b) increasing that base percentage by five percentage points for every complete year (except the first) between--

(i) the time by reference to which the base percentage was, or would have been, determined, and

(ii) the end of the relevant period of account.

(6) In this paragraph "the relevant period of account", in relation to any accounting period of a company, means the period of account ending with that accounting period or, if a period of account does not end with that accounting period, the last period of account of the company to end before the end of that accounting period.

(7) In this paragraph "relevant overseas debt" means any debt which--

(a) satisfies one of the conditions specified in sub-paragraph (8) below; but

(b) is neither interest on a debt nor a debt which represents the consideration for the provision of goods or services.

(8) Those conditions are--

(a) that the debt is owed by an overseas State authority; or

(b) that payment of the debt is guaranteed by an overseas State authority; or

(c) that the debt is estimated to be bad for the purposes of this Chapter wholly or mainly because due payment is or may be prevented, restricted or subjected to conditions--

(i) by virtue of any law of a State or other territory outside the United Kingdom or any act of an overseas State authority; or

(ii) under any agreement entered into in consequence or anticipation of such a law or act.

(9) In this paragraph "overseas State authority" means--

(a) a State or other territory outside the United Kingdom;

(b) the government of such a State or territory;

(d) a public or local authority in such a State or territory; or

(e) a body controlled by such a State, territory, government, bank or authority;

and for this purpose "controlled" shall be construed in accordance with section 840 of the Taxes Act 1988.

(10) The Treasury shall not make any regulations under this paragraph unless a draft of them has been laid before and approved by a resolution of the House of Commons.

Further restriction on bringing into account losses on overseas sovereign debt etc.

9 (1) This paragraph applies where--

(a) for an accounting period in which a company ceases to be a party to a loan relationship ("the loss period") any amount falls for the purposes of this Chapter to be brought into account in respect of that relationship in accordance with an authorised accruals basis of accounting;

(b) by the bringing into account of that amount in that period a loss incurred in connection with a relevant overseas debt falling within sub-paragraph (2) below is treated for the purposes of this Chapter as arising in that period;

(d) the loss is not one incurred on a disposal of the debt to an overseas State authority in a case in which the State or territory by reference to which it is an overseas State authority is the same as that by reference to which the debt is a relevant overseas debt.

(2) A relevant overseas debt falls within this sub-paragraph if--

(a) a deduction has been made in respect of the debt in accordance with section 74(1)(j) of the Taxes Act 1988 for any period of account of the company ending before 1st April 1996;

(b) any debit relating to the debt has been brought into account for the purposes of this Chapter in accordance with so much of any authorised accruals basis of accounting as relates to the matters mentioned in paragraph 5(1)(a) to (c) above; or

(c) the debt is one acquired by the company on or after 20th March 1990 for a consideration greater than the price which it might reasonably have been expected to fetch on a sale in the open market at the time of acquisition.

(3) Where this paragraph applies, the amounts brought into account for the purposes of this Chapter in the loss period shall be such as to secure that only so much of the loss as does not exceed 5 per cent. of the debt is treated for the purposes of this Chapter as arising in the loss period; but sub-paragraph (4) below applies as respects further parts of that loss until the loss is exhausted.

(4) A part of the loss may, in accordance with sub-paragraph (5) below, be brought into account for the purposes of this Chapter in the form of a debit for any accounting period after the loss period ("a subsequent period").

(5) The amount of the debit brought into account under sub-paragraph (4) above for any subsequent period shall not exceed such amount as, together with any parts of the loss which for earlier periods have been represented by--

(a) the amount of the loss treated as arising in the loss period in accordance with sub-paragraph (3) above, or

(b) debits brought into account in accordance with this sub-paragraph,

is equal to 5 per cent. of the debt for each complete year that has elapsed between the beginning of the loss period and the end of the subsequent period.

(6) In this paragraph "overseas State authority" and "relevant overseas debt" have the same meanings as in paragraph 8 above.

(7) References in this paragraph to a loss do not include so much of any loss as falls to be disregarded for the purposes of this Chapter by virtue of paragraph 10 below or to any loss incurred before 1st April 1996.

Imported losses etc.

10 (1) This paragraph applies in the case of a company ("the chargeable company") for an accounting period ("the loss period") where--

(a) an authorised accruals basis of accounting is used as respects a loan relationship of that company for the loss period;

(b) in accordance with that basis of accounting there is an amount which would fall (apart from this paragraph) to be brought into account for the purposes of this Chapter in respect of that relationship;

(c) by the bringing into account of that amount in that period a loss incurred in connection with that loan relationship would be treated for the purposes of this Chapter as arising in that period; and

(d) that loss is referable in whole or in part to a time when the relationship was not subject to United Kingdom taxation.

(2) The amounts brought into account for the purposes of this Chapter in the loss period shall be such as to secure that no part of the loss that is referable to a time when the relationship was not subject to United Kingdom taxation shall be treated for the purposes of this Chapter as arising in the loss period or any other accounting period of the chargeable company.

(3) For the purposes of this paragraph a loss is referable to a time when a relationship is not subject to United Kingdom taxation to the extent that, at the time to which the loss is referable, the chargeable company would not have been chargeable to tax in the United Kingdom on any profits or gains arising from the relationship.

(4) Sub-paragraph (3) above shall have effect where the chargeable company was not a party to the relationship at the time to which the loss is referable as if the reference to that company were a reference to the person who at that time was in the same position as respects the relationship as is subsequently held by the chargeable company.

Transactions not at arm's length

11 (1) Subject to sub-paragraphs (2) and (3) below, where--

(a) debits or credits in respect of a loan relationship of a company fall to be brought into account for the purposes of this Chapter in accordance with an authorised accounting method,

(b) those debits or credits relate to amounts arising from, or incurred for the purposes of, a related transaction, and

the debits or credits given by that method shall be determined on the assumption that the transaction was entered into on the terms on which it would have been entered into between independent persons.

(2) Sub-paragraph (1) above shall not apply to debits arising from the acquisition of rights under a loan relationship where those rights are acquired for less than market value.

(3) Sub-paragraph (1) above does not apply--

(a) in the case of any related transaction between two companies that are members of the same group; or

(b) in relation to a member of a group of companies, in the case of any transaction which is part of a series of transactions having the same effect as a related transaction between two members of the same group.

(4) In this paragraph "related transaction" has the same meaning as in section 84 of this Act.

(5) Section 170 of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992 (groups etc.) shall apply for the interpretation of this paragraph as it applies for the interpretation of sections 171 to 181 of that Act.

Continuity of treatment: groups etc.

12 (1) Subject to paragraph 15 below, this paragraph applies where, as a result of--

(a) a related transaction between two members of the same group of companies,

(b) a series of transactions having the same effect as a related transaction between two companies each of which has been a member of the same group at any time in the course of that series of transactions,

(c) the transfer between two companies of the whole or part of the long term business of any insurance company in accordance with a scheme sanctioned by a court under Part I of Schedule 2C to the [1982 c. 50.] Insurance Companies Act 1982, or

(d) any transfer between two companies which is a qualifying overseas transfer within the meaning of paragraph 4A of Schedule 19AC to the Taxes Act 1988 (transfer of business of overseas life insurance company),

one of those companies ("the transferee company") directly or indirectly replaces the other ("the transferor company") as a party to a loan relationship.

(2) The credits and debits to be brought into account for the purposes of this Chapter in the case of the two companies shall be determined as follows--

(a) the transaction, or series of transactions, by virtue of which the replacement takes place shall be disregarded except for the purpose of identifying the company in whose case any debit or credit not relating to that transaction, or those transactions, is to be brought into account; and

(b) the transferor company and the transferee company shall be deemed (except for that purpose) to be the same company.

(3) This paragraph does not apply by virtue of sub-paragraph (1)(a) or (b) above in relation to any transfer of an asset, or of any rights under or interest in an asset, where the asset was within one of the categories set out in section 440(4)(a) to (e) of the Taxes Act 1988 (assets held for certain categories of long term business) either immediately before the transfer or immediately afterwards.

(4) This paragraph does not apply by virtue of sub-paragraph (1)(c) or (d) above in relation to any transfer of an asset, or of any rights under or interest in an asset, where--

(a) the asset was within one of the categories set out in section 440(4) of the Taxes Act 1988 immediately before the transfer; and

(b) is not within that category immediately afterwards.

(5) For the purposes of sub-paragraph (4) above, where one of the companies is an overseas life insurance company an asset shall be taken to be within the same category both immediately before the transfer and immediately afterwards if it--

(a) was within one category immediately before the transfer; and

(b) is within the corresponding category immediately afterwards.

(6) References in this paragraph to one company replacing another as a party to a loan relationship shall include references to a company becoming a party to any loan relationship under which its rights are equivalent to those of the other company under a loan relationship of which that other company has previously ceased to be a party.

(7) For the purposes of sub-paragraph (6) above a person's rights under a loan relationship are equivalent to rights under another such relationship if they entitle the holder of an asset representing the relationship--

(a) to the same rights against the same persons as to capital, interest and dividends, and

(b) to the same remedies for the enforcement of those rights,

notwithstanding any difference in the total nominal amounts of the assets, in the form in which they are held or in the manner in which they can be transferred.

(8) Sub-paragraphs (4) and (5) of paragraph 11 above have effect for the purposes of this paragraph as they have effect for the purposes of that paragraph.

(9) In this paragraph "overseas life insurance company" has the same meaning as in Chapter I of Part XII of the Taxes Act 1988.

Loan relationships for unallowable purposes

13 (1) Where in any accounting period a loan relationship of a company has an unallowable purpose, the debits which, for that period fall, in the case of that company, to be brought into account for the purposes of this Chapter shall not include so much of the debits given by the authorised accounting method used as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose.

(2) For the purposes of this paragraph a loan relationship of a company shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company--

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