Finance Act 1997 (c. 16)

(The document as of February, 2008)

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(4) Subject to sub-paragraph (5) below, where--

(a) one of a number of related transactions designed to produce a guaranteed return is the grant of an option,

(b) at least one of the other transactions is a transaction entered into after the grant of the option, and

(c) the transaction or transactions entered into after the grant of the option is or include a disposal which is not itself the grant of an option,

the disposal consisting in the grant of the option shall be deemed for the purposes of this Schedule to be a disposal made on the first occasion after the grant of the option when one of the other transactions which is a disposal but is not itself the grant of an option is entered into.

(5) Nothing in sub-paragraph (4) above affects so much of sub-paragraph (2) above as (by applying section 144(2) or 144A(2) of the 1992 Act (cases where options are exercised))--

(a) requires the grant of an option and the transaction entered into by the grantor in fulfilment of his obligations under that option to be treated for the purposes of this Schedule as a single transaction; or

(b) determines the time at which such a single transaction is to be treated for the purposes of this Schedule as entered into.

(6) In this paragraph--

"future" means outstanding rights and obligations under a commodity or financial futures contract;
"option" means a traded option or an option which is not a traded option but is an option relating to--
(a)
currency, shares, stock, securities or an interest rate; or
(b)
rights under a commodity or financial futures contract;
"traded option" has the meaning given for the purposes of subsection (4) of section 144 of the 1992 Act by subsection (8) of that section.

The return from one or more disposals

5 (1) In this Schedule references to the return from one or more disposals are references to the return on investment represented either--

(a) by the total net profits and gains arising from the disposal or disposals; or

(b) by all but an insignificant part of those net profits and gains.

(2) For the purposes of the references in sub-paragraph (1) above to the total net profits and gains from any two or more disposals, it shall be assumed that profits and gains realised, and losses sustained, by persons who are associated with each other are all realised or sustained by the same person.

(3) For the purposes of sub-paragraph (2) above persons are associated with each other in relation to any two or more disposals made in pursuance of the same scheme or arrangements if--

(a) each of those persons shares or is to share, to an extent determined for the purposes of or in accordance with the scheme or arrangements, in the net return represented by the aggregate of all the profits, gains and losses realised or sustained on those disposals;

(b) those persons are associated companies at the time when the last of those disposals is made; or

(c) those persons have been associated companies at an earlier time falling after the first occasion on which a transaction was entered into in pursuance of the scheme or arrangements.

(4) In this paragraph--

"associated company" shall be construed in accordance with section 416; and
"scheme or arrangements" shall be construed in accordance with paragraph 6(4) below.

Related transactions

6 (1) For the purposes of this Schedule two or more transactions are related if all of them are entered into in pursuance of the same scheme or arrangements.

(2) Nothing in this Schedule shall be construed as preventing transactions with different parties, or transactions with parties different from the parties to the scheme or arrangements in pursuance of which they are entered into, from being related transactions.

(3) For the purposes of this paragraph the cases in which any two or more transactions are to be taken to be entered into in pursuance of the same scheme or arrangements shall include any case in which it would be reasonable to assume, from either or both of--

(a) the likely effect of the transactions, and

(b) the circumstances in which the transactions are entered into, or in which any of them is entered into,

that neither of them or, as the case may be, none of them would have been entered into independently of the other or others.

(4) In this paragraph "scheme or arrangements" includes schemes, arrangements and understandings of any kind, whether or not legally enforceable.

Special rule for trusts

7 (1) Where any profits or gains are treated, in accordance with paragraph 1 above, as income arising to trustees for any year of assessment, the relevant part of that income shall be treated for the purposes of the Tax Acts as if it were income to which section 686 applies (income taxable at the rate applicable to trusts).

(2) In sub-paragraph (1) above the reference to the relevant part of any income is a reference to so much (if any) of that income as--

(a) does not fall to be treated for the purposes of the Income Tax Acts as income of a settlor;

(b) is not income arising under a trust established for charitable purposes; and

(c) is not income from investments, deposits or other property held for any such purposes as are mentioned in sub-paragraph (i) or (ii) of section 686(2)(c) (property held for pension purposes).

(3) Subsection (6) of section 686 (meaning of "trustees" etc.) shall apply for the purposes of this paragraph as it applies for the purposes of that section.

Transfer of assets abroad

8 For the purpose of determining whether an individual ordinarily resident in the United Kingdom has a liability for income tax in respect of any profit or gain which--

(a) is realised by a person resident or domiciled outside the United Kingdom, and

(b) arises from a transaction to which this Schedule applies,

sections 739 and 740 (transfer of assets abroad) shall have effect as if that profit or gain, when realised, constituted income becoming payable to the person resident or domiciled outside the United Kingdom.

Apportionment in the case of insurance companies

9 Section 432A (apportionment of insurance companies' income) shall have effect in the case of income and losses chargeable or relievable by virtue of this Schedule as if (where that would not otherwise be the case)--

(a) any such income were for the purposes of that section a gain accruing on the disposal of an asset; and

(b) any such loss were for the purposes of that section a loss accruing on the disposal of an asset. "

Section 82.

SCHEDULE 12 Leasing arrangements: finance leases and loans

Part I Leasing arrangements where any of the return on investment is in capital form

Purpose of this Part of this Schedule

1 (1) This Part of this Schedule is concerned with arrangements--

(a) which involve the lease of an asset;

(b) which are or have been entered into by companies or other persons;

(c) which are of such a kind as, in the case of companies incorporated in any part of the United Kingdom, falls for the purposes of accounts of such companies to be treated in accordance with normal accountancy practice as finance leases or loans; and

(d) whose effect is that some or all of the return on investment in respect of the finance lease or loan--

(i) is or may be in the form of a sum which is not rent; and

(ii) would not, apart from this Schedule, be wholly brought into account for tax purposes as rent from the lease.

(2) The principal purpose of this Part of this Schedule is, in the case of any such arrangements,--

(a) to charge any person entitled to the lessor's interest under the lease of the asset to tax from time to time on amounts of income determined by reference to those which fall for accounting purposes to be treated in accordance with normal accountancy practice as the income return, on and after 26th November 1996, on investment in respect of the finance lease or loan (taking into account the substance of the matter as a whole, including in particular the state of affairs as between connected persons, or within a group of companies, as reflected or falling to be reflected in accounts of any of those persons or in consolidated group accounts);

(b) where the sum mentioned in sub-paragraph (1)(d) above falls due, to recover by reference to that sum the whole or any part of any reliefs, allowances or deductions which are or have been allowed or made in respect of capital expenditure incurred in respect of the leased asset.

Application of this Part of this Schedule

2 (1) This Part of this Schedule applies in any case where (whether before or after the passing of this Act)--

(a) a lease of an asset is or has been granted; and

(b) in the case of the lease, the conditions in paragraph 3 below are or have been satisfied at some time in a period of account of the current lessor.

(2) Where the conditions in paragraph 3 below have been satisfied at some time in a period of account of the person who was at that time the lessor, they shall be taken to continue to be satisfied for the purposes of this Part of this Schedule unless and until--

(a) the asset ceases to be leased under the lease; or

(b) the lessor's interest under the lease is assigned to a person who is not connected with any of the persons described in sub-paragraph (3) below.

(3) Those persons are--

(a) the assignor;

(b) any person who was the lessor at some time before the assignment; or

(c) any person who at some time after the assignment becomes the lessor pursuant to arrangements made by a person who was the lessor, or was connected with the lessor, at some time before the assignment.

(4) Nothing in sub-paragraph (2) above prevents this Part of this Schedule from again applying in the case of the lease if the conditions for its application are satisfied after the assignment.

The conditions

3 (1) The condition in this sub-paragraph is that at the relevant time the leasing arrangements are such as fall for accounting purposes to be treated in accordance with normal accountancy practice as a finance lease or a loan and--

(a) the lessor, or a person connected with him, falls for accounting purposes to be treated in accordance with normal accountancy practice as the finance lessor in relation to the finance lease or loan, or

(b) the finance lease or loan falls for accounting purposes to be treated, in accordance with normal accountancy practice, as subsisting for the purposes of consolidated group accounts of a group of companies of which the lessor is a member.

(2) The condition in this sub-paragraph is that, under the leasing arrangements, there is or may be payable to the lessor, or to a person connected with him, a sum (a "major lump sum") which is not rent but is a sum such as falls for accounting purposes to be treated in accordance with normal accountancy practice--

(a) as to part, as repayment of some or all of the investment in respect of a finance lease or loan; and

(b) as to part, as a return on investment in respect of a finance lease or loan.

(3) The condition in this sub-paragraph is that not all of that part of a major lump sum which falls within paragraph (b) of sub-paragraph (2) above would, apart from this Schedule, fall to be brought into account for tax purposes in chargeable periods of the lessor ending with the relevant chargeable period as the normal rent from the lease for periods of account of the lessor.

(4) The condition in this sub-paragraph is that, as respects the lessor at the relevant time,--

(a) the period of account of his in which the relevant time falls, or

(b) an earlier period of account of his during which he was the lessor,

is a period of account for which the accountancy rental earnings in respect of the lease exceed the normal rent for the period.

(5) The condition in this sub-paragraph is that at the relevant time--

(a) arrangements falling within sub-paragraph (1) of paragraph 4 below exist; or

(b) if the condition in paragraph (a) above is not satisfied, circumstances falling within sub-paragraph (2) of that paragraph exist.

(6) In determining the normal rent for a period of account for the purpose of determining whether the condition in sub-paragraph (4) above is satisfied, rent which for the purposes of corporation tax under Schedule A falls to be brought into account as a person becomes entitled to it shall be treated--

(a) as if it accrued evenly throughout the period to which, in accordance with the terms of the lease, each payment to which the person becomes entitled relates, and

(b) as if he had become entitled to the rent as it so accrues,

unless any such payment falls due more than 12 months after the time at which any of the rent to which that payment relates is so treated as accruing.

(7) In determining the normal rent for a period of account for the purpose of determining whether the condition in sub-paragraph (4) above is satisfied, rent which falls to be brought into account for tax purposes as it falls due shall be treated--

(a) as accruing evenly throughout the period to which, in accordance with the terms of the lease, each payment falling due relates, and

(b) as falling due as it so accrues,

unless any such payment falls due more than 12 months after the time at which any of the rent to which that payment relates is so treated as accruing.

(8) In this paragraph--

"the relevant chargeable period", in the case of any major lump sum, means--
(a)
the chargeable period of the lessor which is related to his period of account in which that major lump sum is or may be payable in accordance with the leasing arrangements; or
(b)
if there are two or more such chargeable periods, the latest of them;
"the relevant time" means the time as at which it falls to be determined for the purposes of sub-paragraph (1) or (2) of paragraph 2 above whether the conditions in this paragraph are or, as the case may be, were satisfied.

The arrangements and circumstances in paragraph 3(5)

4 (1) The arrangements mentioned in paragraph 3(5)(a) above are arrangements under which--

(a) the lessee or a person connected with him may acquire, whether directly or indirectly, the leased asset, or an asset representing the leased asset, from the lessor or a person connected with the lessor; and

(b) in connection with that acquisition, the lessor or a person connected with him may receive, whether directly or indirectly, a qualifying lump sum from the lessee or a person connected with the lessee.

(2) The circumstances mentioned in paragraph 3(5)(b) above are circumstances which make it more likely--

(a) that the events described in sub-paragraph (3) below will occur, than

(b) that the event described in sub-paragraph (4) below will occur.

(3) The events mentioned in sub-paragraph (2)(a) above are--

(a) that the lessee or a person connected with him will acquire, whether directly or indirectly, the leased asset or an asset representing the leased asset from the lessor or a person connected with the lessor; and

(b) that, in connection with that acquisition, the lessor or a person connected with him will receive, whether directly or indirectly, a qualifying lump sum from the lessee or a person connected with the lessee.

(4) The event mentioned in sub-paragraph (2)(b) above is that, before any such acquisition as is mentioned in sub-paragraph (3) above takes place, the leased asset or, as the case may be, the asset representing the leased asset, will have been acquired, in a sale on the open market, by a person who is not the lessor or the lessee and who is not connected with either of them.

(5) In this paragraph, "qualifying lump sum" means any sum which is not rent but at least part of which would, if the recipient were a company incorporated in the United Kingdom, fall for accounting purposes to be treated in accordance with normal accountancy practice as a return on investment in respect of a finance lease or loan.

Current lessor to be taxed by reference to accountancy rental earnings

5 (1) Where, in the case of any period of account of the current lessor,--

(a) this Part of this Schedule applies in the case of the lease, and

(b) the accountancy rental earnings in respect of the lease for that period of account exceed the normal rent for that period,

he shall be treated for tax purposes as if in that period of account he had been entitled to, and there had arisen to him, rent from the lease of an amount equal to those accountancy rental earnings (instead of the normal rent referred to in paragraph (b) above).

(2) Where a person is treated under sub-paragraph (1) above as if he had in a period of account been entitled to, and there had arisen to him, any rent from a lease of an asset, the rent shall be treated for tax purposes--

(a) as if it had accrued at an even rate throughout so much of the period of account as falls within the period for which the asset is leased; and

(b) as if that person had become entitled to it as it accrued.

Reduction of taxable rent by certain excesses

6 (1) Subject to sub-paragraph (6)(b) below, if in the case of the lease--

(a) the normal rent for a period of account of the current lessor throughout which the leasing arrangements are such as fall for accounting purposes to be treated in accordance with normal accountancy practice as a finance lease or loan, exceeds

(b) the accountancy rental earnings for the period,

there is for the purposes of this paragraph a "normal rental excess" for that period of an amount equal to the excess.

(2) In this paragraph the "cumulative normal rental excess" in the case of the lease and a period of account of the current lessor means so much of the aggregate of the normal rental excesses for previous periods of account of his as (after taking account of any increases under paragraph 10 below) has not been--

(a) set off under this paragraph against the taxable rent for any such previous period; or

(b) reduced under paragraph 10 below.

(3) Subject to sub-paragraph (8)(b) below, if the taxable rent in the case of the lease for a period of account of the current lessor is, by virtue of paragraph 5 above, an amount equal to the accountancy rental earnings, there is for the purposes of this paragraph an "accountancy rental excess" for that period of an amount equal to the difference between--

(a) the accountancy rental earnings for the period of account; and

(b) the normal rent for the period.

(4) In this paragraph the "cumulative accountancy rental excess", in the case of the lease and a period of account of the current lessor, means so much of the aggregate of the accountancy rental excesses for previous periods of account of his as (after taking account of any increases under paragraph 9 below) has not been--

(a) set off under this paragraph against the taxable rent for any such previous period;

(b) reduced under paragraph 9 below; or

(5) If a period of account of the current lessor is one--

(a) for which the normal rent exceeds the accountancy rental earnings, and

(b) for which there is any cumulative accountancy rental excess,

sub-paragraph (6) below shall apply.

(6) Where this sub-paragraph applies--

(a) the taxable rent for the period of account shall be reduced (but not below the accountancy rental earnings) by setting against it the cumulative accountancy rental excess; and

(b) the normal rental excess for the period shall be the amount (if any) by which--

(i) the normal rent, reduced by an amount equal to the reduction under paragraph (a) above, exceeds

(ii) the accountancy rental earnings,

and if there is no such excess, there is no normal rental excess for the period.

(7) If a period of account of the current lessor is one--

(a) for which the taxable rent in the case of the lease is, by virtue of paragraph 5 above, an amount equal to the accountancy rental earnings, and

(b) there is any cumulative normal rental excess,

sub-paragraph (8) below shall apply.

(8) Where this sub-paragraph applies--

(a) the taxable rent for the period of account shall be reduced (but not below the normal rent) by setting against it the cumulative normal rental excess, and

(b) the accountancy rental excess for the period shall be the amount (if any) by which--

(i) the accountancy rental earnings, reduced by an amount equal to the reduction under paragraph (a) above, exceeds

(ii) the normal rent,

and if there is no such excess, there is no accountancy rental excess for the period.

(9) In this paragraph "the taxable rent", in the case of a period of account of the current lessor, means the amount which would, apart from this paragraph and paragraph 8(6) below, be treated for tax purposes as rent from the lease--

(a) which arises to him, and

(b) if rent arising to him from the lease is chargeable to corporation tax under Schedule A, to which he is entitled,

in that period of account for the purpose of determining his liability to tax for the related chargeable period or periods.

Assignments on which neither a gain nor a loss accrues

7 (1) This paragraph applies in any case where--

(a) the current lessor assigns the lessor's interest under the lease; and

(b) the assignment is a disposal on which, by virtue of any of the enactments specified in section 35(3)(d) of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992, neither a gain nor a loss accrues.

(2) Where this paragraph applies, this Schedule shall have effect as if--

(a) a period of account of the assignor ended, and

(b) a period of account of the assignee began,

with the assignment.

(3) Where this paragraph applies--

(a) any unused cumulative accountancy rental excess, or

(b) any unused cumulative normal rental excess,

of the assignor shall become the cumulative accountancy rental excess or the cumulative normal rental excess (as the case may be) for the period of account of the assignee which begins with the assignment.

(4) In sub-paragraph (3) above--

"unused cumulative accountancy rental excess", in relation to the assignor, means the aggregate of--
(a)
any cumulative accountancy rental excess, and
(b)
any accountancy rental excess,

for the period of account of his which ends with the assignment;
"unused cumulative normal rental excess", in relation to the assignor, means the aggregate of--
(a)
any cumulative normal rental excess, and
(b)
any normal rental excess,

for the period of account of his which ends with the assignment.

Relief for bad debts etc: corporation tax under Schedule A

8 (1) Section 41 of the Taxes Act 1988 (which gives a person relief from corporation tax under Schedule A for rent etc not paid, by treating him as if he had never been entitled to the rent) shall be disregarded in determining for the purposes of this Part of this Schedule the amount of--

(a) the accountancy rental earnings in respect of the lease, or

(b) the normal rent from the lease,

for any period of account.

(2) Where for any period of account--

(a) a person is treated under paragraph 5 above as if he had been entitled to receive an amount of rent, and

(b) the amount is in respect of rents on the profits or gains arising from which that person is chargeable to corporation tax under Schedule A,

section 41 of the Taxes Act 1988 shall not have effect in relation to amounts in respect of rents from the lease of the asset for that or any subsequent period of account of his, or of any person to whom the lessor's interest under the lease is assigned, until the lease terminates or is assigned in circumstances such that paragraph 7 above does not apply.

(3) Where, by virtue of sub-paragraph (2) above, section 41 of the Taxes Act 1988 does not apply, sub-paragraph (4) below shall apply instead.

(4) In computing the profits or gains on which a person is chargeable to corporation tax under Schedule A in a case falling within sub-paragraph (2) above, any sums falling within sub-paragraph (i), (ii) or (iii) of section 74(1)(j) of the Taxes Act 1988 in respect of amounts in respect of rents from the lease of the asset shall be deductible in a period of account as an expense to the extent that they would be deductible in that period of account if--

(a) amounts in respect of rents from the lease of the asset fell to be taken into account as trading receipts in computing the profits or gains of a trade carried on by the person;

(b) the asset were leased in the course of that trade; and

(c) the charge to corporation tax under Schedule A were in respect of such annual profits or gains as are described in that Schedule arising from a trade.

(5) Any such expense as is mentioned in sub-paragraph (4) above shall be treated for the purposes of section 25 of the Taxes Act 1988 (deductions from rent for the purposes of corporation tax under Schedule A) as if that expense--

(a) were included among the permitted deductions, within the meaning of that section;

(b) were a payment made in respect of the premises comprised in the lease; and

(c) were a payment which became due, and was made, immediately before the end of the period of account mentioned in sub-paragraph (4) above.

(6) Where--

(a) a deduction has been made by virtue of sub-paragraph (4) above in respect of an amount, but

(b) subsequently an amount ("the relevant credit") is recovered or credited in respect of the amount in respect of which the deduction was made, and

(c) the relevant credit would, on the suppositions in paragraphs (a) to (c) of sub-paragraph (4) above, be brought into account for tax purposes as a trading receipt for a period of account of the current lessor,

the taxable rent for that period of account shall be increased by the amount of the relevant credit.

(7) In sub-paragraph (6) above, "the taxable rent", in the case of a period of account of the current lessor, means the amount which would, apart from that sub-paragraph, be treated for tax purposes as rent from the lease--

(a) which arises to him, and

(b) if rent arising to him from the lease is chargeable to corporation tax under Schedule A, to which he is entitled,

in that period of account for the purpose of determining his liability to tax for the related chargeable period or periods.

(8) After the time when the conditions in paragraph 3 above become satisfied as respects any particular lessor, no claim under section 41 of the Taxes Act 1988 shall be made in respect of any amount which that lessor was entitled to receive in respect of rents from the lease of the asset.

(9) Where--

(a) before the time at which the conditions in paragraph 3 above become satisfied as respects any particular lessor, a claim under section 41 of the Taxes Act 1988 in respect of an amount which he was entitled to receive in respect of any rents from the lease of the asset has been made, and

(b) the claim is to any extent allowed,

no amount shall be deductible under sub-paragraph (4) above in respect of that amount so far as so allowed.

Relief for bad debts etc: cumulative accountancy rental excess

9 (1) If, in the case of the lease, for any period of account--

(a) the accountancy rental earnings exceed the normal rent,

(b) a bad debt deduction falls to be made in respect of rent from the lease,

(d) there is a cumulative accountancy rental excess,

the cumulative accountancy rental excess for the period of account shall be reduced (but not below nil) by the amount by which the bad debt deduction exceeds the accountancy rental earnings.

(2) If, in the case of the lease, for any period of account--

(a) the accountancy rental earnings do not exceed the normal rent,

(b) a bad debt deduction falls to be made in respect of rent from the lease, and

sub-paragraph (3) below shall apply.

(3) Where this sub-paragraph applies, the amount of the cumulative accountancy rental excess which may be set against the taxable rent for the period of account shall not exceed the amount (if any) by which the normal rent exceeds the bad debt deduction (and, if the normal rent does not exceed the bad debt deduction, shall be nil).

(4) If, in a case where sub-paragraph (3) above applies, the bad debt deduction exceeds the normal rent for the period of account, the cumulative accountancy rental excess for the period of account shall be reduced (but not below nil) by the amount by which the bad debt deduction exceeds the normal rent.

(5) Where--

(a) the cumulative accountancy rental excess for any period of account of the current lessor has been reduced under sub-paragraph (1) or (4) above by reason of a bad debt deduction, but

(b) in a subsequent period of account of his, an amount ("the relevant credit") is recovered or credited in respect of the amount which constituted the bad debt deduction,

the cumulative accountancy rental excess (if any) for the period of account mentioned in paragraph (b) above shall, subject to sub-paragraph (6) below, be increased by the relevant credit.

(6) If, in a case falling within sub-paragraph (5) above,--

(a) the relevant credit, exceeds

(b) the aggregate of the reductions falling within paragraph (a) of that sub-paragraph,

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