SCHEDULES

Section 31.

SCHEDULE 1RESTRICTIONS ON SCHEDULE A DEDUCTIONS

Expenditure before 1964-65: deductions from rents

1(1)Except as provided by sub-paragraphs (2) and (3) below, no payment shall be deductible under sections 25 and 26 if made before the beginning of the year 1964-65.

(2)Where, by virtue of paragraph 1(2) of Schedule 2 to the 1970 Act, any amount fell to be treated as a payment in relation to premises made by a person in the year 1964-65 in respect of dilapidation attributable to that year, the amount shall be similarly treated for the purposes of sections 25 and 26.

(3)If the amount of any loss was treated, by virtue of paragraph 1(3) of that Schedule, as if it were a payment such as is mentioned in section 72(1) of the 1970 Act made by any person in respect of any premises in and in respect of any year, it shall be treated for the purposes of sections 25 and 26 as if it were a payment such as is mentioned in section 25(1) made by that person in respect of those premises in and in respect of that year.

(4)A deduction falling to be made by virtue of sub-paragraph (3) above shall be made notwithstanding anything in sections 392(3) and 396(1); and relief shall not be given under either of those sections in respect of the loss in so far as a deduction in respect of it is given under this paragraph.

Expenditure before 1964-65: deductions from other receipts

2(1)Subject to sub-paragraph (2) below, no payment shall be deductible under section 28 if made before the beginning of the year 1964-65.

(2)Sub-paragraph (1) above shall not prevent the deduction of a payment in so far as a loss in respect thereof was carried forward to the year 1964-65 by virtue of section 346 of the [1952 c. 10.] Income Tax Act 1952 (Case VI losses).

(3)Paragraph 1(4) above shall apply in the case of a deduction falling to made by virtue of sub-paragraph (2) above as it applies in the case of one falling to be made by virtue of paragraph 1(3) above.

Expenditure on sea walls before 1964-65

3(1)Section 30 shall not apply in relation to expenditure incurred before the beginning of the year 1964-65 except in accordance with sub-paragraphs (2) and (3) below.

(2)Subject to sub-paragraph (3) below, section 30 shall apply in relation to expenditure which, by virtue of paragraph 3(1) of Schedule 2 to the 1970 Act, was treated as if—

(a)it had been incurred in the year of assessment following that in which it was actually incurred, and

(b)in so far as it was incurred in repairing an embankment, it had been incurred in making it,

as if it had been incurred in that year and in making that embankment.

(3)If, by virtue of the proviso to paragraph 3(1) of Schedule 2 to the 1970 Act, any expenditure fell to be treated for the purposes of sections 71 to 77 of that Act as if it were an amount paid by any person in and in respect of the year 1964-65 in respect of the maintenance of premises preserved or protected by an embankment, it shall be similarly treated for the purposes of sections 25 to 31.

Section 39(3).

SCHEDULE 2PREMIUMS ETC. TAXABLE UNDER SCHEDULES A AND D: SPECIAL RELIEF FOR INDIVIDUALS

1A claim for relief under this Schedule shall be made to the Board if the claimant is not resident in the United Kingdom.

2The relief shall be computed in accordance with paragraphs 3 to 6 below, and in those paragraphs—

• “chargeable sum” means an amount to which under section 34(1), (2), (3), (4) or (5), the claimant is treated as becoming entitled in the year of assessment, or in respect of which he is by virtue of section 34(6) or (7) or 35 or 36, chargeable to income tax for the year under Case VI of Schedule D;

• “relevant period”, in relation to any chargeable sum, means the period treated in computing the amount of the sum as being the duration of the lease in respect of which it arises or where it arises (by virtue of section 36) in connection with the sale of an estate or interest in land, means the period mentioned in subsection (1) of that section;

• “yearly equivalent”, in relation to any chargeable sum, means the amount which bears to that sum the same proportion as one bears to the number of years and fractions of years in the relevant period.

3There shall be computed—

(a)the amount of the tax which, in respect of the chargeable sum or the aggregate of the chargeable sums, as the case may be, would be chargeable if—

(i)the relief were not given, and

(ii)that sum or aggregate were treated as the highest part of the claimant’s total income, and

(iii)amounts deductible in computing the tax were so far as possible deducted from other sums from which they are deductible in the year rather than from that sum or aggregate, and

(b)the amount of the tax which, in respect of that sum or aggregate, would be chargeable if calculated in accordance with paragraph 4 below by reference to the yearly equivalent of that sum or, as the case may be, of each sum comprised in that aggregate,

and the relief shall consist of a reduction or repayment of tax equal to the difference between those amounts.

4(1)Where the relief is to be given in respect of one chargeable sum only, the tax shall be calculated for the purposes of paragraph 3(b) above as follows—

(a)from the yearly equivalent of that sum there shall be deducted such amounts as, following the principle set out in paragraph 3(a)(iii) above, are deductible from that sum;

(b)if any balance of the yearly equivalent remains, the tax in respect of the chargeable sum shall be calculated at the rate which, apart from the relief, would apply if the amount of the sum were reduced to the amount of that balance and were then treated as the highest part of the claimant’s total income or, if two or more rates would then apply, at those rates in corresponding proportions;

(c)if no such balance remains, the tax shall be calculated at the rate applicable to the highest part of the remainder of the claimant’s total income for the year of assessment,

and, whether or not any such balance remains, the tax shall be arrived at by applying that rate, or those rates, to so much of the chargeable sum as remains after deducting such amounts as, following the principle set out in paragraph 3(a)(iii) above, are deductible from that sum.

(2)Where the relief is to be given in respect of two or more chargeable sums, the tax for each shall be calculated for the purposes of paragraph 3(b) above as provided by sub-paragraph (1) above, but so that—

(a)the rate of tax on a sum arising in respect of any relevant period shall be calculated before the rate of tax on any sum arising in respect of a shorter relevant period, and

(b)in calculating the rate of tax on a sum arising in respect of any relevant period and the deductions from that sum, an amount deducted in respect of a sum tax for which has already been calculated shall not again be deducted, and in calculating a rate of tax—

(i)any chargeable sum tax for which has not already been calculated, or in respect of which no balance of the yearly equivalent remains, shall be disregarded, and

(ii)as respects any other chargeable sum, the total income of the claimant shall be taken to include the sum, but on the assumption that the amount of it was only that of the balance remaining of the yearly equivalent.

(3)Where two or more chargeable sums arise in respect of relevant periods of equal duration they shall be treated for the purposes of this paragraph as a single chargeable sum of an amount equal to the aggregate of those sums and arising in respect of a relevant period of like duration.

5A provision of paragraph 3 or 4 above requiring tax to be calculated as if an amount were treated as the highest part of the claimant’s total income shall apply notwithstanding any provision of the Income Tax Acts directing other income to be treated as the highest part of his total income, but for the purposes of those paragraphs his total income shall be deemed—

(a)not to include any amount in respect of which he is chargeable to tax under section 148, and

(b)to include, in respect of any amount which would otherwise be included therein by virtue of section 547(1)(a), no greater amount than the appropriate fraction thereof within the meaning of section 550.

6A provision of paragraph 3 or 4 above shall apply in relation to any part of the claimant’s total income (as computed for the purposes of that provision) as respects which he would be entitled under Chapter I of Part VII to a deduction equal to that part as if that part were subject to a nil rate of tax.

Section 44(2).

SCHEDULE 3MACHINERY FOR ASSESSMENT, CHARGE AND PAYMENT OF INCOME TAX UNDER SCHEDULE C AND, IN CERTAIN CASES, SCHEDULE D

PART IPUBLIC REVENUE DIVIDENDS ETC. PAYABLE TO THE BANK OF ENGLAND OR THE BANK OF IRELAND OR ENTRUSTED FOR PAYMENT TO THE BANK OF ENGLAND, THE BANK OF IRELAND OR THE NATIONAL DEBT COMMISSIONERS

1The Bank of England and the Bank of Ireland as respects the dividends and the profits attached thereto payable to them out of the public revenue of the United Kingdom, or payable out of any public revenue and entrusted to them for payment and distribution, and the National Debt Commissioners, as respects the dividends payable by them or of which they have the distribution, shall, when any payment becomes due, deliver to the Board true accounts, in books provided for the purpose, of—

(a)the amounts of the dividends and profits attached thereto payable to the Bank, and

(b)all dividends entrusted to the Bank or the National Debt Commissioners for payment to the persons entitled thereto, and

(c)the amount of income tax chargeable thereon at the basic rate in force at the time of payment, without any other deduction than is allowed by the Income Tax Acts.

2(1)In the case of dividends and profits attached thereto payable to the Bank of England out of the public revenue of the United Kingdom, the Bank of England shall set apart the income tax in respect of the amount payable to them.

(2)In the case of dividends and profits attached thereto entrusted to the Bank of England for payment and distribution, dividends payable by the Bank of Ireland at its principal office in Belfast, and dividends payable by the National Debt Commissioners or of which the National Debt Commissioners have the distribution—

(a)the Bank of England, the Bank of Ireland and the National Debt Commissioners respectively shall, before any payment is made by them, retain the amount of the income tax for the purposes of the Income Tax Acts, and

(b)the retaining of the amount shall be deemed to be a payment of the income tax by the persons entitled to the dividends, and shall be allowed by them on the receipt of the residue thereof, and

(c)the Bank of England, the Bank of Ireland and the National Debt Commissioners respectively shall be acquitted and discharged of a sum equal to the amount retained as though that sum had been actually paid.

(3)In relation to dividends payable to the Bank of Ireland out of the public revenue of the United Kingdom, and public revenue dividends which are entrusted to the Bank of Ireland for payment and distribution and are not payable by that Bank out of its principal office in Belfast, the following provisions shall have effect—

(a)the money which, apart from this sub-paragraph, would be issuable to the Bank of Ireland under section 14 of the [1870 c. 71.] National Debt Act 1870, or otherwise payable to the Bank of Ireland for the purpose of dividends on securities of the United Kingdom government entered in the register of the Bank of Ireland in Dublin, shall be issued and paid to the Bank of England; and

(b)the Bank of England shall set apart and retain out of moneys so issued and paid to them the amount of the income tax on the dividends payable to the Bank of Ireland, and on the dividends on the securities of the United Kingdom government entered in the register of the Bank of Ireland in Dublin; and

(c)the Bank of England shall pay to the Bank of Ireland the residue of moneys so issued and paid to them, to be applied by the Bank of Ireland to the payment of the dividends; and

(d)the retaining of the amount shall be deemed to be a payment of the income tax by the persons entitled to the dividends, and shall be allowed by them on the receipt of the residue thereof, and the Bank of England and the Bank of Ireland shall be acquitted and discharged of a sum equal to the amount retained as though that sum had been actually paid.

3Money set apart or retained under paragraph 2 above, and the amount of any tax charged on the trading profits of the Bank of England or the Bank of Ireland, shall be paid into the general account of the Board at the Bank of England or the Bank of Ireland.

4No deduction of income tax under this Part of this Schedule shall be made from any dividends payable in respect of stock, securities or annuities standing in the name of the official custodian for charities, nor from any dividends in respect of which there is given to the Bank of England a certificate from the Charity Commissioners that the dividends are subject only to charitable trusts and are exempt from tax.

PART IIPUBLIC REVENUE DIVIDENDS PAYABLE BY PUBLIC OFFICES AND DEPARTMENTS

5Where any payment is made of public revenue dividends payable by any public office or department of the Crown, the appropriate officer shall retain the income tax charged and pay the same into the general account of the Board at the Bank of England or the Bank of Ireland.

PART IIIOTHER PUBLIC REVENUE DIVIDENDS, FOREIGN DIVIDENDS AND PROCEEDS OF COUPONS

6(1)The following persons are chargeable persons for the purposes of this Part of this Schedule—

(a)every person (other than the National Debt Commissioners or the Bank of England or the Bank of Ireland) who is entrusted with the payment of any dividends which are payable out of the public revenue of Northern Ireland, or which are payable to any persons in the United Kingdom out of any public revenue other than that of the United Kingdom or Northern Ireland;

(b)every person in the United Kingdom who is entrusted with the payment of any foreign dividends;

(c)every banker or other person in the United Kingdom who obtains payment of any dividends in such circumstances that the dividends are chargeable to tax under Schedule C, or in the case of foreign dividends, under Schedule D; and

(d)every banker in the United Kingdom who sells or otherwise realises coupons, and every dealer in coupons in the United Kingdom who purchases coupons, in such manner that the proceeds of the sale or realisation are chargeable to tax under Schedule C, or in the case of foreign dividends, under Schedule D.

(2)Every chargeable person shall deliver to the Board—

(a)on demand by the Board, true and perfect accounts of the amount of all such dividends or proceeds; and

(b)not later than 12 months after paying any dividends or effecting any other transaction in respect of which he is a chargeable person, and unless within that time he delivers an account with respect to the dividends or proceeds in question under sub-paragraph (a) above, a written statement specifying his name and address and describing those dividends or proceeds.

7The Board shall have all necessary powers in relation to the examining, auditing, checking and clearing of the books and accounts of dividends or proceeds delivered under paragraph 6 above, and shall assess and charge the dividends or proceeds at the basic rate of tax in force at the time of payment, but reduced by the amount of the exemptions (if any) allowed by them, and shall give notice of the amount so assessed and charged to the chargeable person.

8The chargeable person shall out of moneys in his hands pay the income tax on the dividends or proceeds on behalf of the persons entitled thereto, and shall be acquitted in respect of all such payments, and the provisions of the Income Tax Acts shall apply as in the case of dividends payable out of the public revenue of the United Kingdom and entrusted to the Bank of England for payment and distribution.

9The chargeable person shall pay the income tax into the general account of the Board at the Bank of England or the Bank of Ireland within 30 days of the date of the issue of the notice of assessment, and in default of payment it shall be recovered from him in the same manner as other tax assessed and charged on him may be recovered.

10(1)Subject to sub-paragraph (2) below, a chargeable person who does all such things as are necessary to enable the tax to be assessed and paid shall receive as remuneration an allowance, to be calculated by reference to the amount of the dividends or proceeds paid from which tax has been deducted, and to be fixed by the Treasury at a rate not being less than 68p for every £1,000 of that amount.

(2)Sub-paragraph (1) above shall not apply to any person entrusted with the payment of dividends payable out of the public revenue of Northern Ireland.

11Nothing in paragraphs 6 to 10 above shall impose on any banker the obligation to disclose any particulars relating to the affairs of any person on whose behalf he may be acting.

12Where income tax in respect of the proceeds of the sale or realisation of any coupon has been accounted for under this Part of this Schedule by any banker or dealer, and the coupon has been subsequently paid in such manner that income tax has been deducted from the payment under any of the provisions of this Schedule, the tax so deducted shall be repaid.

A claim under this paragraph shall be made to the Board.

13(1)Without prejudice to the generality of paragraph 7 above, the Board may, by notice served on any chargeable person, require that person within such time as may be specified in the notice to make available at his premises for inspection by an officer authorised by the Board all such books and other documents in the possession or control of that person as the officer may reasonably require for the purpose of determining whether any accounts delivered by that person under paragraph 6 above are correct and complete.

(2)The Board may grant a certificate exempting any chargeable person from the provisions of sub-paragraph (1) above, and while the certificate is in force the powers conferred by that sub-paragraph shall not be exercisable in relation to that person; and any such certificate may be revoked at any time by the Board, and may contain such terms and conditions as they think proper.

14In this Part of this Schedule—

• “dividends” includes foreign dividends, and

• “foreign dividends” has the meaning given by section 123.

PART IVINTEREST PAYABLE OUT OF THE PUBLIC REVENUE OF THE REPUBLIC OF IRELAND ETC.

15(1)Any person who is entrusted with the payment of any interest, dividends or other annual payments which are payable to any persons in the United Kingdom out of the public revenue of the Republic of Ireland, or out of or in respect of the stocks, funds, shares or securities of any Republic of Ireland company, society, adventure or concern, shall be relieved from the obligation imposed on him under the preceding provisions of this Schedule to pay income tax thereon on behalf of the persons entitled thereto as regards any such interest, dividends or other annual payments in respect of which he furnishes to the Board, in such form and subject to such conditions as they may prescribe, a list containing—

(a)a full description of the interest, dividends or other annual payments, and

(b)the name and address of each person who is entitled thereto, and

(c)the amount thereof to which each such person is entitled.

(2)Any person entrusted with payment who, by virtue of sub-paragraph (1) above, is relieved from the obligation to pay income tax on interest, dividends or other annual payments, shall be entitled to the like remuneration to which, if he had paid tax thereon, he would have been entitled under paragraph 10 above.

(3)Any interest, dividends or other annual payments in respect of which the person entrusted with payment is relieved from the obligation to pay income tax by virtue of sub-paragraph (1) above, shall be assessable and chargeable under Case IV or V of Schedule D, as the case may be.

(4)The Board may make such regulations as may be necessary for the purposes of this paragraph.

(5)This paragraph shall apply to—

(a)any banker or other person in the United Kingdom who obtains payment of any such interest, dividends or other annual payments as is or are mentioned in sub-paragraph (1) above; and

(b)to any person who would, apart from this paragraph, be obliged to pay income tax in respect of the proceeds of the sale or other realisation of any coupon for any such interest, dividends or other annual payments,

as it applies to any person entrusted with the payment of any such interest, dividends or other annual payments, with the substitution in a case falling within paragraph (b) above, of references to the proceeds of the sale or other realisation for references to such interest, dividends or other annual payments.

In this sub-paragraph “coupon” has the same meaning as in section 123.

Section 57.

SCHEDULE 4DEEP DISCOUNT SECURITIES

Interpretation

1(1)For the purposes of this Schedule—

(a)“adjusted issue price”, in relation to any security in a particular income period, is the aggregate of the issue price of the security and the income elements for all previous income periods;

(b)“the amount payable on redemption” does not include any amount payable by way of interest;

(c)“a deep discount”, in relation to any redeemable security, means a discount which—

(i)represents more than 15 per cent. of the amount payable on redemption of that security; or

(ii)is 15 per cent. or less, but exceeds half Y per cent. of the amount so payable (where Y is the number of complete years between the date of issue of the security and the redemption date);

(d)subject to sub-paragraph (2) below, “a deep discount security” means any redeemable security which has been issued by a company, after 13th March 1984, at a deep discount, other than—

(i)a share in the company;

(ii)a security in respect of which the amount payable on redemption is determined by reference to the movement of the retail prices index or any similar general index of prices which is published by, or by an agent of, the government of any territory outside the United Kingdom; or

(iii)a security the whole or part of which, by virtue of section 209(2)(c), is a “distribution”;

(e)“a discount” means any amount by which the issue price of a redeemable security is less than the amount payable on redemption of that security;

(f)“income period” means —

(i)in the case of a security carrying a right to interest, any period to which a payment of interest which falls to be made in respect of the security is attributable; and

(ii)in any other case, any year ending immediately before the anniversary of the issue of the security or any period of less than a year which begins on the issue or on such an anniversary and ends on the redemption date;

(g)“the redemption date” in relation to any redeemable security, means the earliest date on which, under the terms on which the security is issued, the holder of the security will be entitled to require it to be redeemed by the company which issued it;

(h)“yield to maturity”, in relation to any security, means a rate (expressed as a percentage) such that if a sum equal to the issue price of the security were to be invested at that rate on the assumption that—

(i)the rate would be applied on a compounding basis at the end of each income period; and

(ii)the amount of any interest attributable to an income period would be deducted after applying the rate,

the value of that sum at the redemption date would be equal to the amount payable on redemption of the security; and

(j)“chargeable security” has the meaning given by paragraph 2(5) below.

(2)Where securities which were issued on or before 13th March 1984 have been exchanged at any time after that date for new securities which would be deep discount securities but for this sub-paragraph, the new securities shall not be treated as deep discount securities if—

(a)the old securities would not have been deep discount securities if they had been issued after 13th March 1984;

(b)the date which is the redemption date in relation to the new securities is not later than the date which was the redemption date in relation to the old securities; and

(c)the amount payable on redemption of the new securities does not exceed the amount which would have been payable on redemption of the old securities.

(3)For the purposes of this Schedule, a security comprised in any letter of allotment or similar instrument shall be treated as issued unless the right to the security conferred by the letter or instrument remains provisional until accepted, and there has been no acceptance.

Charge to tax after acquisition of certain securities

2(1)This sub-paragraph applies to deep discount securities issued by a company on or after 19th March 1985 where one or both of the following applies—

(a)immediately before the issue the assets held by the company included relevant securities with a value equal to at least 75 per cent

of the value of all the assets held by it;

(b)the terms of issue of the deep discount securities are determined by the company by reference to (though not necessarily in such a way that they reflect) the terms of issue of relevant securities which are held by the company when the deep discount securities are issued or which it intends to acquire later.

(2)This sub-paragraph applies to deep discount securities issued by a company where—

(a)sub-paragraph (1) above would apply if the references to relevant securities included references to United Kingdom corporate bonds; and

(b)the company acquired those bonds on or after their issue (by another company) in circumstances where sub-paragraph (1) above would have applied if they had been deep discount securities.

(3)This sub-paragraph applies to deep discount securities of a particular kind issued by a company and in the case of which—

(a)neither of the preceding sub-paragraphs applies; and

(b)at any time in the first income period of the securities of that kind the assets held by the company include relevant securities with a value equal to at least 75 per cent. of the value of all the assets held by it.

(4)This sub-paragraph applies to deep discount securities issued by a company where either—

(a)they are issued on a conversion to which section 82 of the 1979 Act applies of old securities; or

(b)they are issued by a company in exchange for old securities in circumstances in which section 85(3) of the 1979 Act applies or are treated as so issued by virtue of section 86(1) of that Act;

and in this sub-paragraph “old securities” means deep discount securities to which sub-paragraph (1), (2) or (3) above or this sub-paragraph applies, except that securities to which sub-paragraph (3) above applies are not old securities unless sub-paragraph (3)(b) has been fulfilled in their case by the time the conversion or exchange concerned takes place.

(5)In the following provisions of this Schedule “chargeable security” means a deep discount security to which any of the preceding sub-paragraphs applies.

(6)In this paragraph—

• “relevant securities” means securities within the meaning of section 710, but excluding United Kingdom corporate bonds;

• “terms of issue” includes terms relating to amounts payable on redemption or by way of interest, or to times of payment of such amounts; and

• “value” in relation to assets means the price they might reasonably be expected to fetch on a sale in the open market.

(7)For the purposes of this paragraph—

(a)a company holds assets if it has a beneficial interest in them and acquires them if it acquires such an interest in them; and

(b)securities are of the same kind if they are treated as being of the same kind by the practice of a stock exchange, or would be so treated if dealt with on a stock exchange.

(8)In this paragraph “United Kingdom corporate bonds” means securities—

(a)issued by a company resident in the United Kingdom at the time of issue;

(b)the debt on which represents and has at all times represented a normal commercial loan, as defined in paragraph 1(5) of Schedule 18; and

(c)which are expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling.

(9)For the purposes of sub-paragraph (8)(c) above—

(a)a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and

(b)a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.

3(1)Where a person acquires a chargeable security, the chargeable amount shall be treated as income chargeable to tax under Case III or IV (as the case may be) of Schedule D on each of the following occasions—

(a)the end of each income period to fall within the period of ownership;

(b)the end of any income period which ends but does not begin in the period of ownership.

(2)In sub-paragraph (1) above “the chargeable amount” means—

(a)where paragraph (a) applies, an amount equal to the income element for the income period;

(b)where paragraph (b) applies, an amount equal to the income element for the part of the income period falling within the period of ownership.

(3)The income chargeable shall (notwithstanding anything in sections 64 to 67) be taken into account in computing tax charged for the year of assessment in which the occasion concerned occurs.

Charge to tax on disposal of securities

4(1)On the disposal by any person of any deep discount security—

(a)an amount which represents the accrued income attributable to the period between his acquisition and disposal of the security (the (“period of ownership”), less any amount or amounts treated as income by virtue of paragraph 3 above, shall be treated as income chargeable to tax under Case III or, as may be, Case IV of Schedule D; and

(b)the tax shall (notwithstanding anything in sections 64 to 67 but subject to sub-paragraph (5) below) be computed on the income so arising from any disposal made in the year of assessment.

(2)The amount which represents the accrued income attributable to any period of ownership is the aggregate of the income elements for each income period or part of an income period in the period of ownership.

(3)In relation to any security, the income element for any income period shall be determined by applying the formula—

(4)The income element for any period (the (“short period”) falling within an income period shall be determined by applying the formula—

(5)Where—

(a)by virtue of sub-paragraph (1) above income tax is chargeable under Case IV of Schedule D, and

(b)the person making the disposal satisfies the Board, on a claim in that behalf, that he is not domiciled in the United Kingdom, or that, being a British subject or a citizen of the Republic of Ireland, he is not ordinarily resident in the United Kingdom,

the tax shall be computed on the amounts, if any, received in the United Kingdom in the year of assessment in question in respect of the sum mentioned in sub-paragraph (1)(a) above (any such amounts being treated as income arising when they are received in the United Kingdom).

(6)For the purposes of sub-paragraph (5) above—

(a)there shall be treated as received in the United Kingdom all amounts paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom; and

(b)subsections (6) to (9) of section 65 shall apply as they apply for the purposes of subsection (5) of that section.

(7)Sections 348 to 350 and 123 shall not apply to so much of the proceeds of redemption of a deep discount security as represents income chargeable to tax under Case III or, as may be, Case IV of Schedule D.

Deduction of income element from total profits of company and allowance as charge on income

5(1)In computing the corporation tax chargeable for any accounting period of a company which has issued any deep discount security, the income element in respect of that security for any income period ending in or with that accounting period shall be allowed as a deduction against the total profits of the company for the accounting period as reduced by any relief other than group relief.

(2)The income element for any income period ending in or with an accounting period of a company which has issued a deep discount security shall be treated for the purposes of the Corporation Tax Acts, other than those of section 338(1), as a charge on income paid by the company in the accounting period.

(3)No income element in respect of any deep discount security shall be so allowed or treated unless—

(a)the cost of paying so much of the amount payable on redemption as represents the discount is ultimately borne by the company;

(b)the income element would not otherwise be deductible in computing the issuing company’s profits or any description of those profits for purposes of corporation tax; and

(c)at least one of the conditions mentioned in sub-paragraph (4) below is satisfied.

(4)The conditions are—

(a)that the company exists wholly or mainly for the purpose of carrying on a trade;

(b)that the deep discount security was issued wholly and exclusively to raise money for purposes of a trade carried on by the company;

(c)that the company is an investment company.

(5)Where, on redemption of any deep discount security, any part of the amount payable on redemption is, by virtue of section 209(2)(d) and (e), a distribution of the company, sub-paragraphs (1) and (2) above shall not apply to any income element in respect of that security.

(6)Relief shall not be given under any provision of the Tax Acts in respect of any income element if (at any time) a scheme has been effected or arrangements have been made such that the sole or main benefit that might be expected to accrue to the company from the issue of the security in question is the obtaining of a reduction in tax liability by means of that relief.

(7)In sub-paragraph (6) above “relief” means relief by way of deduction in computing profits or gains or deduction or set-off against income or total profits; and where the relief is claimed by virtue of section 403(7) any question under this paragraph as to what benefit might be expected to accrue from the transaction in question shall be determined by reference to the claimant company and the surrendering company taken together.

6(1)Section 494 shall apply in relation to income elements in respect of deep discount securities and paragraph 5 above as it applies in relation to interest and section 338.

(2)In the application of section 494 to any deep discount security, subsection (2)(b) shall have effect as if the references to the rate at which interest was payable were references to the aggregate of the rate of interest payable and the amount of any income element in respect of the security for the period in question.

Disposals

7(1)Subject to sub-paragraphs (2) and (3) below, there is a disposal of a deep discount security for the purposes of this Schedule if there would be such a disposal for the purposes of the 1979 Act.

(2)Notwithstanding anything in section 49(1)(b) of that Act (no deemed disposal on death), where the assets of which a deceased person was competent to dispose include any deep discount security that security shall, for the purposes of this Schedule, be deemed to have been disposed of by the deceased immediately before his death.

(3)In any case where—

(a)there is a conversion of securities to which section 82 of the 1979 Act applies and those securities include deep discount securities; or

(b)securities including deep discount securities are exchanged (or by virtue of section 86(1) of that Act are treated as exchanged) for other securities in circumstances in which section 85(3) of that Act applies,

then the securities converted or exchanged shall (subject to sub-paragraph (4) below and notwithstanding section 78 of that Act) be treated for the purposes of the charge to tax under paragraph 4 above as having been disposed of immediately before the time of the conversion, or, as the case may be, the exchange, by the person who was the beneficial owner of the securities at that time.

(4)Where a person would (but for this sub-paragraph) be treated by sub-paragraph (3) above as having, for the purposes of paragraph 4 above, disposed of deep discount securities, other than chargeable securities, which are converted into, or exchanged for, other deep discount securities—

(a)he shall not be so treated—

(i)if the date which is the redemption date in relation to the new securities is not later than the date which was the redemption date in relation to the converted or exchanged securities; and

(ii)no consideration is given for the conversion or exchange other than the new securities; but

(b)the amount of the accrued income attributable to his period of ownership of the converted or exchanged securities (including any amount added by virtue of the previous operation of this paragraph) shall be added to the amount of the accrued income attributable to his period of ownership of the new securities.

8(1)Where any deep discount security is disposed of and acquired under a contract, the time at which the disposal and acquisition is made is the time at which the contract is made (and not, if different, the time at which the security is transferred).

(2)If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.

Securities issued and owned by associated companies or group companies

9(1)Where a deep discount security issued by a company is at any time beneficially owned by another company which is—

(a)an associated company (within the meaning of section 416) of the issuing company; or

(b)a member of a group of companies of which the issuing company is also a member;

paragraph 5(1) and (2) above shall apply to any linked income element with the addition, after the words “the accounting period” of the words “in which the security is redeemed”.

(2)In this paragraph “linked income element” means the income element in respect of the security in question for any income period in which the security is at any time beneficially owned by the other company.

(3)For the purposes of this paragraph, two companies shall be deemed to be members of a group of companies if one is a 51 per cent. subsidiary of the other or both are 51 per cent. subsidiaries of a third company.

Close companies

10(1)Where a deep discount security issued by a close company is at any time beneficially owned by—

(a)a participator in the company;

(b)an associate of such a participator; or

(c)a company of which such a participator has control,

paragraph 5(1) and (2) above shall apply to any linked income element with the addition, after the words “the accounting period”, of the words “in which the security is redeemed”.

(2)In sub-paragraph (1) above “linked income element” means the income element in respect of the security in question for any income period in which the security is at any time beneficially owned by a person mentioned in that sub-paragraph.

(3)Any amount which a close company is allowed, by virtue of paragraph 5(1) above, to deduct from its total profits for any accounting period shall be treated for the purposes of section 423 as if it were interest paid by the company in that period.

(4)In this paragraph—

• “associate” has the meaning given in section 417(3) and (4);

• “control” shall be construed in accordance with section 416(2) to (6); and

• “participator” means a person who is, in relation to a company, a participator for the purposes of Part XI (by virtue of section 417) other than a person who is a participator for those purposes by virtue only of his holding a deep discount security issued by the company.

(5)In determining whether a person who carries on a business of banking is a participator in a company for the purposes of this paragraph, there shall be disregarded any securities of the company acquired by him in the ordinary course of his business.

Early redemption

11(1)Where any deep discount security is redeemed before the redemption date by the company which issued it, paragraphs 4, 5, 7(1) and (2) and 8 to 10 above shall have effect subject to the provisions of this paragraph.

(2)The accrued income attributable to the period between the acquisition of the security by the person who, immediately before its redemption, was the beneficial owner of the security and its redemption shall be the amount paid to him on redemption of the security less the issue price of the security or, in a case where he did not acquire it on its issue, less the aggregate of—

(a)the issue price; and

(b)the accrued income attributable to the period beginning with the issue, and ending with his acquisition, of the security;

and, if in either case paragraph 3 above applies, less also an amount equal to the chargeable amount (within the meaning of that paragraph).

(3)The deduction allowed under paragraph 5(1) above in relation to the accounting period in which the deep discount security is redeemed shall be the amount paid by the company on redemption less the aggregate of—

(a)the issue price of the security; and

(b)the accrued income attributable to the period beginning with the issue of the security and ending with the last income period to end in or with the accounting period of the company which precedes that in which the security is redeemed.

(4)Where paragraph 9 or 10 above has applied to the deep discount security at any time, the amount mentioned in sub-paragraph (3)(b) above shall not include any linked income element (within the meaning of that paragraph).

(5)Where the aggregate mentioned in sub-paragraph (3) above exceeds the amount paid by the company on redemption of the security, the amount of the excess or, if it is less, the amount mentioned in paragraph (b) of that sub-paragraph shall be treated as income of the company—

(a)arising in the accounting period in which the security is redeemed; and

(b)chargeable to tax under Case VI of Schedule D.

(6)Where a resolution is passed, an order made or any other act takes place for the winding up of a company which has issued a deep discount security before the security is redeemed, this paragraph shall have effect in relation to any payment made in respect of the security in the course of the winding up as if the payment were made on redemption.

Identification of securities disposed of

12The rules contained in section 88 of the Finance [1982 c. 39.] Act 1982 (identification, for the purposes of capital gains tax, of securities disposed of) shall apply for the purposes of this Schedule as they apply for the purposes of capital gains tax.

Information

13(1)Every company which issues deep discount securities shall cause to be shown on the certificate of each such security the income element for each income period between the date of issue of the security and the redemption date.

(2)Every company which issues a chargeable security to which paragraph 2(1), (2) or (4) above applies shall cause to be shown on the certificate of each such security the fact that tax is chargeable under paragraph 3 above.

Charities

14A charity shall be exempt from income tax in respect of an amount which (apart from this paragraph) is chargeable to income tax by virtue of this Schedule if the amount is applicable and applied for charitable purposes.

In this paragraph “charity” has the same meaning as in section 506.

Section 97.

SCHEDULE 5TREATMENT OF FARM ANIMALS ETC. FOR PURPOSES OF CASE I OF SCHEDULE D

Farming: the general rule

1(1)Subject to the provisions of this Schedule, in computing profits or gains under Case I of Schedule D, animals kept by a farmer for the purposes of his farming shall be treated as trading stock.

(2)Animals forming part of production herds with respect to which an election under paragraph 2 below has effect shall not be so treated, but shall be treated instead in accordance with the rules set out in paragraph 3 below.

(3)An election under paragraph 2 below is referred to in this Schedule as “an election for the herd basis”.

Farming: election for the herd basis

2(1)An election for the herd basis shall apply to all production herds of a particular class kept by the farmer making the election, including herds which he has ceased to keep before, or first begins to keep after, the making of the election.

(2)An election for the herd basis must be made in writing to the inspector, and must specify the class of herds to which it relates.

(3)Subject to paragraphs 6 and 12 below, an election for the herd basis made by any farmer shall be valid only if it is made not later than two years after the end of—

(a)the first chargeable period for which he is chargeable under Case I of Schedule D to tax in respect of the profits or gains of his farming, or is given relief under section 380 or 393(2) in respect of his farming, being profits or gains or relief the amount of which is computed by reference to the facts of a period during the whole or some part of which he kept a production herd of the class in question; or

(b)the first period for which an account is made up for his farming.

(4)An election for the herd basis made by any farmer shall be irrevocable and, subject to paragraph 6 below, shall have effect—

(a)in a case within sub-paragraph (3)(a) above, for the first chargeable period referred to in that sub-paragraph and all subsequent chargeable periods; and

(b)in a case within sub-paragraph (3)(b) above, for the first chargeable period for which the profits or gains or losses of his farming are computed by reference to the facts of the first period for which an account is made up for his farming.

3(1)Where an election for the herd basis has effect, the consequences for the purposes of computing profits or gains under Case I of Schedule D shall be as provided by this paragraph.

(2)The initial cost of the herd and, subject to the provisions of this paragraph as to replacements, the cost of any animal added to the herd shall not be deducted as an expense and the value of the herd shall not be brought into account.

(3)Where an animal which has theretofore been treated as part of the farmer’s trading stock is added to the herd otherwise than by way of replacement, there shall be included as a trading receipt—

(a)in the case of an animal bred by the farmer, a sum equal to the cost of breeding it and rearing it to maturity; and

(b)in any other case, a sum equal to the initial cost to the farmer of acquiring the animal, together with any cost incurred by him in rearing it to maturity.

(4)Where an animal (the (“first animal”) forming part of the herd dies, or ceases to form part of the herd, and is replaced in the herd by another animal (the (“second animal”)—

(a)any proceeds of sale of the first animal shall be included as a trading receipt; and

(b)the cost of the second animal, except in so far as that cost consists of such costs as are allowable apart from the provisions of this Schedule as deductions in computing profits or gains of farming under Case I of Schedule D, shall, subject to sub-paragraphs (5) and (6) below, be deducted as an expense.

(5)Where the second animal is of better quality than the first animal, the amount deducted shall not exceed the amount which it would have been necessary to expend in order to acquire an animal of the same quality as the first animal.

(6)Where the first animal was slaughtered by the order of any Ministry, government department or local or public authority under the law relating to diseases of animals, and the second animal is of worse quality, the amount included as a trading receipt shall not exceed the amount allowable as a deduction.

(7)Where the herd is sold as a whole, and another production herd of the same class is acquired, sub-paragraphs (1) to (6) above shall apply as though there had been sold from, and replaced in, the original herd a number of animals equal to the number in the original herd or in the newly acquired herd, whichever is the less.

(8)Subject to sub-paragraph (9) below, if (either all at once or over a period not exceeding 12 months) either—

(a)the whole of a herd is sold in circumstances in which sub-paragraph (7) above does not apply, or

(b)a part of a herd is sold on a substantial reduction being made in the number of animals in the herd,

any profit or loss arising from the transaction shall not be taken into account.

(9)Where within five years of the sale the seller acquires or begins to acquire another production herd of the class in question or, as the case may be, acquires or begins to acquire animals to replace the part of the herd in question—

(a)sub-paragraphs (4) to (7) above shall apply to the acquisition or replacement, except that, if the sale was one which the seller was compelled to effect by causes wholly beyond his control, the amount included as a trading receipt in respect of any animal sold which is replaced by an animal of worse quality shall not exceed the amount allowable as a deduction in respect of that animal of worse quality; and

(b)for the purpose of the application of those sub-paragraphs, the proceeds of sale of the animals comprised in the original herd or part of a herd shall be brought into account as if they had been respectively received at the times of the corresponding acquisitions.

(10)If an animal forming part of the herd is sold, and none of sub-paragraphs (4) to (9) above applies, any profit or loss arising from the transaction shall be included or deducted, as the case may be; and for the purposes of this sub-paragraph, that profit or loss shall be computed by comparing with the proceeds of sale—

(a)in the case of an animal bred by the farmer, the cost of breeding it and rearing it to maturity; and

(b)in any other case, a sum equal to the initial cost to the farmer of acquiring the animal (or in the case of an animal acquired otherwise than for valuable consideration, its market value when the farmer acquired it) together, in both cases, with any cost incurred by him in rearing it to maturity.

(11)Where the herd is sold as a whole, and another production herd of the same class is acquired, and the number of animals in the newly acquired herd is less than the number in the original herd, then, if the difference is not substantial, sub-paragraphs (8) and (9) above shall not apply, and sub-paragraph (10) above shall apply to a number of animals in the original herd equal to the difference.

(12)The preceding provisions of this paragraph shall apply in relation to the death or destruction of animals as they apply in relation to their sale, as if any insurance or compensation moneys received by reason of the death or destruction were proceeds of sale, and any reference in this paragraph to the proceeds of sale of an animal includes a reference to any proceeds of sale of its carcase or any part of its carcase.

Farming: provisions applicable to special cases

4A farmer who, having kept a production herd of a particular class, ceases altogether to keep herds of that class for a period of at least five years shall, as respects production herds kept by him after the end of that period, be treated as if he had never kept any production herds of that class before the end of that period.

5(1)Where a farmer transfers to another person all or any of the animals which form part of a production herd otherwise than by way of sale or by way of sale but for a price other than that which they would have fetched if sold in the open market, and either—

(a)the transferor is a body of persons over whom the transferee has control or the transferee is a body of persons over whom the transferor has control or both the transferor and the transferee are bodies of persons and some other person has control over both of them; or

(b)it appears with respect to the transfer, or with respect to transactions of which the transfer is one that the sole or main benefit, or one of the main benefits, which (apart from the provisions of this paragraph) might have been expected to accrue to the parties or any of them was a benefit resulting from—

(i)the obtaining of a right to make an election for the herd basis, or

(ii)such an election having effect or ceasing to have effect, or

(iii)such an election having a greater effect or a less effect;

the like consequences shall ensue, in relation to all persons concerned, for the purpose of computing profits or gains under Case I of Schedule D as would have ensued if the animals had been sold for the price which they would have fetched if sold in the open market.

(2)In this paragraph “body of persons” includes a partnership, and “control” has the meaning given by section 840.

6(1)Where the whole or a substantial part of a production herd kept by a farmer for the purposes of his farming is slaughtered by the order of any Ministry, government department or local or public authority under the law relating to the diseases of animals in such circumstances that compensation is payable in respect of it, an election for the herd basis thereupon made by the farmer in relation to that herd and any other production herds of the same class so kept by him shall, subject to sub-paragraph (2) below, be valid notwithstanding that it is not made within the time required by paragraph 2(3) above.

(2)An election for the herd basis made by virtue of sub-paragraph (1) above shall, subject to sub-paragraph (3) below, only be valid if made not later than two years after the end of the first chargeable period for which the tax chargeable on the farmer in respect of the profits or gains of his farming finally falls to be computed by reference to the facts of a period in which the compensation is relevant.

(3)If that first chargeable period is the second year of assessment within the meaning of section 62 and notice is given under subsection (2) of that section, then for the purposes of income tax (but not corporation tax), the election shall be valid if made not later than the giving of that notice.

(4)An election for the herd basis made by virtue of sub-paragraph (1) above shall, notwithstanding paragraph 2(4) above, have effect only for the chargeable period mentioned in sub-paragraph (2) above and subsequent chargeable periods except that for the purposes of income tax (but not corporation tax) the election shall have effect for earlier chargeable periods for the purposes of any claim under section 380 which is made by the farmer for relief in respect of his farming, if the relief falls to be computed wholly or partly by reference to the facts of a period in which the compensation is relevant.

(5)For the purposes of this paragraph, compensation shall be deemed to be relevant in any period if, but only if, it falls (or would but for an election under this paragraph fall) to be taken into account as a trading receipt in computing the profits or gains or losses of that or an earlier period.

Exclusion of working animals, and interpretation of preceding provisions

7Nothing in this Schedule applies to any animals kept wholly or mainly for the work they do in connection with the carrying on of the farming.

8(1)In this Schedule “herd” includes a flock, and any other collection of animals however named.

(2)For the purposes of this Schedule, immature animals kept in a herd shall not be treated as forming part of the herd unless—

(a)the land on which the herd is kept is such that animals which die or cease to form part of the herd cannot be replaced except by animals bred and reared on that land; and

(b)the immature animals in question are bred in the herd, are maintained in the herd for the purpose of replacement, and are necessarily maintained for that purpose;

and references in this Schedule to herds shall be construed accordingly.

(3)References in this Schedule to an animal being added to a herd include references to an immature animal which is kept in the herd becoming a mature animal except that not more immature animals shall be treated as forming part of a herd than are required to prevent a fall in the numbers of the herd.

(4)Female animals shall be treated for the purposes of this Schedule as becoming mature when they produce their first young.

(5)In this Schedule “a production herd” means, in relation to a farmer, a herd of animals of the same species (irrespective of breed) kept by him wholly or mainly for the sake of the products which they produce for him to sell, being products obtainable from the living animal.

In this sub-paragraph “products obtainable from the living animal” means—

(a)the young of the animal, or

(b)any other product obtainable from the animal, not being a product obtainable only by slaughtering the animal itself.

(6)For the purposes of this Schedule, production herds kept by a farmer shall be deemed to be of the same class if, and only if, all the animals kept in the herds are of the same species (irrespective of breed) and the products produced for him to sell for the sake of which (either wholly or mainly) the herds are kept by him are of the same kinds in the case of all the herds; and elections for the herd basis shall be framed accordingly.

(7)Any reference in this Schedule to profits or gains chargeable to tax under Schedule D includes a reference to profits or gains which would be so chargeable if there were any such profits or gains for the chargeable period in question.

Application of preceding provisions to trades other than farming, creatures other than animals, and animals and creatures kept singly

9(1)The preceding provisions of this Schedule shall, with the necessary adaptations, apply in relation to trades other than farming, and trades consisting only in part of farming as they apply in relation to farming, and references to farmers shall be construed accordingly.

(2)Those provisions shall (both in relation to farming and in relation to other trades) apply in relation to living creatures other than animals as they apply in relation to animals.

(3)Laying birds shall be treated for the purposes of this Schedule as becoming mature when they first lay.

(4)The provisions of this Schedule shall (both in relation to farming and in relation to other trades) apply, with the necessary adaptations, in relation to animals or other creatures kept singly as they apply in relation to herds.

(5)Nothing in this Schedule shall apply in relation to any animal or other creature kept wholly or mainly for public exhibition or for racing or other competitive purposes.

Supplemental and saving

10Where an election for the herd basis is made, every person carrying on any farming or other trade affected by the election shall, if required to do so by notice from the inspector, make and deliver to the inspector, within the time specified in the notice, such returns as to, and as to the products of, the animals or other creatures kept by him for the purposes of the trade as may be required by the notice.

11Where an election for the herd basis has effect for any chargeable period after an assessment for that period has become final and conclusive, any such assessment or, on a claim therefor, repayment of tax shall be made as may be necessary to give effect to the election.

12The validity of an election for the herd basis in force immediately before the commencement of this Schedule and made in pursuance of—

(a)section 35 of the Finance [1973 c. 51.] Act 1973 on or after 25th July 1973 and before 6th April 1976, or

(b)section 48(6) to (9) of the [1984 c. 43.] Finance Act 1984,

shall not be affected by the repeal of those sections by this Act.

Section 157.

SCHEDULE 6TAXATION OF DIRECTORS AND OTHERS IN RESPECT OF CARS

PART ITABLES OF FLAT RATE CASH EQUIVALENTS

PART IISUPPLEMENTARY PROVISIONS

Application of Tables A and B

1(1)In the case of cars with an original market value of £19,250 or less, Table A applies to those having an internal combustion engine with one or more reciprocating pistons, and Table B applies to other cars.

(2)A car’s cylinder capacity is the cylinder capacity of its engine calculated as for the purposes of the [1971 c. 10.] Vehicles (Excise) Act 1971 or the [1972 c. 10 (N.I.).] Vehicles (Excise) Act (Northern Ireland) 1972.

Reduction for periods when car not available for use

2(1)If, for any part of the relevant year, the car was unavailable, the cash equivalent is to be reduced by an amount which bears to the full amount of the equivalent (ascertained under Part I of this Schedule) the same proportion as the number of days in the year on which the car was unavailable bears to 365.

(2)The car is to be treated as being unavailable on any day if—

(a)it was not made available to the employee until after that day, or it had ceased before that day to be available to him; or

(b)it was incapable of being used at all throughout a period of not less than 30 consecutive days of which that day was one.

Car used preponderantly for business purposes

3(1)The cash equivalent derived from Table A, B or C is to be reduced (or, where paragraph 2 above applies, further reduced) by half if it is shown to the inspector’s satisfaction that the employee was required by the nature of his employment to make and made use of the car preponderantly for business travel, which means that such travel must have amounted to at least 18,000 miles in the relevant year.

(2)In relation to a car which for part of the year was unavailable in the sense of paragraph 2 above, the figure of 18,000 is proportionately reduced.

Reduction for employee paying for use of car

4If in the relevant year the employee was required, as a condition of the car being available for his private use, to pay any amount of money (whether by way of deduction from his emoluments or otherwise) for that use, the cash equivalent—

(a)is to be reduced (or, if already reduced under the foregoing paragraphs, further reduced) by the amount so paid by the employee in or in respect of the year; or

(b)if that amount exceeds the equivalent shown in the applicable Table in Part I of this Schedule, is nil.

Cars with insubstantial business use and additional cars

5(1)The cash equivalent derived from Table A, B or C is to be increased by half if in the relevant year—

(a)the car was not used for the employee’s business travel; or

(b)its use for such travel did not amount to more than 2,500 miles.

(2)In relation to a car which for part of the year was unavailable in the sense of paragraph 2 above, the figure of 2,500 is proportionately reduced.

(3)Without prejudice to sub-paragraph (1) above, if in any year a person is taxable under section 157 in respect of two or more cars which are made available concurrently, there shall be increased by half the cash equivalent derived from Table A, B or C in respect of each of those cars other than the one which in the period for which they are concurrently available is used to the greatest extent for the employee’s business travel.

(4)In paragraphs 2 to 4 above references to the cash equivalent which is to be reduced shall be construed as references to the cash equivalent after any increase under this paragraph.

Section 160.

SCHEDULE 7TAXATION OF BENEFIT FROM LOANS OBTAINED BY REASON OF EMPLOYMENT

PART IMEANING OF “OBTAINED BY REASON OF EMPLOYMENT”

1(1)Subject to sub-paragraph (5) below, the benefit of a loan is obtained by reason of a person’s employment if, in relation to that person, it is of a class described in sub-paragraphs (2), (3) or (4) below.

(2)A loan made by his employer.

(3)A loan made by a company—

(a)over which his employer had control;

(b)by which his employer (being a company) was controlled; or

(c)which was controlled by a person by whom his employer (being a company) was controlled.

(4)A loan made in any case where—

(a)his employer was, or had control over, or was controlled by, a close company; and

(b)the loan was made by a person having a material interest in that close company or, that company being controlled by another company, in that other company.

(5)Sub-paragraph (2) above does not apply to a loan made by his employer, being an individual, and shown to have been made in the normal course of his domestic, family or personal relationships.

2In paragraph 1 above—

(a)references to a loan being made by any person include references to his assuming the rights and liabilities of the person who originally made the loan and to his arranging, guaranteeing or in any way facilitating the continuation of a loan already in existence;

(b)“employer” includes a prospective employer; and

(c)“company”, except in the expression “close company”, includes a partnership.

PART IICALCULATION OF CASH EQUIVALENT OF LOAN BENEFIT

General

3(1)The cash equivalent for any year of the benefit obtained from a loan is—

(a)the amount of interest (calculated in accordance with paragraph 4 or 5 below) which would have been payable for that year had interest at the official rate been payable on the loan, less

(b)the amount of interest actually paid on the loan for that year.

(2)Where an assessment for any year in respect of a loan has been made or determined on the footing that the whole or part of the interest payable on the loan for that year was not in fact paid, but it is subsequently paid, then on a claim in that behalf, the cash equivalent for that year shall be recalculated so as to take that payment into account and the assessment shall be adjusted accordingly.

(3)All the loans between the same lender and borrower for which a cash equivalent falls to be ascertained and which are outstanding at any time, as to any amount, in any year are to be treated for the purposes of this Schedule as a single loan.

Normal method of calculation (averaging)

4In the absence of a requirement or election that paragraph 5 below should apply, the amount of interest at the official rate payable on a loan for any year (“the relevant year”) shall be ascertained as follows—

(a)take half the aggregate of—

(i)the maximum amount of the loan outstanding on 5th April preceding the relevant year or, if it was made in that year, on the date on which it was made, and

(ii)the maximum amount of the loan outstanding on 5th April in the relevant year or, if the loan was discharged in that year, the date of discharge;

(b)multiply that figure by the number of whole months during which the loan was outstanding in that year, and divide by 12;

(c)multiply the result by the official rate of interest in force during the period when the loan was outstanding in that year or, if the official rate changed during that period, the average rate during that period ascertained by reference to the number of days in the period and the number of days for which each rate was in force.

For the purposes of this paragraph, months begin on the sixth day of the calendar month.

Election for alternative method of calculation

5(1)For any year of assessment (“the relevant year”) the alternative method of calculation set out in this paragraph applies if—

(a)the inspector so requires, by notice given to the employee, for the purpose of any assessment to income tax (or the adjustment of any such assessment in consequence of an appeal); or

(b)the employee so elects, by notice given to the inspector within the time allowed by sub-paragraph (2) below.

(2)An election by the employee must be made—

(a)in a case where an assessment including the emoluments in question has been made on the basis of the normal method of calculation, within the time allowed for appealing against that assessment or such further time as the inspector may allow;

(b)where no such assessment has been made, within six years after the end of the relevant year of assessment.

(3)The alternative method of calculating the amount of interest at the official rate payable on a loan for the relevant year is as follows—

(a)take each period in the relevant year during which the official rate of interest remains the same;

(b)for each such period take for each day in the period the maximum amount outstanding of the loan on that day, and add those amounts together;

(c)multiply that sum by the official rate in force during the period divided by 365; and

(d)add together the resulting figures for each period in the relevant year.

PART IIIEXCEPTIONS WHERE INTEREST ELIGIBLE FOR RELIEF

6Interest is eligible for relief for the purposes of this Part of this Schedule if it is eligible for relief under section 353 or would be eligible for such relief apart from subsection (2) of that section.

7Section 160(1) does not apply to a loan in any year—

(a)for which interest is paid on the loan and the whole of that interest is eligible for relief, or

(b)for which no interest is paid on the loan but had interest been paid on it at the official rate the whole of that interest would have been eligible for relief.

8Where for any year interest is paid on a loan and part of that interest is eligible for relief, the calculation of the cash equivalent under Part II of this Schedule is modified as follows—

(a)where paragraph 4 applies, the maximum amounts referred to in sub-paragraph (a)(i) and (ii) of that paragraph shall be proportionately reduced by reference to the proportion which so much of that interest paid for that year as is not eligible for relief bears to the whole of the interest so paid;

(b)where paragraph 5 applies, the maximum amounts referred to in sub-paragraph (3)(b) of that paragraph shall be proportionately reduced by reference to the proportion which so much of the interest paid on each such amount for the day in question as is not eligible for relief bears to the whole of the interest so paid; and

(c)the amount of interest eligible for relief shall be left out of account in ascertaining for the purposes of paragraph 3(1)(b) above the amount of interest paid for that year.

9(1)Where for any year—

(a)no interest is paid on a loan, but

(b)had interest been paid on it at the official rate part of that interest would have been eligible for relief,

then the calculation of the cash equivalent under Part II of this Schedule shall be modified as provided by paragraph 8(a) or (b) above with the substitution for the references to the amounts of interest paid or not eligible for relief of references to the amounts (ascertained in accordance with the following provisions of this paragraph) which would have been paid or would not have been eligible for relief.

(2)For the purposes of paragraph 8(a) above as applied by this paragraph, the whole amount of interest at the official rate which would have been paid for any year shall be taken to be the amount payable for that year calculated in accordance with paragraph 4 above (disregarding paragraph 8); and the amount of that interest which would not have been eligible for relief shall be ascertained—

(a)by finding that amount on the assumption that the amount referred to in paragraph 4(a)(i) was the amount outstanding for the whole year;

(b)by finding that amount on the assumption that the amount referred to in paragraph 4(a)(ii) was the amount outstanding for the whole year; and

(c)by adding together the resulting figures and dividing by 2.

(3)For the purposes of paragraph 8(b) above as applied by this paragraph, the amount of interest which would have been paid and the amount of it which would not have been eligible for relief shall be ascertained on the assumption that interest at the official rate was paid daily throughout the year on the maximum amount outstanding on each day.

10(1)If—

(a)a person has a loan on which no interest is paid and of which the benefit was obtained by reason of his or any other person’s employment (“the employer’s loan”); and

(b)that person or his wife or her husband has another loan which was made later than, or at the same time as, the employer’s loan and interest on which is, in whole or in part, eligible for relief;

then, for the purposes of determining whether, had interest been paid on the employer’s loan at the official rate, the whole or any part of that interest would have been eligible for relief, sections 354(5) and (6), 355(1) to (4), 356 to 358 and 360 to 365 shall have effect as if the employer’s loan were made after any other loan which falls within paragraph (b) above and which, in the context of the application of sections 354(1) to (4) and 355(5), relates to the same land, caravan or house boat as does the employer’s loan.

(2)Where such a loan is made as is mentioned in paragraph (b) of sub-paragraph (1) above, sections 354(5) and (6), 355(1) to (4), 356 to 358 and 360 to 365 have effect in accordance with that sub-paragraph with respect to so much of the interest referred to therein as would be paid on and after the day on which the loan is made; and paragraph 9(3) above shall have effect for the purpose of determining how much of that interest would have been eligible for relief.

11(1)Where in any year a person has, alone or together with his wife or her husband, two or more loans—

(a)on which no interest is paid, and

(b)which, assuming the application of sections 354(1) to (4) and 355(5), would relate, in the context of those sections, to the same land, caravan or house boat,

then, for the purpose of determining whether, had interest been paid on any of those loans, it would, in whole or in part, have been eligible for relief, it shall be assumed in the first instance that those loans constitute a single loan (equal in amount to the aggregate of the actual loans) and to the extent that, had interest been paid on that single loan, it would have been eligible for relief, the relief shall then be attributed first to the earliest of the actual loans and, if all the relief is not thereby attributed, the balance shall be attributed to the next in time and so on with any of the balance remaining until the relief is wholly attributed.

(2)Nothing in sub-paragraph (1) above affects the operation of paragraph 10 above in relation to the priority which it gives to a loan falling within sub-paragraph (1)(b) of that paragraph, but any question which of two or more loans falling within sub-paragraph (1) above is the earlier shall be determined without regard to that paragraph.

12References in paragraphs 10 and 11 above to a husband or wife do not include references to a separated husband or wife.

Section 176(9).

SCHEDULE 8PROFIT-RELATED PAY SCHEMES: CONDITIONS FOR REGISTRATION

Form

1The terms of the scheme must be set out in writing.

Employer and employment unit

2The scheme must identify the scheme employer.

3If the scheme employer does not pay the emoluments of all the employees to whom the scheme relates, the scheme must identify each of the persons who pays the emoluments of any of those employees.

4(1)The scheme must identify the undertaking to which the scheme relates and that undertaking must be one which is carried on with a view to profit.

(2)The references in sub-paragraph (1) above to an undertaking include references to part of an undertaking; and the provisions of a scheme identifying part of an undertaking must do so in such a way as to distinguish it, otherwise than by name only, from other parts of the undertaking.

Employees

5The scheme must contain provisions by reference to which the employees to whom the scheme relates may be identified.

6The scheme must contain provisions ensuring that no payments are made under it by reference to a profit period if the employees to whom the scheme relates constitute less than 80 per cent. of all the employees in the employment unit at the beginning of that profit period, but for this purpose any person who is at that time within paragraph 7 or 8 below shall not be counted.

7(1)The scheme must contain provisions ensuring that no payments are made under it to any person who is employed in the employment unit by a company and who has, or is an associate of a person who has, a material interest in the company.

(2)For the purposes of this paragraph a person shall be treated as having a material interest in a company—

(a)if he, either on his own or with any one or more of his associates, or if any associate of his with or without such other associates, is the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 25 per cent. of the ordinary share capital of the company; or

(b)if, in the case of a close company, on an amount equal to the whole distributable income of the company falling to be apportioned under Chapter III of Part XI for the purpose of computing total income, more than 25 per cent. of that amount could be apportioned to him together with his associates (if any), or to any associate of his, or to any such associates taken together.

(3)In this paragraph—

• “associate” has the same meaning as in section 417(3) and (4); and

• “control” has the meaning given by section 840;

and the definition of “control” in section 840 applies (with the necessary modifications) in relation to a company which is an unincorporated association as it applies in relation to one that is not.

8The persons within this paragraph are any of the following employees who are excluded by the scheme from receiving any payment of profit-related pay—

(a)those who are not required under the terms of their employment to work in the employment unit for 20 hours or more a week;

(b)those who have not been employed by a relevant employer for a minimum period (of not more than three years) specified in the scheme;

and for this purpose “relevant employer” means the scheme employer or any person who pays the emoluments of any of the employees to whom the scheme relates.

Profit periods

9The scheme must identify the accounting period or periods by reference to which any profit-related pay is to be calculated.

10(1)Subject to sub-paragraphs (2) and (3) below, any such accounting period must be a period of 12 months.

(2)If the scheme is a replacement scheme, the first of two profit periods may be a period of less than 12 months, but the scheme may not provide for more than two profit periods.

(3)The scheme may make provision for a profit period to be abbreviated where registration of the scheme is cancelled with effect from a day after the beginning of the period; and a scheme making such provision may exclude the operation of all or any of the provisions of paragraph 13(4) and (5) or (as the case may be) paragraph 14(3)(b), (4) and (5) below in relation to the determination of the distributable pool for an abbreviated period.

(4)For the purposes of this paragraph, a scheme is a replacement scheme if—

(a)it succeeds another scheme (or two or more other schemes) registration of which was cancelled under section 178(1)(a) on the ground of a change in the employment unit or in the circumstances relating to the scheme; and

(b)that change occurred not more than three months before the beginning of the first (or only) profit period of the new scheme, and the Board are satisfied that it was not brought about with a view to the registration of the new scheme or in circumstances satisfying the conditions in section 177(1)(a), (b) and (c); and

(c)not less than one half of the employees to whom the new scheme relates were employees to whom the previous scheme (or any of the previous schemes) related at the time of that change.

Distributable pool

11The scheme must contain provisions by reference to which the aggregate sum that may be paid to employees in respect of a profit period (“the distributable pool”) may be determined.

12Except where the scheme is a replacement scheme (within the meaning of paragraph 10 above), the provisions for the determination of the distributable pool must employ either the method specified in paragraph 13 below (“method A”) or the method specified in paragraph 14 below (“method B”).

13(1)Method A is that the distributable pool is equal to a fixed percentage of the profits of the employment unit in the profit period.

(2)That percentage must be such that, on the assumption as to profits mentioned in sub-paragraph (3) below, it will produce a distributable pool equal to not less than 5 per cent. of the standard pay of the employment unit.

(3)The assumption referred to in sub-paragraph (2) above is that the profits in the profit period are the same as those in a base year specified in the scheme; and that base year must be a period of 12 months ending at a time within the period of two years immediately preceding the profit period, or the first of the profit periods, to which the scheme relates.

(4)Notwithstanding sub-paragraph (1) above, a scheme employing method A may include provision for disregarding profits in the profit period so far as they exceed 160 per cent. (or such greater percentage as may be specified in the scheme) of—

(a)if the profit period is the first or only period to which the scheme relates, the profits for the base year referred to in sub-paragraph (3) above;

(b)in any other case, the profits for the previous profit period.

(5)Notwithstanding sub-paragraph (1) above, a scheme employing method A may include provision to the effect that there shall be no distributable pool if the profits in the profit period are less than an amount specified in, or ascertainable by reference to, the scheme; but that amount must be less than the amount which would produce a distributable pool of 5 per cent. of the standard pay of the employment unit.

(6)The references in this paragraph to the standard pay of the employment unit are references to the amount which the scheme employer, at the time when he applies for registration of the scheme, reasonably estimates will be the annual equivalent of the pay, at the beginning of the profit period or first profit period, of the employees to whom the scheme will then relate; and for this purpose an estimate shall (in the absence of evidence to the contrary) be taken to be a reasonable one if it is based on the most recent information available to the employer as to the monthly or annual pay of the relevant employees.

14(1)Method B is that the distributable pool is—

(a)if the profit period is the first or only profit period to which the scheme relates, a percentage of a notional pool of an amount specified in the scheme;

(b)in any other case, a percentage of the distributable pool for the previous profit period.

(2)The amount of the notional pool referred to in sub-paragraph (1) above must not be less than 5 per cent. of the standard pay of the employment unit.

(3)The percentage referred to in sub-paragraph (1) above must be either—

(a)that arrived at by expressing the profits in the profit period as a percentage of the profits in the preceding period of 12 months; or

(b)the percentage mentioned in paragraph (a) above reduced (if it is more than 100) or increased (if it is less than 100) by a specified fraction of the difference between it and 100;

and the reference in paragraph (b) above to a specified fraction is a reference to a fraction of not more than one half specified in the scheme.

(4)Notwithstanding sub-paragraph (1) above, a scheme employing method B may include provision for disregarding profits in the profit period so far as they exceed 160 per cent. (or such greater percentage as may be specified in the scheme) of the profits in the preceding period of 12 months.

(5)Notwithstanding sub-paragraph (1) above, a scheme employing method B may include provision to the effect that there shall be no distributable pool if the profits in the profit period are less than an amount specified in, or ascertainable by reference to, the scheme; but that amount must be less than the amount which would produce a distributable pool of 5 per cent. of the standard pay of the employment unit.

(6)Where by virtue of a provision of the kind described in sub-paragraph (5) above there is no distributable pool for a profit period, any comparison required in accordance with sub-paragraph (1)(b) to be made with the distributable pool for that period shall be made with what would have been the pool but for sub-paragraph (5).

(7)In this paragraph “standard pay of the employment unit” has the same meaning as it has in paragraph 13 above.

15If the scheme is a replacement scheme (within the meaning of paragraph 10 above), it must provide for the distributable pool for a profit period to be equal to a specified percentage of the profits for the period.

Payment from distributable pool etc.

16The scheme must provide for the whole of the distributable pool to be paid to employees in the employment unit.

17The scheme must make provision as to when payments will be made to employees.

18(1)The provisions of the scheme must be such that employees participate in the scheme on similar terms.

(2)For the purposes of sub-paragraph (1) above, the fact that the payments to employees vary according to the levels of their remuneration, the length of their service or similar factors shall not be regarded as meaning that they do not participate on similar terms.

Ascertainment of profits

19(1)The scheme must provide for the preparation of a profit and loss account in respect of—

(a)each profit period of the employment unit; and

(b)any other period the profits for which must be ascertained for the purposes of this Chapter.

(2)The profit and loss account must give a true and fair view of the profit or loss of the employment unit for the period to which it relates.

(3)Subject to sub-paragraph (2) above, the requirements of Schedule 4 to the [1985 c. 6.] Companies Act 1985 shall apply (with any necessary modifications) to a profit and loss account prepared for the purposes of the scheme as they apply to a profit and loss account of a company for a financial year.

(4)Notwithstanding the preceding provisions of this paragraph, a profit and loss account prepared for the purposes of the scheme must not make any deduction, in arriving at the profits or losses of the employment unit, for the remuneration of any person excluded from the scheme by virtue of paragraph 7 above.

(5)Notwithstanding the preceding provisions of this paragraph, if the scheme so provides in relation to any of the items listed in sub-paragraph (6) below, a profit and loss account prepared for the purposes of the scheme may, in arriving at the profits or losses of the employment unit—

(a)leave the item out of account notwithstanding that Schedule 4 to the Companies Act 1985 requires it to be taken into account; or

(b)take the item into account notwithstanding that Schedule 4 to the Companies Act 1985 requires it to be left out of account.

(6)The items referred to in sub-paragraph (5) above are—

(a)interest receivable and similar income;

(b)interest payable and similar charges;

(c)goodwill;

(d)tax on profit or loss on ordinary activities (but not any penalty under the Taxes Acts);

(e)research and development costs;

(f)profit-related pay payable under the scheme;

(g)extraordinary income;

(h)extraordinary charges;

(j)extraordinary profit or loss;

(k)tax on extraordinary profit or loss.

(7)References in this paragraph to Schedule 4 to the [1985 c. 6.] Companies Act 1985 shall be construed, in relation to Northern Ireland, as references to Schedule 4 to the [S.I. 1986/1032 (N.I. 6).] Companies (Northern Ireland) Order 1986.

20(1)The scheme must provide that, in preparing a profit and loss account for the purposes of this Schedule, no changes may be made from the accounting policies used in preparing accounts for any earlier period relevant for those purposes, or in the methods of applying those policies, if the effect of the changes (either singly or taken together) would be that the amount of profits (or losses) differed by more than 5 per cent. from what would be that amount if no changes were made.

(2)Sub-paragraph (1) above has effect subject to paragraph 19(2) above.

Sections 185, 186, 187.

SCHEDULE 9APPROVED SHARE OPTION SCHEMES AND PROFIT SHARING SCHEMES

PART IGENERAL

1(1)Subject to the provisions of this Schedule, on the application of a body corporate (“the grantor”) which has established a share option scheme or a profit sharing scheme, the Board shall approve the scheme if they are satisfied that it fulfils such requirements of Part II and this Part as apply in relation to the scheme in question, and the requirements of Part III, IV or V of this Schedule; and in this Schedule—

• “the relevant requirements” means, in relation to any scheme, the requirements of this Schedule by reference to which the scheme is approved; and

• “savings-related share option scheme” means a scheme in relation to which the relevant requirements include the requirements of Part III of this Schedule.

(2)An application under sub-paragraph (1) above shall be made in writing and contain such particulars and be supported by such evidence as the Board may require.

(3)Where the grantor has control of another company or companies, the scheme may be expressed to extend to all or any of the companies of which it has control and in this Schedule a scheme which is expressed so to extend is referred to as a “group scheme”.

(4)In relation to a group scheme the expression “participating company” means the grantor or any other company to which for the time being the scheme is expressed to extend.

2(1)The Board shall not approve a scheme under this Schedule if it appears to them that it contains features which are neither essential nor reasonably incidental to the purpose of providing for employees and directors benefits in the nature of rights to acquire shares or, in the case of a profit sharing scheme, in the nature of interests in shares.

(2)A profit sharing scheme shall not be approved under paragraph 1 above unless the Board are satisfied that, whether under the terms of the scheme or otherwise, every participant in the scheme is bound in contract with the grantor—

(a)to permit his shares to remain in the hands of the trustees throughout the period of retention; and

(b)not to assign, charge or otherwise dispose of his beneficial interest in his shares during that period; and

(c)if he directs the trustees to transfer the ownership of his shares to him at any time before the release date, to pay to the trustees before the transfer takes place a sum equal to income tax at the basic rate on the appropriate percentage of the locked-in value of the shares at the time of the direction; and

(d)not to direct the trustees to dispose of his shares at any time before the release date in any other way except by sale for the best consideration in money that can reasonably be obtained at the time of the sale or, in the case of redeemable shares in a workers' cooperative, by redemption.

(3)The Board must be satisfied in the case of a savings-related share option scheme or a profit sharing scheme—

(a)that there are no features of the scheme (other than any which are included to satisfy requirements of this Schedule) which have or would have the effect of discouraging any description of employees or former employees who fulfil the conditions in paragraph 26(1) or, as the case may be, 36(1) below from actually participating in the scheme; and

(b)where the grantor is a member of a group of companies, that the scheme does not and would not have the effect of conferring benefits wholly or mainly on directors of companies in the group or on those employees of companies in the group who are in receipt of the higher or highest levels of remuneration.

(4)For the purposes of sub-paragraph (3) above “a group of companies” means a company and any other companies of which it has control.

3(1)If, at any time after the Board have approved a share option scheme, any of the relevant requirements ceases to be satisfied or the grantor fails to provide information requested by the Board under paragraph 6 below, the Board may withdraw the approval with effect from that time or such later time as the Board may specify; but where rights obtained under a savings-related share option scheme before the withdrawal of approval from the scheme under this paragraph are exercised after the withdrawal, section 185(3) shall apply in respect of the exercise as if the scheme were still approved.

(2)If at any time after the Board have approved a profit sharing scheme—

(a)a participant is in breach of any of his obligations under paragraph 2(2)(a), (c) and (d) above; or

(b)there is, with respect to the operation of the scheme, any contravention of any of the relevant requirements, Schedule 10, the scheme itself or the terms of the trust referred to in paragraph 30(1)(c) below; or

(c)any shares of a class of which shares have been appropriated to the participants receive different treatment in any respect from the other shares of that class, in particular, different treatment in respect of—

(i)the dividend payable;

(ii)repayment;

(iii)the restrictions attaching to the shares; or

(iv)any offer of substituted or additional shares, securities or rights of any description in respect of the shares; or

(d)the Board cease to be satisfied that the scheme complies with the requirements of paragraph 2(3) above or paragraph 36 below; or

(e)the trustees, the grantor or, in the case of a group scheme, a company which is or has been a participating company fail or fails to furnish any information which they are or it is required to furnish under paragraph 6 below,

the Board may, subject to sub-paragraph (3) below, withdraw the approval with effect from that time or from such later time as the Board may specify.

(3)It shall not be a ground for withdrawal of approval of a profit sharing scheme that shares which have been newly issued receive, in respect of dividends payable with respect to a period beginning before the date on which the shares were issued, treatment which is less favourable than that accorded to shares issued before that date.

4If an alteration is made in the scheme at any time after the Board have approved the scheme, the approval shall not have effect after the date of the alteration unless the Board have approved the alteration.

5If aggrieved—

(a)in any case, by the failure of the Board to approve the scheme or to approve an alteration in the scheme or by the withdrawal of approval; or

(b)in the case of a savings-related share option scheme, by the failure of the Board to decide that a condition subject to which the approval has been given is satisfied; or

(c)in the case of a profit sharing scheme, by the failure of the Board to approve an alteration in the terms of the trust referred to in paragraph 30(1)(c) below;

the grantor may, by notice given to the Board within 30 days from the date on which it is notified of the Board’s decision, require the matter to be determined by the Special Commissioners, and the Special Commissioners shall hear and determine the matter in like manner as an appeal.

6The Board may by notice require any person to furnish them, within such time as the Board may direct (not being less than 30 days), with such information as the Board think necessary for the performance of their functions under the relevant provisions and as the person to whom the notice is addressed has or can reasonably obtain, including in particular information—

(a)to enable the Board to determine—

(i)whether to approve a scheme or withdraw an approval already given; or

(ii)the liability to tax, including capital gains tax, of any person who has participated in a scheme; and

(b)in relation to the administration of a scheme and any alteration of the terms of a scheme.

PART IIREQUIREMENTS GENERALLY APPLICABLE

7The provisions of this Part apply in relation to all schemes unless otherwise stated.

8The scheme must not provide for any person to be eligible to participate in it, that is to say, to obtain and exercise rights under it, or in the case of a profit sharing scheme to have shares appropriated to him, at any time when he has, or has within the preceding 12 months had, a material interest in a close company which is—

(a)a company shares in which, in the case of a profit sharing scheme, are to be appropriated or, in the case of a share option scheme, may be acquired pursuant to the exercise of rights obtained under the scheme; or

(b)a company which has control of such a company or is a member of a consortium which owns such a company.

In determining whether a company is a close company for the purposes of this paragraph, sections 414(1)(a) and 415 shall be disregarded.

9(1)A share option scheme must provide for directors and employees to obtain rights to acquire shares (“scheme shares”) which satisfy the requirements of paragraphs 10 to 14 below.

(2)In the case of a profit sharing scheme, the shares to be acquired by the trustees as mentioned in paragraph 30 below (“scheme shares”) must satisfy the requirements of paragraphs 10 to 12 and 14 below.

10Scheme shares must form part of the ordinary share capital of—

(a)the grantor; or

(b)a company which has control of the grantor; or

(c)a company which either is, or has control of, a company which—

(i)is a member of a consortium owning either the grantor or a company having control of the grantor; and

(ii)beneficially owns not less than three-twentieths of the ordinary share capital of the company so owned.

11Scheme shares must be—

(a)shares of a class quoted on a recognised stock exchange; or

(b)shares in a company which is not under the control of another company; or

(c)shares in a company which is under the control of a company (other than a company which is, or would if resident in the United Kingdom be, a close company), whose shares are quoted on a recognised stock exchange.

12(1)Scheme shares must be—

(a)fully paid up;

(b)not redeemable; and

(c)not subject to any restrictions other than restrictions which attach to all shares of the same class or a restriction authorised by sub-paragraph (2) below.

Sub-paragraph (b) above does not apply, in the case of a profit sharing scheme, in relation to shares in a workers' cooperative.

(2)Except as provided below, the shares may be subject to a restriction imposed by the company’s articles of association—

(a)requiring all shares held by directors or employees of the company or of any other company of which it has control to be disposed of on ceasing to be so held; and

(b)requiring all shares acquired, in pursuance of rights or interests obtained by such directors or employees, by persons who are not (or have ceased to be) such directors or employees to be disposed of when they are acquired.

(3)A restriction is not authorised by sub-paragraph (2) above unless—

(a)any disposal required by the restriction will be by way of sale for a consideration in money on terms specified in the articles of association; and

(b)the articles also contain general provisions by virtue of which any person disposing of shares of the same class (whether or not held or acquired as mentioned in sub-paragraph (2) above) may be required to sell them on terms which are the same as those mentioned in paragraph (a) above.

(4)In the case of a profit sharing scheme, except in relation to redeemable shares in a workers' cooperative, nothing in sub-paragraph (2) above authorises a restriction which would require a person, before the release date, to dispose of his beneficial interest in shares the ownership of which has not been transferred to him.

13(1)In determining, in the case of a share option scheme, for the purposes of paragraph 12(1)(c) above whether scheme shares which are or are to be acquired by any person are subject to any restrictions, there shall be regarded as a restriction attaching to the shares any contract, agreement, arrangement or condition by which his freedom to dispose of the shares or of any interest in them or of the proceeds of their sale or to exercise any right conferred by them is restricted or by which such a disposal or exercise may result in any disadvantage to him or to a person connected with him.

(2)Sub-paragraph (1) does not apply to so much of any contract, agreement, arrangement or condition as contains provisions similar in purpose and effect to any of the provisions of the Model Rules set out in the Model Code for Securities Transactions by Directors of Listed Companies issued by the Stock Exchange in November 1984.

14(1)Except where scheme shares are shares in a company the ordinary share capital of which consists of shares of one class only, the majority of the issued shares of the same class either must be employee-control shares or must be held by persons other than—

(a)persons who acquired their shares in pursuance of a right conferred on them or an opportunity afforded to them as a director or employee of the grantor or any other company and not in pursuance of an offer to the public;

(b)trustees holding shares on behalf of persons who acquired their beneficial interests in the shares as mentioned in sub-paragraph (a) above; and

(c)in a case where the shares fall within sub-paragraph (c), but not within sub-paragraph (a), of paragraph 11 above, companies which have control of the company whose shares are in question or of which that company is an associated company.

(2)In its application to a profit sharing scheme, sub-paragraph (1) above shall have effect with the addition after the words “ordinary share capital of which” of the words “at the time of the acquisition of the shares by the trustees”.

(3)For the purposes of this paragraph, shares in a company are employee-control shares if—

(a)the persons holding the shares are, by virtue of their holding, together able to control the company; and

(b)those persons are or have been employees or directors of the company or of another company which is under the control of the company.

15(1)Except in the case of a profit sharing scheme, the scheme may provide that if any company (“the acquiring company”)—

(a)obtains control of a company whose shares are scheme shares as a result of making a general offer—

(i)to acquire the whole of the issued ordinary share capital of the company which is made on a condition such that if it is satisfied the person making the offer will have control of the company; or

(ii)to acquire all the shares in the company which are of the same class as the scheme shares;

(b)obtains control of a company whose shares are scheme shares in pursuance of a compromise or arrangement sanctioned by the court under section 425 of the [1985 c. 6.] Companies Act 1985 or Article 418 of the [S.I. 1986/1032 (N.I. 6).] Companies (Northern Ireland) Order 1986; or

(c)becomes bound or entitled to acquire shares in a company whose shares are scheme shares under sections 428 to 430 of that Act or Articles 421 to 423 of that Order,

any participant in the scheme may at any time within the appropriate period, by agreement with the acquiring company, release his rights under the scheme (in this paragraph referred to as (“the old rights”) in consideration of the grant to him of rights (in this paragraph referred to as (“the new rights”) which are equivalent to the old rights but relate to shares in a different company (whether the acquiring company itself or some other company falling within paragraph 10(b) or (c) above).

(2)In sub-paragraph (1) above “the appropriate period” means—

(a)in a case falling within paragraph (a), the period of six months beginning with the time when the person making the offer has obtained control of the company and any condition subject to which the offer is made is satisfied;

(b)in a case falling within paragraph (b), the period of six months beginning with the time when the court sanctions the compromise or arrangement; and

(c)in a case falling within paragraph (c), the period during which the acquiring company remains bound or entitled as mentioned in that paragraph.

(3)The new rights shall not be regarded for the purposes of this paragraph as equivalent to the old rights unless—

(a)the shares to which they relate satisfy the conditions specified, in relation to scheme shares, in paragraphs 10 to 14 above; and

(b)the new rights will be exercisable in the same manner as the old rights and subject to the provisions of the scheme as it had effect immediately before the release of the old rights; and

(c)the total market value, immediately before the release, of the shares which were subject to the participant’s old rights is equal to the total market value, immediately after the grant, of the shares in respect of which the new rights are granted to the participant; and

(d)the total amount payable by the participant for the acquisition of shares in pursuance of the new rights is equal to the total amount that would have been payable for the acquisition of shares in pursuance of the old rights.

(4)Where any new rights are granted pursuant to a provision included in a scheme by virtue of this paragraph they shall be regarded—

(a)for the purposes of section 185 and this Schedule; and

(b)for the purposes of the subsequent application (by virtue of a condition complying with sub-paragraph (3)(b) above) of the provisions of the scheme,

as having been granted at the time when the corresponding old rights were granted.

(5)Where a scheme which was approved before 1st August 1987 is altered before 1st August 1989 so as to include such a provision as is mentioned above (“an exchange provision”), the scheme as altered may by virtue of this and the following sub-paragraphs apply that provision to rights obtained under the scheme before the date on which the alteration takes effect.

(6)If an exchange provision is applied as mentioned in sub-paragraph (5) above in a case where, on or after 17th March 1987 but before the date on which the alteration takes effect, an event has occurred by reason of which a person holding rights under the scheme would be able to take advantage of the exchange provision—

(a)the scheme may permit a person who held rights under the scheme immediately before that event to take advantage of the exchange provision; and

(b)in a case where rights then held would otherwise, by reason of the event, have ceased to be exercisable, the scheme may provide that the exchange provision shall apply as if the rights were still exercisable.

(7)The application of an exchange provision as mentioned in sub-paragraph (5) or (6) above shall not itself be regarded for the purposes of this Schedule as the acquisition of a right.

(8)Sub-paragraphs (5) and (6) above have effect subject to paragraph 4 above.

PART IIIREQUIREMENTS APPLICABLE TO SAVINGS-RELATED SHARE OPTION SCHEMES

16(1)The scheme must provide for the scheme shares to be paid for with moneys not exceeding the amount of repayments made and any interest paid to them under a certified contractual savings scheme which has been approved by the Board for the purposes of this Schedule.

(2)Where the Board are satisfied that—

(a)a person has entered into a certified contractual savings scheme before 15th November 1980, and

(b)he has obtained rights under a scheme established before that date to acquire shares in a company of which he is an employee or director (or a company of which such a company has control) using repayments made under the certified contractual savings scheme;

then, repayments and interest paid under the certified contractual savings scheme shall be treated as repayments and interest paid, under a scheme approved by the Board for the purposes of this Schedule under sub-paragraph (1) above, and, accordingly, may be used for the purchase of shares under a savings-related share option scheme approved under this Schedule.

(3)The repayments and interest to which sub-paragraph (2) above applies shall not exceed the repayments and interest to which the participant would have been entitled if the terms of the scheme had corresponded to those of a certified contractual savings scheme approved by the Board under sub-paragraph (1) above.

17Subject to paragraphs 18 to 21 below, the rights obtained under the scheme must not be capable of being exercised before the bonus date, that is to say, the date on which repayments under the certified contractual savings scheme are due; and for the purposes of this paragraph and paragraph 16 above—

(a)repayments under a certified contractual savings scheme may be taken as including or as not including a bonus;

(b)the time when repayments are due shall be, where repayments are taken as including the maximum bonus, the earliest date on which the maximum bonus is payable and, in any other case, the earliest date on which a bonus is payable under the scheme; and

(c)the question what is to be taken as so included must be required to be determined at the time when rights under the scheme are obtained.

18The scheme must provide that if a person who has obtained rights under the scheme dies before the bonus date the rights must be exercised, if at all, within 12 months after the date of his death and if he dies within six months after the bonus date the rights may be exercised within 12 months after the bonus date.

19The scheme must provide that if a person who has obtained rights under it ceases to hold the office or employment by virtue of which he is eligible to participate in the scheme by reason of—

(a)injury or disability or redundancy within the meaning of the [1978 c. 44.] Employment Protection (Consolidation) Act 1978; or

(b)retirement on reaching pensionable age or any other age at which he is bound to retire in accordance with the terms of his contract of employment,

then the rights must be exercised, if at all, within six months of his so ceasing and, if he so ceases for any other reason within three years of obtaining the rights, they may not be exercised at all except pursuant to such a provision of the scheme as is mentioned in paragraph 21(1)(e) below; and in relation to the case where he so ceases for any other reason more than three years after obtaining the rights the scheme must either provide that the rights may not be exercised or that they must be exercised, if at all, within six months of his so ceasing.

20The scheme must provide that where a person who has obtained rights under it continues to hold the office or employment by virtue of which he is eligible to participate in the scheme after the date on which he reaches pensionable age, he may exercise the rights within six months of that date.

21(1)The scheme may provide that—

(a)if any person obtains control of a company whose shares are scheme shares as a result of making a general offer falling within paragraph 15(a)(i) or (ii) above, rights obtained under the scheme to acquire shares in the company may be exercised within six months of the time when the person making the offer has obtained control of the company and any condition subject to which the offer is made has been satisfied;

(b)if under section 425 of the [1985 c. 6] Companies Act 1985 or Article 418 of the [S.I. 1986/1032 (N.I. 6).] Companies (Northern Ireland) Order 1986 (power to compromise with creditors and members) the court sanctions a compromise or arrangement proposed for the purposes of or in connection with a scheme for the reconstruction of a company whose shares are scheme shares or its amalgamation with any other company or companies, rights obtained under the share option scheme to acquire shares in the company may be exercised within six months of the court sanctioning the compromise or arrangement;

(c)if any person becomes bound or entitled, under sections 428 to 430 of that Act of 1985 or Articles 421 to 423 of that Order of 1986 (power to acquire shares of shareholders dissenting from schemes or contract approved by majority), to acquire shares in a company shares in which are scheme shares, rights obtained under the scheme to acquire shares in the company may be exercised at any time when that person remains so bound or entitled;

(d)if a company whose shares are scheme shares passes a resolution for voluntary winding up, rights obtained under a scheme to acquire shares in the company may be exercised within six months of the passing of the resolution; and

(e)if a person ceases to hold an office or employment by virtue of which he is eligible to participate in the scheme by reason only that—

(i)that office or employment is in a company of which the grantor ceases to have control; or

(ii)that office or employment relates to a business or part of a business which is transferred to a person who is neither an associated company of the grantor nor a company of which the grantor has control;

rights under the scheme held by that person may be exercised within six months of his so ceasing.

(2)For the purposes of this paragraph a person shall be deemed to have obtained control of a company if he and others acting in concert with him have together obtained control of it.

(3)Where a scheme which has been approved before 1st August 1986 has been or is altered before 1st August 1988 so as to include such a provision as is specified in sub-paragraph (1)(e) above, the scheme as altered may by virtue of this sub-paragraph apply that provision to rights obtained under the scheme before the date on which the alteration takes effect, and where that provision is so applied in relation to such rights—

(a)the scheme may permit a person having such rights to take advantage of the provision notwithstanding that under the scheme he would otherwise be unable to exercise those rights after he has ceased to hold the office or employment in question; and

(b)if, before the date on which the alteration takes effect, a person who held such rights on 18th March 1986 ceases, in either of the circumstances set out in sub-paragraph (1)(e) above, to hold an office or employment by virtue of which he was eligible to participate in the scheme, then, so far as concerns the rights so held, the scheme may permit him to take advantage of the provision in question as if the alteration had been made immediately before he ceased to hold that office or employment; and

(c)the application of the provision shall not itself be regarded as the acquisition of a right for the purposes of this Schedule.

This sub-paragraph has effect subject to paragraph 4 above.

22Except as provided in paragraph 18 above, rights obtained by a person under the scheme must not be capable—

(a)of being transferred by him, or

(b)of being exercised later than six months after the bonus date.

23No person shall be treated for the purposes of paragraph 19 or 21(1)(e) above as ceasing to hold an office or employment by virtue of which he is eligible to participate in the scheme until he ceases to hold an office or employment in the grantor or in any associated company or company of which the grantor has control.

24(1)The scheme must provide for a person’s contributions under the certified contractual savings scheme to be of such amount as to secure as nearly as may be repayment of an amount equal to that for which shares may be acquired in pursuance of rights obtained under the scheme; and for this purpose the amount of repayment under the certified contractual savings scheme shall be determined as mentioned in paragraph 17 above.

(2)The scheme must not—

(a)permit the aggregate amount of a person’s contributions under certified contractual savings schemes linked to savings-related share option schemes approved under this Schedule to exceed £100 monthly, nor

(b)impose a minimum on the amount of a person’s contributions which exceeds £10 monthly.

(3)The Treasury may by order amend sub-paragraph (2) above by substituting for any amount for the time being specified in that sub-paragraph such amount as may be specified in the order.

25The price at which scheme shares may be acquired by the exercise of a right obtained under the scheme—

(a)must be stated at the time the right is obtained, and

(b)must not be manifestly less than 90 per cent. of the market value of shares of the same class at that time or, if the Board and the grantor agree in writing, at such earlier time or times as may be provided in the agreement,

but the scheme may provide for such variation of the price as may be necessary to take account of any variation in the share capital of which the scheme shares form part.

26(1)Subject to paragraph 8 above, every person who—

(a)is a full-time employee or a full-time director of the grantor or, in the case of a group scheme, a participating company, and

(b)has been such an employee or director at all times during a qualifying period not exceeding five years, and

(c)is chargeable to tax in respect of his office or employment under Case I of Schedule E,

must be eligible to participate in the scheme, that is to say, to obtain and exercise rights under it, on similar terms, and those who do participate in the scheme must actually do so on similar terms.

(2)For the purposes of sub-paragraph (1) above, the fact that the rights to be obtained by the persons participating in a scheme vary according to the levels of their remuneration, the length of their service or similar factors shall not be regarded as meaning that they are not eligible to participate in the scheme on similar terms or do not actually do so.

(3)Except as provided by paragraph 19 above or pursuant to such a provision as is referred to in paragraph 21(1)(e) above, a person must not be eligible to participate in the scheme at any time unless he is at that time a director or employee of the grantor or, in the case of a group scheme, of a participating company.

PART IVREQUIREMENTS APPLICABLE TO OTHER SHARE OPTION SCHEMES

27(1)A person must not be eligible to obtain rights under the scheme at any time unless he is at that time a full-time director or qualifying employee of the grantor or, in the case of a group scheme, of a participating company, but the scheme may provide that a person may exercise rights under it after he has ceased to be a full-time director or qualifying employee.

(2)The scheme must not permit any person obtaining rights under it to transfer any of them but may provide that, if a person who has obtained rights under it dies before exercising them, they may be exercised after, but not more than one year after, the date of his death.

(3)Where the scheme contains the provision permitted by sub-paragraph (2) above and any rights are exercised—

(a)after the death of the person who obtained them; but

(b)before the expiry of the period of ten years beginning with his obtaining them;

subsection (3) of section 185 shall apply with the omission of the reference to subsection (5) of that section.

(4)In sub-paragraph (1) above “qualifying employee”, in relation to a company, means an employee of the company (other than one who is a director of the company or, in the case of a group scheme, of a participating company) who is required, under the terms of his employment, to work for the company for at least 20 hours a week.

28(1)The scheme must provide that no person shall obtain rights under it which would, at the time they are obtained, cause the aggregate market value of the shares which he may acquire in pursuance of rights obtained under the scheme or under any other share option scheme, not being a savings-related share option scheme, approved under this Schedule and established by the grantor or by any associated company of the grantor (and not exercised) to exceed or further exceed the appropriate limit.

(2)The appropriate limit is the greater of—

(a)£100,000; or

(b)if there were relevant emoluments for the preceding year of assessment, four times the amount of the relevant emoluments for the current or preceding year of assessment (whichever of those years gives the greater amount); or

(c)if there were no relevant emoluments for the preceding year of assessment, four times the amount of the relevant emoluments for the period of 12 months beginning with the first day during the current year of assessment in respect of which there are relevant emoluments.

(3)For the purposes of sub-paragraph (1) above, the market value of shares shall be calculated as at the time when the rights in relation to those shares were obtained or, in a case where an agreement relating to them has been made under paragraph 29 below, such earlier time or times as may be provided in the agreement.

(4)For the purposes of sub-paragraph (2) above, the relevant emoluments are such of the emoluments of the office or employment by virtue of which the person in question is eligible to participate in the scheme as are liable to be paid under deduction of tax pursuant to section 203 after deducting amounts included by virtue of Chapter II of Part V.

29The price at which scheme shares may be acquired by the exercise of a right obtained under the scheme—

(a)must be stated at the time the right is obtained, and

(b)must not be manifestly less than the market value of shares of the same class at that time or, if the Board and the grantor agree in writing, at such earlier time or times as may be provided in the agreement, but the scheme may provide for such variation of the price as may be necessary to take account of any variation in the share capital of which the scheme shares form part.

PART VREQUIREMENTS APPLICABLE TO PROFIT SHARING SCHEMES

30(1)The scheme must provide for the establishment of a body of persons resident in the United Kingdom (“the trustees”)—

(a)who, out of moneys paid to them by the grantor or, in the case of a group scheme, a participating company, are required by the scheme to acquire shares in respect of which the conditions in paragraphs 10 to 12 and 14 above are fulfilled; and

(b)who are under a duty to appropriate shares acquired by them to individuals who participate in the scheme, not being individuals who are ineligible by virtue of paragraph 8 or 35 of this Schedule; and

(c)whose functions with respect to shares held by them are regulated by a trust which is constituted under the law of a part of the United Kingdom and the terms of which are embodied in an instrument which complies with the provisions of paragraphs 31 to 34 below.

(2)If at any time after the Board have approved the scheme, an alteration is made in the terms of the trust referred to in sub-paragraph (1)(c) above, the approval shall not have effect after the date of the alteration unless the Board have approved the alteration.

(3)The scheme must provide that the total of the initial market values of the shares appropriated to any one participant in a year of assessment will not exceed the relevant amount.

(4)In this Part of this Schedule “initial market value”, in relation to a participant’s shares, means the market value of those shares determined—

(a)except where paragraph (b) below applies, on the date on which the shares were appropriated to him; and

(b)if the Board and the trustees agree in writing, on or by reference to such earlier date or dates as may be provided for in the agreement.

31The trust instrument shall provide that, as soon as practicable after any shares have been appropriated to a participant, the trustees will give him notice of the appropriation—

(a)specifying the number and description of those shares; and

(b)stating their initial market value.

32(1)The trust instrument must contain a provision prohibiting the trustees from disposing of any shares, except as mentioned in paragraph 1(1)(a), (b) or (c) of Schedule 10, during the period of retention (whether by transfer to the participant or otherwise).

(2)The trust instrument must contain a provision prohibiting the trustees from disposing of any shares after the end of the period of retention and before the release date except—

(a)pursuant to a direction given by or on behalf of the participant or any person in whom the beneficial interest in his shares is for the time being vested; and

(b)by a transaction which would not involve a breach of the participant’s obligations under paragraph 2(2)(c) or (d) above.

33The trust instrument must contain a provision requiring the trustees—

(a)subject to their obligations under paragraph 7 of Schedule 10 and to any such direction as is mentioned in paragraph 4(2) of that Schedule to pay over to the participant any money or money’s worth received by them in respect of or by reference to any of his shares other than money’s worth consisting of new shares within the meaning of paragraph 5 of that Schedule; and

(b)to deal only pursuant to a direction given by or on behalf of the participant or any person in whom the beneficial interest in his shares is for the time being vested with any right conferred in respect of any of his shares to be allotted other shares, securities or rights of any description.

34The trust instrument must impose an obligation on the trustees—

(a)to maintain such records as may be necessary to enable the trustees to carry out their obligations under paragraph 7 of Schedule 10; and

(b)where the participant becomes liable to income tax under Schedule E by reason of the occurrence of any event, to inform him of any facts relevant to determining that liability.

35(1)An individual shall not be eligible to have shares appropriated to him under the scheme at any time unless he is at that time or was within the preceding 18 months a director or employee of the grantor or, in the case of a group scheme, of a participating company.

(2)An individual shall not be eligible to have shares appropriated to him under the scheme at any time if in that year of assessment shares have been appropriated to him under another approved scheme established by the grantor or by—

(a)a company which controls or is controlled by the grantor or which is controlled by a company which also controls the grantor, or

(b)a company which is a member of a consortium owning the grantor or which is owned in part by the grantor as a member of a consortium.

36(1)Subject to paragraphs 8 and 35 above, every person who at any time—

(a)is a full-time employee or a full-time director of the grantor or, in the case of a group scheme, a participating company, and

(b)has been such an employee or director at all times during a qualifying period, not exceeding five years, ending at that time, and

(c)is chargeable to tax in respect of his office or employment under Case I of Schedule E,

must then be eligible (subject to paragraphs 8 and 35 of this Schedule) to participate in the scheme on similar terms and those who do participate must actually do so on similar terms.

(2)For the purposes of sub-paragraph (1) above, the fact that the number of shares to be appropriated to the participants in a scheme varies by reference to the levels of their remuneration, the length of their service or similar factors shall not be regarded as meaning that they are not eligible to participate in the scheme on similar terms or do not actually do so.

PART VIMATERIAL INTEREST TEST

Interests under trusts

37(1)This paragraph applies in a case where—

(a)the individual (“the beneficiary”) was one of the objects of a discretionary trust; and

(b)the property subject to the trust at any time consisted of or included any shares or obligations of the company.

(2)If neither the beneficiary nor any relevant associate of his had received any benefit under the discretionary trust before 14th November 1986, then, as respects any time before that date, the trustees of the settlement concerned shall not be regarded, by reason only of the matters referred to in sub-paragraph (1) above, as having been associates (as defined in section 417(3) and (4)) of the beneficiary.

(3)If, on or after 14th November 1986—

(a)the beneficiary ceases to be eligible to benefit under the discretionary trust by reason of—

(i)an irrevocable disclaimer or release executed by him under seal; or

(ii)the irrevocable exercise by the trustees of a power to exclude him from the objects of the trust; and

(b)immediately after he so ceases, no relevant associate of his is interested in the shares or obligations of the company which are subject to the trust; and

(c)during the period of 12 months ending with the date when the beneficiary so ceases, neither the beneficiary nor any relevant associate of his received any benefit under the trust,

the beneficiary shall not be regarded, by reason only of the matters referred to in sub-paragraph (1) above, as having been interested in the shares or obligations of the company as mentioned in section 417(3)(c) at any time during the period of 12 months referred to in paragraph (c) above.

(4)In sub-paragraphs (2) and (3) above “relevant associate” has the meaning given to “associate” by subsection (3) of section 417 but with the omission of paragraph (c) of that subsection.

(5)Sub-paragraph (3)(a)(i) above, in its application to Scotland, shall be construed as if the words “under seal” were omitted.

Options etc.

38(1)For the purposes of section 187(3)(a) a right to acquire shares (however arising) shall be taken to be a right to control them.

(2)Any reference in sub-paragraph (3) below to the shares attributed to an individual is a reference to the shares which, in accordance with section 187(3)(a), fall to be brought into account in his case to determine whether their number exceeds a particular percentage of the company’s ordinary share capital.

(3)In any case where—

(a)the shares attributed to an individual consist of or include shares which he or any other person has a right to acquire; and

(b)the circumstances are such that, if that right were to be exercised, the shares acquired would be shares which were previously unissued and which the company is contractually bound to issue in the event of the exercise of the right;

then, in determining at any time prior to the exercise of that right whether the number of shares attributed to the individual exceeds a particular percentage of the ordinary share capital of the company, that ordinary share capital shall be taken to be increased by the number of unissued shares referred to in paragraph (b) above.

(4)This paragraph has effect as respects any time after 5th April 1987.

Shares held by trustees of approved profit sharing schemes

39In applying section 187(3), as respects any time before or after the passing of this Act, there shall be disregarded—

(a)the interest of the trustees of an approved profit sharing scheme in any shares which are held by them in accordance with the scheme and have not yet been appropriated to an individual; and

(b)any rights exercisable by those trustees by virtue of that interest.

Section 186.

SCHEDULE 10FURTHER PROVISIONS RELATING TO PROFIT SHARING SCHEMES

Limitations on contractual obligations of participants

1(1)Any obligation placed on the participant by virtue of paragraph 2(2) of Schedule 9 shall not prevent the participant from—

(a)directing the trustees to accept an offer for any of his shares (“the original shares”) if the acceptance or agreement will result in a new holding being equated with the original shares for the purposes of capital gains tax; or

(b)directing the trustees to agree to a transaction affecting his shares or such of them as are of a particular class, if the transaction would be entered into pursuant to a compromise, arrangement or scheme applicable to or affecting—

(i)all the ordinary share capital of the company in question or, as the case may be, all the shares of the class in question; or

(ii)all the shares, or all the shares of the class in question, which are held by a class of shareholders identified otherwise than by reference to their employment or their participation in an approved scheme; or

(c)directing the trustees to accept an offer of cash, with or without other assets, for his shares if the offer forms part of a general offer which is made to holders of shares of the same class as his or of shares in the same company and which is made in the first instance on a condition such that if it is satisfied the person making the offer will have control of that company, within the meaning of section 416; or

(d)agreeing after the expiry of the period of retention to sell the beneficial interest in his shares to the trustees for the same consideration as, in accordance with sub-paragraph (d) of paragraph 2(2) of Schedule 9, would be required to be obtained for the shares themselves.

(2)No obligation placed on the participant by virtue of paragraph 2(2)(c) of Schedule 9 shall be construed as binding his personal representatives to pay any sum to the trustees.

(3)If, in breach of his obligation under paragraph 2(2)(b) of Schedule 9 a participant assigns, charges or otherwise disposes of the beneficial interest in any of his shares, then, as respects those shares, he shall be treated for the purposes of the relevant provisions as if at the time they were appropriated to him he was ineligible to participate in the scheme; and paragraph 6 below shall apply accordingly.

The period of retention

2For the purposes of any of the relevant provisions, “the period of retention”, in relation to any of a participant’s shares, means the period beginning on the date on which they are appropriated to him and ending on the second anniversary of that date or, if it is earlier—

(a)the date on which the participant ceases to be a director or employee of the grantor or, in the case of a group scheme, a participating company by reason of injury or disability or on account of his being dismissed by reason of redundancy, within the meaning of the [1978 c. 44.] Employment Protection (Consolidation) Act 1978 or the [1965 c. 19 (N.I.).] Contracts of Employment and Redundancy Payments Act (Northern Ireland) 1965; or

(b)the date on which the participant reaches pensionable age; or

(c)the date of the participant’s death;

(d)in a case where the participant’s shares are redeemable shares in a workers' cooperative, the date on which the participant ceases to be employed by, or by a subsidiary of, the cooperative.

For the purposes of sub-paragraph (a) above, in the case of a group scheme, the participant shall not be treated as ceasing to be a director or employee of a participating company until such time as he is no longer a director or employee of any of the participating companies.

The appropriate percentage

3Subject to paragraph 6(4) below, for the purposes of any of the relevant provisions charging an individual to income tax under Schedule E by reason of the occurrence of an event relating to any of his shares, any reference to “the appropriate percentage” in relation to those shares shall be determined according to the time of that event, as follows—

(a)if the event occurs before the fourth anniversary of the date on which the shares were appropriated to the participant and paragraph (c) below does not apply, the appropriate percentage is 100 per cent.;

(b)if the event occurs on or after the fourth anniversary and before the fifth anniversary of the date on which the shares were appropriated to the participant and paragraph (c) below does not apply, the appropriate percentage is 75 per cent.;

(c)if the participant—

(i)ceases to be a director or employee of the grantor or, in the case of a group scheme, a participating company as mentioned in paragraph 2(a) above, or

(ii)reaches pensionable age,

and the event occurs before the fifth anniversary of the date on which the shares were appropriated to him, the appropriate percentage is 50 per cent.

Capital receipts

4(1)Money or money’s worth is not a capital receipt for the purposes of section 186(3) if or, as the case may be, to the extent that—

(a)it constitutes income in the hands of the recipient for the purposes of income tax; or

(b)it consists of the proceeds of a disposal falling within section 186(4); or

(c)it consists of new shares within the meaning of paragraph 5 below.

(2)If, pursuant to a direction given by or on behalf of the participant or any person in whom the beneficial interest in the participant’s shares is for the time being vested, the trustees—

(a)dispose of some of the rights arising under a rights issue, as defined in section 186(8), and

(b)use the proceeds of that disposal to exercise other such rights,

the money or money’s worth which constitutes the proceeds of that disposal is not a capital receipt for the purposes of section 186(3).

(3)If, apart from this sub-paragraph, the amount or value of a capital receipt would exceed the sum which, immediately before the entitlement to the receipt arose, was the locked-in value of the shares to which the receipt is referable, section 186(3) shall have effect as if the amount or value of the receipt were equal to that locked-in value.

(4)Section 186(3) does not apply in relation to a capital receipt if the entitlement to it arises after the death of the participant to whose shares it is referable.

Company reconstructions

5(1)This paragraph applies where there occurs in relation to any of a participant’s shares (“the original holding”) a transaction which results in a new holding being equated with the original holding for the purposes of capital gains tax; and any such transaction is referred to below as a “company reconstruction”.

(2)Where an issue of shares of any of the following descriptions (in respect of which a charge to income tax arises) is made as part of a company reconstruction, those shares shall be treated for the purposes of this paragraph as not forming part of the new holding, that is to say—

(a)redeemable shares or securities issued as mentioned in section 209(2)(c);

(b)share capital issued in circumstances such that section 210(1) applies; and

(c)share capital to which section 249 applies.

(3)In this paragraph—

• “corresponding shares”, in relation to any new shares, means those shares in respect of which the new shares are issued or which the new shares otherwise represent;

• “new shares” means shares comprised in the new holding which were issued in respect of, or otherwise represent, shares comprised in the original holding; and

• “original holding” has the meaning given by sub-paragraph (1) above.

(4)Subject to the following provisions of this paragraph, in relation to a profit sharing scheme, references in the relevant provisions to a participant’s shares shall be construed, after the time of the company reconstruction, as being or, as the case may be, as including references to any new shares, and for the purposes of the relevant provisions—

(a)a company reconstruction shall be treated as not involving a disposal of shares comprised in the original holding;

(b)the date on which any new shares are to be treated as having been appropriated to the participant shall be that on which the corresponding shares were appropriated; and

(c)the conditions in paragraphs 10 to 12 and 14 of Schedule 9 shall be treated as fulfilled with respect to any new shares if they were (or were treated as) fulfilled with respect to the corresponding shares.

(5)In relation to shares comprised in the new holding, section 186(5) shall apply as if the references in that subsection to the initial market value of the shares were references to their locked-in value immediately after the company reconstruction, which shall be determined as follows—

(a)ascertain the aggregate amount of locked-in value immediately before the reconstruction of those shares comprised in the original holding which had at that time the same locked-in value; and

(b)distribute that amount pro rata among—

(i)such of those shares as remain in the new holding, and

(ii)any new shares in relation to which those shares are the corresponding shares,according to their market value immediately after the date of their reconstruction;

and section 186(5)(a) shall apply only to capital receipts after the date of the reconstruction.

(6)For the purposes of the relevant provisions if, as part of a company reconstruction, trustees become entitled to a capital receipt, their entitlement to the capital receipt shall be taken to arise before the new holding comes into being and, for the purposes of sub-paragraph (5) above, before the date on which the locked-in value of any shares comprised in the original holding falls to be ascertained.

(7)In the context of a new holding, any reference in this paragraph to shares includes securities and rights of any description which form part of the new holding for the purposes of Chapter II of Part IV of the 1979 Act.

Excess or unauthorised shares

6(1)This paragraph applies in any case where—

(a)the total amount of the initial market value of all the shares which are appropriated to an individual in any one year of assessment (whether under a single approved profit sharing scheme or under two or more such schemes) exceeds the relevant amount; or

(b)the trustees of an approved profit sharing scheme appropriate shares to an individual at a time when he is ineligible to participate in the scheme by virtue of paragraph 8 or 35 of Schedule 9.

(2)In this paragraph—

• “excess shares” means any share which caused the relevant amount to be exceeded and any share appropriated after that amount was exceeded; and

• “unauthorised shares” means any share appropriated as mentioned in sub-paragraph (1)(b) above.

(3)For the purposes of sub-paragraph (1)(a) above, if a number of shares is appropriated to an individual at the same time under two or more approved profit sharing schemes, the same proportion of the shares appropriated at that time under each scheme shall be regarded as being appropriated before the relevant amount is exceeded.

(4)For the purposes of any of the relevant provisions charging an individual to income tax under Schedule E by reason of the occurrence of an event relating to any of his shares—

(a)the appropriate percentage in relation to excess or unauthorised shares shall in every case be 100 per cent.; and

(b)without prejudice to section 187(8), the event shall be treated as relating to shares which are not excess or unauthorised shares before shares which are.

(5)Excess or unauthorised shares which have not been disposed of before the release date or, if it is earlier, the date of the death of the participant whose shares they are, shall be treated for the purposes of the relevant provisions as having been disposed of by the trustees immediately before the release date or, as the case may require, the date of the participant’s death, for a consideration equal to their market value at that time.

(6)The locked-in value at any time of any excess or unauthorised shares shall be their market value at that time.

(7)Where there has been a company reconstruction to which paragraph 5 above applies, a new share (within the meaning of that paragraph) shall be treated as an excess or unauthorised share if the corresponding share (within the meaning of that paragraph) or, if there was more than one corresponding share, each of them was an excess or unauthorised share.

P.A.Y.E. deduction of tax

7(1)Subject to sub-paragraphs (4) and (5) below, where the trustees of an approved profit sharing scheme receive a sum of money which constitutes (or forms part of)—

(a)the proceeds of a disposal of shares falling within section 186(4), or

(b)a capital receipt,

in respect of which a participant in the scheme is chargeable to income tax under Schedule E in accordance with section 186, the trustees shall pay out of that sum of money to the company specified in sub-paragraph (3) below an amount equal to that on which income tax is so payable; and the company shall then pay over that amount to the participant but in so doing shall make a P.A.Y.E. deduction.

(2)Where a participant disposes of his beneficial interest in any of his shares to the trustees of the scheme and the trustees are deemed by virtue of section 186(9) to have disposed of the shares in question, this paragraph shall apply as if the consideration payable by the trustees to the participant on the disposal had been received by the trustees as the proceeds of disposal of shares falling within section 186(4).

(3)The company to which the payment mentioned in sub-paragraph (1) above is to be made is the company—

(a)of which the participant is an employee or director at the time the trustees receive the sum of money referred to in that sub-paragraph, and

(b)whose employees are at that time eligible (subject to the terms of the scheme and Schedule 9) to be participants in the approved profit sharing scheme concerned,

and if there is more than one company which falls within paragraphs (a) and (b) above, such one of those companies as the Board may direct.

(4)Where the trustees of an approved profit sharing scheme receive a sum of money to which sub-paragraph (1) above applies but—

(a)there is no company which falls within paragraphs (a) and (b) of sub-paragraph (3) above, or

(b)the Board is of opinion that it is impracticable for the company which falls within those paragraphs (or, as the case may be, any of them) to make a P.A.Y.E. deduction and accordingly direct that this sub-paragraph shall apply,

then, in paying over to the participant the proceeds of the disposal or the capital receipt, the trustees shall make a P.A.Y.E. deduction in respect of an amount equal to that on which income tax is payable as mentioned in sub-paragraph (1) above as if the participant were a former employee of the trustees.

(5)Where the trustees of an approved profit sharing scheme receive a sum of money to which sub-paragraph (1) above applies and the Board direct that this sub-paragraph shall apply—

(a)the trustees shall make the payment mentioned in that sub-paragraph to the company specified in the Board’s direction; and

(b)that company shall pay over that amount to the participant but in so doing shall make a P.A.Y.E. deduction, and for that purpose if the participant is not an employee of that company he shall be treated as a former employee;

but no such direction shall be given except with the consent of the trustees, the company or companies (if any) specified in sub-paragraph (3) above and the company specified in the direction.

(6)Where, in accordance with this paragraph any person is required to make a P.A.Y.E. deduction in respect of any amount, that amount shall be treated for the purposes of section 203 and any regulations made under that section as an amount of income payable to the recipient and assessable to income tax under Schedule E, and, accordingly, such deduction shall be made as is required by those regulations.

(7)Where, in connection with a transfer of a participant’s shares to which sub-paragraph (c) of paragraph 2(2) of Schedule 9 applies, the trustees receive such a sum as is referred to in that sub-paragraph, that sum shall be treated for the purposes of the Income Tax Acts—

(a)as a sum deducted by the trustees pursuant to a requirement to make a P.A.Y.E. deduction under sub-paragraph (4) above; and

(b)as referable to the income tax to which, as a result of the transfer, the participant is chargeable by virtue of section 186(4).

(8)Unless the Board otherwise direct, in the application of this paragraph to a sum of money which constitutes or forms part of the proceeds of a disposal of, or a capital receipt referable to, excess or unauthorised shares (within the meaning of paragraph 6 above), the trustees shall determine the amount of the payment mentioned in sub-paragraph (1) above or, as the case may be, the amount of the P.A.Y.E. deduction to be made under sub-paragraph (4) above as if the shares were not excess or unauthorised shares.

Section 188.

SCHEDULE 11RELIEF AS RESPECTS TAX ON PAYMENTS ON RETIREMENT OR REMOVAL FROM OFFICE OR EMPLOYMENT

PART IGENERAL PROVISIONS

Preliminary

1Relief shall be allowed in accordance with the following provisions of this Schedule in respect of tax chargeable by virtue of section 148, where a claim is made under section 188(6).

2(1)A person shall not be entitled to relief under this Schedule in so far as such relief, together with any personal relief allowed to him, would reduce the amount of income on which he is chargeable below the amount income tax on which he is entitled to charge against any other person, or to deduct, retain or satisfy out of any payment which he is liable to make to any other person.

(2)In sub-paragraph (1) above “personal relief” means relief under Chapter I of Part VII.

Relief by reduction of sums chargeable

3In computing the charge to tax in respect of a payment chargeable to tax under section 148, being a payment made in respect of an office or employment in which the service of the holder includes foreign service, there shall be deducted from the payment a sum which bears to the amount which would be chargeable to tax apart from this paragraph the same proportion as the length of the foreign service bears to the length of the service before the relevant date.

Relief by reduction of tax

4(1)Subject to sub-paragraph (2) below, in the case of any payment in respect of which tax is chargeable under section 148, the following relief shall be allowed by way of deduction from the tax chargeable by virtue of that section, that is to say, there shall be ascertained—

(a)the amount of tax which would be chargeable apart from this paragraph in respect of the income of the holder or past holder of the office or employment for the chargeable period of which the payment is treated as income;

(b)the amount of tax which would have been so chargeable if the payment had not been made;

and the amount to be deducted shall be half the difference between the amount ascertained at (a) and the amount ascertained at (b).

(2)In the case of a payment which exceeds £50,000, this paragraph applies as if it were a payment of £50,000 exactly.

5(1)Subject to sub-paragraph (2) below, in the case of a payment which exceeds £50,000 and in respect of which tax is chargeable under section 148, the following relief shall be allowed by way of deduction from the tax chargeable by virtue of that section, that is to say, there shall be ascertained—

(a)the amount of tax which would be chargeable apart from this paragraph and paragraph 4 above in respect of the income of the holder or past holder of the office or employment for the chargeable period of which the payment is treated as income; and

(b)the amount of tax which would have been so chargeable if the amount of the payment had been £50,000 exactly;

and the amount to be deducted shall be one-quarter of the difference between the amount ascertained at (a) and the amount ascertained at (b).

(2)In the case of a payment which exceeds £75,000, this paragraph applies as if it were a payment of £75,000 exactly.

(3)Any relief allowed by virtue of this paragraph shall be in addition to that allowed by virtue of paragraph 4 above.

6Where tax is chargeable under section 148 in respect of two or more payments to or in respect of the same person in respect of the same office or employment and is so chargeable for the same chargeable period, those payments shall be treated for the purposes of paragraphs 4 and 5 above as a single payment of an amount equal to their aggregate amount.

7Where tax is chargeable under section 148 in respect of two or more payments to or in respect of the same person in respect of different offices or employments and is so chargeable for the same chargeable period, paragraphs 4 to 6 above shall apply as if those payments were made in respect of the same office or employment.

Supplemental

8Any reference in this Schedule to the emoluments of an office or employment is a reference to those emoluments exclusive of any payment chargeable to tax under section 148; and in calculating for any purpose of this Schedule the amount of such emoluments—

(a)there shall be included any balancing charge to which the holder of the office or employment is liable under section 33 of the 1968 Act or under Chapter I of Part III of the [1971 c. 68.] Finance Act 1971 (“the 1971 Act”), and

(b)there shall be deducted any allowances under Chapter II of Part I of the 1968 Act or Chapter I of Part III of the 1971 Act, and any allowances for expenses under section 198 or 201, to which he is entitled,

and any such charges or allowances for a chargeable period shall, for the purpose of ascertaining the amount of the emoluments for any year of service, be treated as accruing from day to day, and shall be apportioned in respect of time accordingly.

9In this Schedule “the relevant date” means, in relation to a payment not being a payment in commutation of annual or other periodical payments, the date of the termination or change in respect of which it is made and, in relation to a payment in commutation of annual or other periodical payments, the date of the termination or change in respect of which those payments would have been made.

10In this Schedule, “foreign service”, in relation to an office or employment, means—

(a)service before the year 1974-75 such that tax was not chargeable in respect of the emoluments of the office or employment—

(i)in the case of the year 1956-57 or any subsequent chargeable period, under Case I of Schedule E;

(ii)in the case of any preceding year of assessment, under Schedule E; or

(b)service after the year 1973-74 such that the emoluments from the office or employment were not chargeable under Case I of Schedule E (or would not have been so chargeable, had there been any) or that a deduction equal to their whole amount was or would have been allowable under paragraph 1 of Schedule 2 to the [1974 c. 30.] Finance Act 1974, paragraph 1 of Schedule 7 to the [1977 c. 36.] Finance Act 1977 or section 193(1) in charging them.

11Any reference in this Schedule to the amount of tax to which a person is or would be chargeable is a reference to the amount of tax to which he is or would be chargeable either by assessment or by deduction.

PART IIPAYMENTS IN PURSUANCE OF PRE-10th MARCH 1981 OBLIGATIONS

12Where a payment is made in pursuance of an obligation incurred before 10th March 1981, the person chargeable to tax in respect of it may, by notice given to the inspector within six years after the year of assessment in which the payment is made, elect that Part I of this Schedule shall have effect in relation to the payment subject to the modifications contained in the following provisions of this Part, and those provisions shall have effect accordingly (and not otherwise).

13The following paragraphs shall be inserted immediately before paragraph 3—

“2AIn computing the charge to tax in respect of a payment chargeable to tax under section 148, not being a payment of compensation for loss of office, there shall be deducted from the payment a sum equal to the amount (if any) by which the standard capital superannuation benefit for the office or employment in respect of which the payment is made exceeds £10,000.

2B(1)In this Schedule “the standard capital superannuation benefit”, in relation to an office or employment, means a sum arrived at as follows, that is to say—

(a)there shall be ascertained the average for one year of the holder’s emoluments from the office or employment for the last three years of his service before the relevant date (or for the whole period of his service if less than three years);

(b)one-twentieth of the amount ascertained at (a) shall be multiplied by the whole number of complete years of the service of the holder in the office or employment; and

(c)there shall be deducted from the product at (b) a sum equal to the amount, or, as the case may be, to the value at the relevant date, of any lump sum (not chargeable to tax) received or receivable by the holder in respect of the office or employment in pursuance of any such scheme or fund as was described in section 221(1) and (2) of the 1970 Act or is described in section 596.

(2)In sub-paragraph (1)(c) above the reference to a lump sum receivable by the holder includes a reference to a lump sum that would be receivable by him if he had exercised or refrained from exercising (with any necessary consent) any option or other right conferred on him by the rules of the scheme or fund.

2CWhere tax is chargeable under section 148 in respect of two or more payments to which paragraph 2A above applies, being payments made to or in respect of the same person in respect of the same office or employment or in respect of different offices or employments held under the same employer or under associated employers, then—

(a)paragraph 2A above shall apply as if those payments were a single payment of an amount equal to their aggregate amount and, where they are made in respect of different offices or employments, as if the standard capital superannuation benefit were an amount equal to the sum of the standard capital superannuation benefits for those offices or employments, and

(b)where the payments are treated as income of different chargeable periods, the relief to be granted under that paragraph in respect of a payment chargeable for any such period shall be the amount by which the relief computed in accordance with the preceding provision in respect of that payment and any payments chargeable for previous chargeable periods exceeds the relief in respect of the last mentioned payments;

and where the standard capital superannuation benefit for an office or employment in respect of which two or more of the payments are made is not the same in relation to each of those payments, it shall be treated for the purpose of this paragraph as equal to the higher or highest of those benefits.”

14In paragraph 3, after the words “from the payment” there shall be inserted the words “(in addition to any deduction allowed under the preceding provisions of this Schedule)”.

15In paragraph 4(1), for the words following sub-pargraph (b) there shall be substituted the following words—

“(c)the difference between the respective amounts of tax which would be so chargeable on the assumptions—

(i)that the appropriate fraction only of the payment (after deducting any relief applicable thereto under the preceding provisions of this Schedule) had been made, and

(ii)that no part of the payment had been made,

and disregarding, in each case, any other emoluments of the office or employment,

and the amount to be deducted shall be the difference between the amount ascertained at (a) and the sum of the amount ascertained at (b) and the appropriate multiple of the difference ascertained at (c).”

16The following paragraphs shall be inserted after paragraph 5—

“5A(1)Where the income of the holder or past holder of the office or employment for the chargeable period of which the payment is treated as income includes income, income tax on which he is entitled to charge against any other person, or to deduct, retain or satisfy out of any payment which he is liable to make to any other person, the amounts referred to in sub-paragraphs (a) to (c) of paragraph 4 above shall be calculated as if that tax were not chargeable in respect of that income.

(2)Where for any year of assessment an individual claims relief under paragraph 4 above, and also under section 550 or Schedule 2, or under both that section and that Schedule, then, in computing the relief under paragraph 4 above, his income shall be deemed to include—

(a)in respect of any amount which would otherwise be included therein by virtue of section 547(1)(a), no greater amount than the appropriate fraction thereof within the meaning of section 550, and

(b)in respect of any chargeable sum within the meaning of Schedule 2 (including two or more sums treated for the purposes of paragraph 3 of that Schedule as one chargeable sum), no greater amount than the balance (if any) of the yearly equivalent thereof remaining after the making of any deduction required by that paragraph.

5BIn this Schedule “the appropriate fraction” (except in paragraph 5A(2)(a)) and “the appropriate multiple”, in relation to any payment, mean respectively—

(a)where the payment is not a payment of compensation for loss of office, one-sixth and six, and

(b)where the payment is a payment of compensation for loss of office, one divided by the relevant number of years of unexpired service, and that number of years,

and for the purposes of this paragraph “the relevant number of years of unexpired service” means the number of complete years taken into account in calculating the amount of the payment, being years for which the holder of the office or employment would have been entitled (otherwise than by virtue of arrangements made in contemplation of his retirement or removal or of any relevant change in the functions or emoluments of the office or employment) to retain the office or employment or its full emoluments, and where the period so taken into account is less than one complete year or exceeds an exact number of years, it shall be treated for the purposes of this paragraph as one complete year or as the next higher number of complete years, as the case may be.”

17The following proviso shall be added at the end of paragraph 6—

“Provided that, where the appropriate fraction and the appropriate multiple are not the same for each of the payments, the calculations of relief under paragraph 4 above shall be made separately in relation to each payment or payments having a different appropriate fraction and multiple, and in any such calculation—

(a)any payment for which the appropriate multiple is lower shall be left out of account for all the purposes of that paragraph, and

(b)in ascertaining the difference at (c) of that paragraph it shall be assumed that the appropriate fraction only of any payment for which the appropriate multiple is higher had been made,

and the relief to be allowed shall be the sum of the reliefs so calculated in respect of the payments respectively.”

18The following words shall be added at the end of paragraph 7—

“and as if any emoluments of any of those offices or employments were emoluments of the same office or employment.”

19The following paragraph shall be inserted after paragraph 8—

“8AIn this Schedule “payment of compensation for loss of office” means a payment made—

(a)in pursuance of an order of a court in proceedings for wrongful dismissal or otherwise for breach of contract of employment, or by way of settlement of such proceedings or of a claim in respect of which such proceedings could have been brought, or

(b)by way of compensation for the extinguishment of any right the infringement of which would be actionable in such proceedings,

and any question whether, and to what extent, a payment is or is not a payment of compensation for loss of office shall be determined according to all the circumstances and not (or not exclusively) by reference to the terms on which it is expressed to be made.”

Section 193.

SCHEDULE 12FOREIGN EARNINGS

1This Schedule shall have effect for the purpose of supplementing the provisions of section 193(1).

Emoluments eligible for relief

2(1)This paragraph has effect where a deduction falls to be allowed under section 193(1) in respect of the emoluments from an employment (“the relevant employment”) for a year of assessment in which the duties of—

(a)the relevant employment; or

(b)any other employment or employments held by the person concerned which are associated with the relevant employment,

are not performed wholly outside the United Kingdom.

(2)The amount of the emoluments from the relevant employment in respect of which such a deduction is allowed for the year of assessment shall not exceed such proportion of the emoluments for that year from the relevant employment and the other employment or employments (if any) as is shown to be reasonable having regard to the nature of and time devoted to the duties performed outside and in the United Kingdom respectively and to all other relevant circumstances.

(3)For the purposes of this paragraph an employment is associated with another if they are with the same person or with persons associated with each other and—

(a)a company is associated with another company if one of them has control of the other within the meaning of section 416 or both of them are under the control within the meaning of that section of the same person or persons,

(b)an individual or partnership is associated with another person (whether or not a company) if one of them has control of the other within the meaning of section 840 or both are under the control within the meaning of that section of the same person or persons;

but paragraph (b) above shall not be construed as requiring an individual to be treated in any circumstances as under the control of another person.

Qualifying periods

3(1)For the purposes of section 193(1) a qualifying period is a period of consecutive days which either—

(a)consists entirely of days of absence from the United Kingdom; or

(b)consists partly of such days and partly of days included by virtue of sub-paragraph (2) below.

(2)Where, in the case of any person, a period consisting entirely of days of absence from the United Kingdom (“the relevant period”) comes to an end and there have previously been one or more qualifying periods, the relevant period and the (or, if more than one, the last) qualifying period together with the intervening days between those periods shall be treated as a single qualifying period provided that—

(a)there are no more than 62 intervening days, and

(b)the number of days in the resulting period which are not days of absence from the United Kingdom does not exceed one-sixth of the total number of days in that period.

(3)For the purposes of section 193(1) the emoluments from an employment attributable to a qualifying period include any emoluments from that employment for a period of leave immediately following that period but not so as to make any emoluments for one year of assessment emoluments for another.

Supplementary

4For the purposes of this Schedule a person shall not be regarded as absent from the United Kingdom on any day unless he is so absent at the end of it.

5Notwithstanding section 132(4)(b), there shall be treated for the purposes of section 193(1) and this Schedule as performed outside the United Kingdom any duties which a person performs on a vessel or aircraft engaged on—

(a)a voyage or journey beginning or ending outside the United Kingdom (but exclusive of any part of it which begins and ends in the United Kingdom); or

(b)any part beginning or ending outside the United Kingdom of a voyage or journey which begins and ends in the United Kingdom;

and for the purposes of this paragraph any area designated under section 1(7) of the [1964 c. 29.] Continental Shelf Act 1964 shall be treated as part of the United Kingdom.

6Where an employment is in substance one the duties of which fall in the year of assessment to be performed in the United Kingdom, then, for the purposes of section 193(1), there shall be treated as so performed any duties performed outside the United Kingdom the performance of which is merely incidental to the performance of other duties in the United Kingdom.

7In this Schedule references to an employment include references to an office.

Section 238(5), 241(4).

SCHEDULE 13COLLECTION OF ADVANCE CORPORATION TAX

Duty to make returns

1(1)A company shall for each of its accounting periods make, in accordance with this Schedule, returns to the collector of the franked payments made and franked investment income received by it in that period and of the advance corporation tax (if any) payable by it in respect of those payments.

(2)A return shall be made for—

(a)each complete quarter falling within the accounting period, that is to say, each of the periods of three months ending with 31st March, 30th June, 30th September or 31st December which falls within that period:

(b)each part of the accounting period which is not a complete quarter and ends on the first (or only), or begins immediately after the last (or only), of those dates which falls within the accounting period;

(c)if none of those dates falls within the accounting period, the whole accounting period.

(3)A return for any period for which a return is required to be made under this paragraph (“a return period”) shall be made within 14 days from the end of that period.

(4)Subject to paragraphs 4(2) and 7(3) below, no return need be made under this Schedule by a company for any period in which it has made no franked payments.

Contents of return

2(1)Subject to paragraph 7(2) below, the return made by a company for any return period shall show—

(a)the amount of the franked payments made by it in that period;

(b)the amount of franked investment income, if any, received by it in that period, and

(c)if any advance corporation tax is payable in respect of those payments, the amount thereof.

(2)The return shall specify whether any amount of franked payments is included under paragraph (a) of sub-paragraph (1) above in consequence of the giving of a notice under section 247(3) and, if so, the amount so included.

(3)For the purposes of paragraph (b) of sub-paragraph (1) above the amount of franked investment income received by a company in a return period shall be treated as including the excess, if any, of—

(a)any surplus of franked investment income carried forward to the accounting period for which the return is made; and

(b)any amount of franked investment income received by the company in that accounting period but before the beginning of the return period,

over the amount of any franked payments made by the company in that accounting period but before the beginning of the return period.

(4)For the purposes of paragraph (c) of sub-paragraph (1) above advance corporation tax shall be payable in respect of franked payments made in a return period if—

(a)the amount shown under paragraph (a) of that sub-paragraph exceeds the amount shown under paragraph (b) of that sub-paragraph, or

(b)no amount is shown under paragraph (b) of that sub-paragraph;

and the amount of that tax shall be calculated at the rate of advance corporation tax in force for the financial year in which the return period ends on an amount which, when that tax is added to it, is equal to that excess or, if no amount is shown under sub-paragraph (1)(b) above, to the amount shown under sub-paragraph (1)(a) above.

Payment of tax

3(1)Subject to paragraph 7(2) below, advance corporation tax in respect of franked payments required to be included in a return under this Schedule shall be due at the time by which the return for that period is to be made, and advance corporation tax so due shall be payable without the making of any assessment.

(2)Advance corporation tax which has become so due may be assessed on the company (whether or not it has been paid when the assessment is made) if that tax, or any part of it, is not paid on or before the due date.

(3)If it appears to the inspector that there is a franked payment which ought to have been and has not been included in a return, or if the inspector is dissatisfied with any return, he may make an assessment on the company to the best of his judgment; and any advance corporation tax due under an assessment made by virtue of this sub-paragraph shall be treated for the purposes of interest on unpaid tax as having been payable at the time when it would have been payable if a correct return had been made.

Receipt of franked investment income after payment of advance corporation tax

4(1)This paragraph shall have effect where—

(a)a return has been made of franked payments made in any return period falling within an accounting period and advance corporation tax has been paid in respect of those payments; and

(b)the company receives franked investment income after the end of the return period but before the end of the accounting period.

(2)The company shall make a return under paragraph 1 above for the return period in which the franked investment income is received whether or not it has made any franked payments in that period, and, subject to sub-paragraph (3) below, shall be entitled to repayment of any advance corporation tax paid (and not repaid) in respect of franked payments made in the accounting period in question.

(3)If no franked payments were made by the company in the return period for which a return is made by virtue of sub-paragraph (2) above the amount of the repayment shall not exceed the amount of the tax credit comprised in the franked investment income received; and in any other case the repayment shall not exceed the amount of the tax credit comprised in so much of that franked investment income, if any, as exceeds the amount of the franked payments made in that return period.

Claims for set-off in respect of franked investment income received by a company

5Where under paragraph 2 or 4 above franked investment income received by a company falls to be taken into account in determining—

(a)whether advance corporation tax is payable or repayable; or

(b)the amount of such tax which is payable or repayable,

the inclusion of that franked investment income in the appropriate return shall be treated as a claim by the company to have it so taken into account, and any such claim shall be supported by such evidence as the inspector may reasonably require.

6(1)Where a claim has been made under paragraph 5 above no proceedings for collecting tax which would fall to be discharged if the claim were allowed shall be instituted pending the final determination of the claim, but this sub-paragraph shall not affect the date when the tax is due.

(2)When the claim is finally determined any tax underpaid in consequence of sub-paragraph (1) above shall be paid.

(3)Where proceedings are instituted for collecting tax assessed, or interest on tax assessed, under any provision of this Schedule, effect shall not be given to any claim made after the institution of the proceedings so as to affect or delay the collection or recovery of the tax charged by the assessment or of interest thereon, until the claim has been finally determined.

(4)When the claim is finally determined any tax overpaid in consequence of sub-paragraph (3) above shall be repaid.

(5)References in this paragraph to proceedings for the collection of tax include references to proceedings by way of distraint or poinding for tax.

Qualifying distributions which are not payments and payments of uncertain nature

7(1)This paragraph applies to—

(a)any qualifying distribution which is not a payment; and

(b)any payment in respect of which the company making it would be liable to pay advance corporation tax if, but only if, it amounted to or involved a qualifying distribution and it is not in the circumstances clear whether or how far it does so.

(2)No amount shall be shown in respect of the qualifying distribution or payment under paragraph 2(1)(a) or (c) above and paragraph 3(1) above shall not apply to the payment of advance corporation tax in respect thereof.

(3)Particulars of the qualifying distribution or payment shall be given separately in the return for the return period in which it is made and if, apart from that distribution or payment, no franked payment is made in that period, a return containing those particulars shall be made for that period under paragraph 1 above.

(4)Any advance corporation tax payable in respect of the qualifying distribution or payment shall be assessed on the company and shall be so assessed without regard to any franked investment income received by the company but—

(a)relief shall be given from the tax assessed (by discharge thereof) to the extent, if any, to which that tax exceeds the tax that would have been payable if the amount of the franked payment comprising the qualifying distribution or payment, calculated on the amount or value thereof shown in the assessment, had been included in the return under sub-paragraph (1)(a) of paragraph 2 above and the tax had been calculated in accordance with sub-paragraph (4) of that paragraph; and

(b)for the purposes of the application of sub-paragraph (3) of that paragraph to any subsequent return period, the amount of that franked payment shall be taken to be the amount so calculated.

Items included in error

8Where any item has been included in a return under this Schedule as a franked payment made or as franked investment income received by a company but that item should have been included in a return or claim under Schedule 16, the inspector may make any such assessments, adjustments or set-offs as may be required for securing that the resulting liabilities to tax (including interest on unpaid tax) whether of the company or of any other person are the same as they would have been if the item had been included in the right return or claim.

Qualifying distribution made otherwise than in an accounting period

9Where a company makes a qualifying distribution on a date which does not fall within an accounting period the company shall make a return of that distribution within 14 days from that date, and the advance corporation tax in respect thereof shall be due at the time by which the return is to be made, except where the distribution is not a payment in which case the advance corporation tax shall be assessed on the company.

Assessments and due date of tax

10(1)All the provisions of the Corporation Tax Acts as to the time within which an assessment may be made, so far as they refer or relate to the accounting period for which an assessment is made, or the accounting period to which an assessment relates, shall apply in relation to an assessment under this Schedule notwithstanding that, under this Schedule, the assessment may be said to relate to a quarter or other period which is not an accounting period; and the provisions of sections 36 and 39 of the Management Act as to the circumstances in which an assessment may be made out of time shall apply accordingly on the footing that any such assessment relates to the accounting period in which the quarter or other period ends or, in the case of an assessment under paragraph 9 above, to an accounting period ending on the date on which the distribution is made.

(2)Advance corporation tax assessed on a company under this Schedule shall be due within 14 days after the issue of the notice of assessment (unless due earlier under paragraph 3(1) or 9 above).

(3)Sub-paragraph (2) above has effect subject to any appeal against the assessment, but no such appeal shall affect the date when tax is due under paragraph 3(1) or 9 above.

(4)On the determination of an appeal against an assessment under this Schedule any tax overpaid shall be repaid.

(5)Any tax assessable under any one or more of the provisions of this Schedule may be included in one assessment if the tax so included is all due on the same date.

Section 266(12).

SCHEDULE 14PROVISIONS ANCILLARY TO SECTION 266

PART IMODIFICATION OF SECTION 266 IN CERTAIN CASES

Husband and wife

1(1)The references in section 266 to an individual’s spouse shall include any person who was that individual’s spouse at the time the insurance or contract was made, unless the marriage was dissolved before 6th April 1979.

(2)Where an election under section 287 is in force, the relief to which either the husband or the wife is entitled under section 266 in respect of an insurance or contract on the life of the other or made by the other shall not be affected by section 287(4), (5) or (6).

(3)Where throughout a year of assessment a woman is a married woman living with her husband, then—

(a)if no election under section 283 is in force, section 274 and paragraph 6 below shall apply as if any relief to which the wife is entitled under section 266 were relief to which the husband is entitled; and

(b)if such an election is in force, section 274 and paragraph 6 below shall apply separately to the amounts paid by each of them, but as if for the limit specified in that section there were substituted, in relation to each of them, a limit of £750 or one-twelfth of their total income, whichever is the greater, plus any amount by which the payments in respect of which relief can be given to the other fall short of the limit so substituted.

Premiums payable to friendly societies and industrial assurance companies

2(1)This paragraph applies to—

(a)a policy issued in the course of an industrial assurance business; and

(b)a policy issued by a registered friendly society in the course of tax exempt life or endowment business (as defined in section 466).

(2)Subject to paragraph 3(2) below, if a policy to which this paragraph applies was issued before the passing of the [1976 c. 40.] Finance Act 1976 (29th July 1976), section 266 shall have effect in relation to it as if subsections (2)(b), (3)(a), (b) and (d) were omitted; and if a policy to which this paragraph applies was issued after the passing of that Act, subsection (2)(b) of that section shall have effect in relation to it as if it permitted the insurance to be on the life of the individual’s parent or grandparent or, subject to sub-paragraph (3) below, on the life of the individual’s child or grandchild.

(3)Relief may be given in respect of premiums under a policy of insurance on the life of an individual’s child or grandchild which was or is issued after the passing of the [1976 c. 40.] Finance Act 1976 (29th July 1976), as if subsection (3)(d) of section 266 were omitted, but may be given only if the annual amount of the premiums, together with that of any relevant premiums, does not exceed £52 if the policy was issued in respect of an insurance made before 25th March 1982 or £64 in any other case.

(4)For the purposes of sub-paragraph (3) above, a relevant premium, in relation to an insurance made at any time on the life of an individual’s child or grandchild, is any premium under a policy of insurance on the same life, where the insurance is made at the same time or earlier, whether it is made by the individual or any other person.

(5)In this paragraph “child” includes a step-child and an illegitimate child whose parents have married each other after his birth, and “grandchild”, “parent” and “grandparent” have corresponding meanings.

3(1)Where a policy is issued or a contract is made by a registered friendly society or a policy to which paragraph 2 above applies is issued by an industrial assurance company, section 266(4), (5) and (8) shall apply in relation to premiums payable under the policy or contract subject to the following provisions of this paragraph.

(2)References to the deductions authorised under section 266(5) shall be construed as including references to any amount retained by or refunded to the person paying the premium under any scheme made by the society or company in accordance with regulations made under this paragraph.

(3)The appropriate authority may make regulations authorising—

(a)the adoption by registered friendly societies and industrial assurance companies of any prescribed scheme for securing that in the case of policies or contracts to which the scheme applies amounts equal to 15 per cent. of the premiums payable are retained by or refunded to the person paying the premiums or that, in the case of such policies or contracts issued or made before 6th April 1979, the amounts expressed as the amounts of the premiums payable are treated as amounts arrived at by deducting 15 per cent. from the amounts payable and that the amounts of the capital sums assured or guaranteed are treated as correspondingly increased; or

(b)the adoption by any such society or company of any special scheme for that purpose which may, in such circumstances as may be prescribed, be approved by the appropriate authority.

(4)Increases treated as made in pursuance of regulations under this paragraph shall not be treated as variations of a policy or contract and shall be disregarded for the purposes of paragraph 2(3) above, sections 268(6), 460, 461(1) and 464 of, and paragraph 7 of Schedule 15 to, this Act and section 100 of the [1891 c. 39.] Stamp Act 1891 and the heading “Policy of Life Insurance” in Schedule 1 to that Act.

(5)The regulations may include such adaptations and modifications of the enactments relating to friendly societies or industrial assurance companies and such other incidental and supplementary provisions as appear to the appropriate authority necessary or expedient for the purpose of enabling such societies or companies to adopt the schemes authorised by the regulations.

(6)Subsections (4), (5) and (7) to (11) of section 6 of the [1969 c. 19.] Decimal Currency Act 1969 shall, with the necessary modifications, apply in relation to regulations made under this paragraph.

PART IISUPPLEMENTARY PROVISIONS AS TO RELIEF UNDER SECTION 266

4(1)Where it appears to the Board that the relief (if any) to which a person is entitled under section 266 has been exceeded or might be exceeded unless the premiums payable by him under any policy or contract were paid in full, they may, by notice to that person and to the person to whom the payments are made, exclude the application of subsection (5) of that section in relation to any payments due or made after such date as may be specified in the notice and before such date as may be specified in a further notice to those persons.

(2)Where the application of section 266(5) is so excluded in relation to any payments, the relief (if any) to which the person by whom the payments are made is entitled under section 266 shall be given to him under paragraph 6 below.

5Where a person is entitled to relief under section 266 in respect of a payment to which section 595 applies, section 266(5) shall not apply but the like relief shall be given to him under paragraph 6 below.

6(1)Where in any year of assessment the relief to which a person is entitled under section 266, otherwise than in accordance with subsections (6) and (7) of that section, has not been fully given in accordance with that section and the preceding provisions of this Schedule, he may claim relief for the difference, and relief for the difference shall then be given by a payment made by the Board or by discharge or repayment of tax or partly in one such manner and partly in another; and where relief so given to any person exceeds that to which he is entitled under section 266, he shall be liable to make good the excess and an inspector may make such assessments as may in his judgment be required for recovering the excess.

(2)The Management Act shall apply to any assessment under this paragraph as if it were an assessment to tax for the year of assessment in which the relief was given and as if—

(a)the assessment were among those specified in sections 55(1) (recovery of tax not postponed) and 86(2) (interest on overdue tax) of that Act; and

(b)the sum charged by the assessment were tax specified in paragraph 3 of the Table in section 86(4) of that Act (reckonable date).

7(1)The Board may make regulations for carrying into effect section 266(4), (5), (8) and (9) and the preceding provisions of this Schedule and paragraphs 9 and 10 of Schedule 15 (“the relevant provisions”).

(2)Regulations under this paragraph may, without prejudice to the generality of sub-paragraph (1) above, provide—

(a)for the furnishing of such information by persons by whom premiums are payable as may be necessary for determining whether they are entitled to make deductions under section 266(5) and for excluding the operation of that subsection in relation to payments made by persons who fail to comply with the regulations;

(b)for rounding to a multiple of one penny any payment which, after a deduction authorised under section 266(5), is not such a multiple;

(c)for the manner in which claims for the recovery of any sum under section 266(5)(b) may be made;

(d)for the furnishing of such information by persons by or to whom premiums are payable as appears to the Board necessary for deciding such claims and for exercising their powers under paragraph 4 or 6 above; and

(e)for requiring persons to whom premiums are paid to make available for inspection by an officer authorised by the Board such books and other documents in their possession or under their control as may reasonably be required for the purposes of determining whether any information given by those persons for the purposes of the relevant provisions is correct and complete.

(3)The following provisions of the Management Act, that is to say—

(a)section 29(3)(c) (excessive relief);

(b)section 30 (recovery of tax repaid in consequence of fraud or negligence etc.);

(c)section 88 (interest); and

(d)section 95 (incorrect return or accounts);

shall apply in relation to the payment of a sum claimed under section 266(5)(b) to which the claimant was not entitled as if it had been income tax repaid as a relief which was not due.

8(1)A policy of life insurance issued in respect of an insurance made on or before 19th March 1968 shall be treated for the purposes of section 266(3)(b) as issued in respect of one made after that date if varied after that date so as to increase the benefits secured or to extend the term of the insurance.

(2)A variation effected before the end of the [1968 c. 44.] year 1968 shall be disregarded for the purposes of sub-paragraph (1) above if its only effect was to bring into conformity with paragraph 2 of Schedule 9 to the Finance Act 1968 (qualifying conditions for endowment policies, and now re-enacted as paragraph 2 of Schedule 15 to this Act) a policy previously conforming therewith except as respects the amount guaranteed on death, and no increase was made in the premiums payable under the policy.

(3)A policy which was issued in the course of industrial assurance business in respect of an insurance made after 13th March 1984 shall be treated for the purposes of section 266(3)(c) and this paragraph as issued in respect of an insurance made on or before that date if—

(a)the proposal form for the policy was completed on or before that date; and

(b)on or before 31st March 1984 the policy was prepared for issue by the company or society concerned; and

(c)on or before 31st March 1984 and in accordance with the normal business practice of the company or society a permanent record of the preparation of the policy was made in any book or by any other means kept or instituted by the company or society for the purpose.

(4)For the purposes of section 266(3)(c) a policy of life insurance which was issued in respect of an insurance made on or before 13th March 1984 shall be treated as issued in respect of an insurance made after that date if the policy is varied after that date so as to increase the benefits secured or to extend the term of the insurance.

(5)If a policy of life insurance which was issued as mentioned in sub-paragraph (4) above confers on the person to whom it was issued an option to have another policy substituted for it or to have any of its terms changed, then, for the purposes of that sub-paragraph and section 266(3)(c), any change in the terms of the policy which is made in pursuance of the option shall be deemed to be a variation of the policy.

(6)In any case where—

(a)one policy is replaced by another in such circumstances that the provisions of paragraph 20 of Schedule 15 apply; and

(b)the earlier policy was issued in respect of an insurance made on or before 13th March 1984; and

(c)the later policy confers on the life or lives assured thereby benefits which are substantially equivalent to those which would have been enjoyed by the life or lives assured under the earlier policy, if that policy had continued in force;

then, for the purposes of section 266(3)(c), the insurance in respect of which the later policy is issued shall be deemed to have been made before 13th March 1984; and in this sub-paragraph “the earlier policy” and “the later policy” have the same meaning as in paragraph 20 of Schedule 15.

(7)In any case where—

(a)there is a substitution of policies falling within paragraph 25(1) or (3) of Schedule 15; and

(b)the old policy was issued in respect of an insurance made on or before 13th March 1984;

then, for the purposes of section 266(3)(c), the insurance in respect of which the new policy is issued shall be deemed to have been made before 13th March 1984; and in this sub-paragraph “the old policy” and “the new policy” have the same meaning as in paragraph 17 of Schedule 15.

Section 267.

SCHEDULE 15QUALIFYING POLICIES

PART IQUALIFYING CONDITIONS

General rules applicable to whole life and term assurances

1(1)Subject to the following provisions of this Part of this Schedule, if a policy secures a capital sum which is payable only on death, or one payable either on death or on earlier disability, it is a qualifying policy if—

(a)it satisfies the conditions appropriate to it under sub-paragraphs (2) to (5) below, and

(b)except to the extent permitted by sub-paragraph (7) below, it does not secure any other benefits.

(2)If the capital sum referred to in sub-paragraph (1) above is payable whenever the event in question happens, or if it happens at any time during the life of a specified person—

(a)the premiums under the policy must be payable at yearly or shorter intervals, and either—

(i)until the happening of the event or, as the case may require, until the happening of the event or the earlier death of the specified person, or

(ii)until the time referred to in sub-paragraph (i) above or the earlier expiry of a specified period ending not earlier than ten years after the making of the insurance; and

(b)the total premiums payable in any period of 12 months must not exceed—

(i)twice the amount of the total premiums payable in any other such period, or

(ii)one-eighth of the total premiums which would be payable if the policy were to continue in force for a period of ten years from the making of the insurance, or, in a case falling within sub-paragraph (ii) of paragraph (a) above, until the end of the period referred to in that sub-paragraph.

(3)If the capital sum referred to in sub-paragraph (1) above is payable only if the event in question happens before the expiry of a specified term ending more than ten years after the making of the insurance, or only if it happens both before the expiry of such a term and during the life of a specified person—

(a)the premiums under the policy must be payable at yearly or shorter intervals, and either—

(i)until the happening of the event or the earlier expiry of that term or, as the case may require, until the happening of the event or, if earlier, the expiry of the term or the death of the specified person, or

(ii)as in sub-paragraph (i) above, but with the substitution for references to the term of references to a specified shorter period being one ending not earlier than ten years after the making of the insurance or, if sooner, the expiry of three-quarters of that term; and

(b)the total premiums payable in any period of 12 months must not exceed—

(i)twice the amount of the total premiums payable in any other such period, or

(ii)one-eighth of the total premiums which would be payable if the policy were to continue in force for the term referred to in sub-paragraph (i) of paragraph (a) above, or, as the case may require, for the shorter period referred to in sub-paragraph (ii) of that paragraph.

(4)If the capital sum referred to in sub-paragraph (1) above is payable only if the event in question happens before the expiry of a specified term ending not more than ten years after the making of the insurance, or only if it happens both before the expiry of such a term and during the life of a specified person, the policy must provide that any payment made by reason of its surrender during the period is not to exceed the total premiums previously paid under the policy.

(5)Except where—

(a)the capital sum referred to in sub-paragraph (1) above is payable only in the circumstances mentioned in sub-paragraph (3) or (4) above; and

(b)the policy does not provide for any payment on the surrender in whole or in part of the rights conferred by it; and

(c)the specified term mentioned in sub-paragraph (3) or, as the case may be, (4) above ends at or before the time when the person whose life is insured attains the age of 75 years;

the capital sum, so far as payable on death, must not be less than 75 per cent. of the total premiums that would be payable if the death occurred at the age of 75 years, the age being, if the sum is payable on the death of the first to die of two persons, that of the older of them, if on the death of the survivor of them, that of the younger of them, and in any other case, that of the person on whose death it is payable; and if the policy does not secure a capital sum in the event of death occurring before the age of 16 or some lower age, it must not provide for the payment in that event of an amount exceeding the total premiums previously paid under it.

(6)In determining for the purposes of sub-paragraph (5) above whether a capital sum is less than 75 per cent. of the total premiums, any amount included in the premiums by reason of their being payable otherwise than annually shall be disregarded, and if the policy is issued in the course of an industrial assurance business, 10 per cent. of the premiums payable under the policy shall be treated as so included.

(7)Notwithstanding sub-paragraph (1)(b) above, if a policy secures a capital sum payable only on death, it may also secure benefits (including benefits of a capital nature) to be provided in the event of a person’s disability; and no policy is to be regarded for the purposes of that provision as securing other benefits by reason only of the fact that—

(a)it confers a right to participate in profits, or

(b)it provides for a payment on the surrender in whole or in part of the rights conferred by the policy, or

(c)it gives an option to receive payments by way of annuity, or

(d)it makes provision for the waiver of premiums by reason of a person’s disability, or for the effecting of a further insurance or insurances without the production of evidence of insurability.

(8)In applying sub-paragraph (2) or (3) above to any policy—

(a)no account shall be taken of any provision for the waiver of premiums by reason of a person’s disability, and

(b)if the term of the policy runs from a date earlier, but not more than three months earlier, than the making of the insurance, the insurance shall be treated as having been made on that date, and any premium paid in respect of the period before the making of the insurance, or in respect of that period and a subsequent period, as having been payable on that date.

(9)References in this paragraph to a capital sum payable on any event include references to any capital sum, or series of capital sums, payable by reason of that event but where what is so payable is either an amount consisting of one sum or an amount made up of two or more sums, the 75 per cent. mentioned in sub-paragraph (5) above shall be compared with the smaller or smallest amount so payable; and a policy secures a capital sum payable either on death or on disability notwithstanding that the amount payable may vary with the event.

(10)In relation to any policy issued in respect of an insurance made before 1st April 1976 this paragraph shall have effect—

(a)with the omission of sub-paragraphs (5) and (6) and in sub-paragraph (9) the words “but where what is so payable is either an amount consisting of one sum or an amount made up of two or more sums, the 75 per cent. mentioned in sub-paragraph (5) above shall be compared with the smaller or smallest amount so payable”; and

(b)with the substitution, for sub-paragraph (7)(b), of—

“(b)it carries a guaranteed surrender value;”.

General rules applicable to endowment assurances

2(1)Subject to the following provisions of this Part of this Schedule, a policy which secures a capital sum payable either on survival for a specified term or on earlier death, or earlier death or disability, including a policy securing the sum on death only if occurring after the attainment of a specified age not exceeding 16, is a qualifying policy if it satisfies the following conditions—

(a)the term must be one ending not earlier than ten years after the making of the insurance;

(b)premiums must be payable under the policy at yearly or shorter intervals, and—

(i)until the happening of the event in question; or

(ii)until the happening of that event, or the earlier expiry of a specified period shorter than the term but also ending not earlier than ten years after the making of the insurance; or

(iii)if the policy is to lapse on the death of a specified person, until one of those times or the policy’s earlier lapse;

(c)the total premiums payable under the policy in any period of 12 months must not exceed—

(i)twice the amount of the total premiums payable in any other such period, or

(ii)one-eighth of the total premiums which would be payable if the policy were to run for the specified term;

(d)the policy—

(i)must guarantee that the capital sum payable on death, or on death occurring after the attainment of a specified age not exceeding 16, will, whenever that event may happen, be equal to 75 per cent. at least of the total premiums which would be payable if the policy were to run for that term, disregarding any amounts included in those premiums by reason of their being payable otherwise than annually, except that if, at the beginning of that term, the age of the person concerned exceeds 55 years, the capital sum so guaranteed may, for each year of the excess, be less by 2 per cent. of that total than 75 per cent. thereof, the person concerned being, if the capital sum is payable on the death of the first to die of two persons, the older of them, if on the death of the survivor of them, the younger of them and in any other case the person on whose death it is payable; and

(ii)if it is a policy which does not secure a capital sum in the event of death before the attainment of a specified age not exceeding 16, must not provide for the payment in that event of an amount exceeding the total premiums previously paid thereunder; and

(e)the policy must not secure the provision (except by surrender in whole or in part of the rights conferred by the policy) at any time before the happening of the event in question of any benefit of a capital nature other than a payment falling within paragraph (d)(ii) above, or benefits attributable to a right to participate in profits or arising by reason of a person’s disability.

(2)For the purposes of sub-paragraph (1)(d)(i) above, 10 per cent. of the premiums payable under any policy issued in the course of industrial assurance business shall be treated as attributable to the fact that they are not paid annually.

(3)Sub-paragraphs (8) and (9) of paragraph 1 above shall, with any necessary modifications, have effect for the purposes of this paragraph as they have effect for the purposes of that paragraph.

(4)In relation to any policy issued in respect of an insurance made before 1st April 1976 this paragraph shall have effect with the omission in sub-paragraph (1)(d)(i) of the words from “except that if” to the end, and in sub-paragraph (1)(e) of the words “in whole or in part of the rights conferred by the policy”.

Special types of policy

(i) Friendly Society policies

3(1)Paragraphs 1 and 2 above do not apply to a policy issued by a registered friendly society in the course of tax exempt life or endowment business in respect of an insurance made or varied on or after 19th March 1985, but such a policy shall not be a qualifying policy unless—

(a)in the case of a policy for the assurance of a gross sum or annuity, the conditions in sub-paragraph (2) are fulfilled with respect to it; and

(b)in the case of a policy for the assurance of a gross sum, the conditions in sub-paragraphs (5) to (11) below are fulfilled with respect to it; and

(c)in the case of a policy issued by a new society, the contract for the insurance was made by a member of the society over the age of 18.

(2)The conditions referred to in sub-paragraph (1) above are as follows—

(a)subject to sub-paragraph (3) below, the period (the “term” of the policy) between—

(i)the making of the insurance or, where the contract provides for the term to begin on a date not more than three months earlier than the making of the insurance, that date, and

(ii)the time when the gross sum assured is payable (or, as the case may be, when the first instalment of the annuity is payable),

shall be not less than ten years, and must not, on any contingency other than the death, or retirement on grounds of ill health, of the person liable to pay the premiums or whose life is insured, become less than ten years;

(b)subject to sub-paragraph (4) below, the premiums payable under the policy shall be premiums of equal or rateable amounts payable at yearly or shorter intervals over the whole term of the policy of assurance, or over the whole term of the policy of assurance apart from any period after the person liable to pay the premiums or whose life is insured attains a specified age, being an age which he will attain at a time not less than ten years after the beginning of the term of the policy of assurance;

(c)until the expiration of three-quarters of the term of the policy of assurance, or of ten years from the beginning of the term, whichever is the shorter, the policy may not be surrendered to the friendly society for consideration exceeding the amount of the premiums paid, except that if a surrender value is prescribed by section 24 of the [1923 c. 8] Industrial Assurance Act 1923 or section 3 of the [1929 c. 28] Industrial Assurance and Friendly Societies Act 1929 or by Article 30 or 35 of and Schedule 7 to the [S.I. 1979/1574 (N.I. 13).] Industrial Assurance (Northern Ireland) Order 1979, the limit on the consideration shall be either that value or the amount of the premiums paid whichever is the greater.

(3)Notwithstanding sub-paragraph (2)(a) above, the policy—

(a)may provide for a payment to a person of an age not exceeding 18 years at any time not less than five years from the beginning of the term of the policy if the premium or premiums payable in any period of 12 months in the term of the policy do not exceed £13;

(b)may provide for a payment at any time not less than five years from the beginning of the term of the policy, if it is one of a series of payments falling due at intervals of not less than five years, and the amount of any payment, other than the final payment, does not exceed four-fifths of the premiums paid in the interval before its payment.

For the purposes of paragraph (a) above, if the term begins on a date earlier than the making of the insurance, any premium paid in respect of a period before the making of the insurance, or in respect of that period and a subsequent period, shall be treated as having been payable on that date.

(4)Notwithstanding sub-paragraph (2)(b) above, the policy—

(a)may allow a payment at any time after the expiration of one-half of the term of the policy of assurance, or of ten years from the beginning of the term, whichever is the earlier, being a payment in commutation of the liability to pay premiums falling due after that time;

(b)may allow the person liable to pay the premiums to commute any liability for premiums where he ceases to reside in the United Kingdom or gives satisfactory proof of intention to emigrate;

(c)may allow any liability for premiums to be discharged in consideration of surrendering a sum which has become payable on the maturity of any other policy of assurance issued by the same friendly society to the person liable to pay the premiums, or to his parent, where that other policy of assurance is issued as part of the friendly society’s tax exempt life or endowment business; and

(d)may make provision for the waiver of premiums by reason of a person’s disability.

(5)Where the policy secures a capital sum which is payable only on death or only on death occurring after the attainment of a specified age not exceeding 16, that capital sum must be not less than 75 per cent. of the total premiums which would be payable if the death of the relevant beneficiary occurred at the age of 75.

(6)Where the policy secures a capital sum which is payable only on survival for a specified term, that capital sum must be not less than 75 per cent. of the total premiums which would be payable if the policy were to run for that term.

(7)Where the policy secures a capital sum which is payable on survival for a specified term or on earlier death, or on earlier death or disability (including a policy securing the sum on death only if occurring after the attainment of a specified age not exceeding 16), the capital sum payable on death, whenever that event occurs, must be not less than 75 per cent. of the total premiums which would be payable if the policy were to run for that term, except that if, at the beginning of that term, the age of the relevant beneficiary exceeds 55, that capital sum may, for each year of the excess, be less by 2 per cent. of that total than 75 per cent. thereof.

(8)For the purposes of sub-paragraphs (5) to (7) above—

(a)“the relevant beneficiary” means—

(i)if the capital sum concerned is payable on the death of the first to die of two persons, the older of them;

(ii)if that capital sum is payable on the death of the survivor of two persons, the younger of them; and

(iii)in any other case, the person on whose death that capital sum is payable; and

(b)in determining the total premiums payable in any circumstances—

(i)where those premiums are payable otherwise than annually, and the policy is issued by a new society, there shall be disregarded an amount equal to 10 per cent. of those premiums;

(ii)where the policy is issued by a society other than a new society, there shall be disregarded an amount equal to £10 for each year for which account is taken of those premiums; and

(iii)so much of any premium as is charged on the ground that an exceptional risk of death is involved shall be disregarded; and

(c)in determining the capital sum payable on any event, there shall be disregarded any provision of the policy under which, on the ground referred to in paragraph (b)(iii) above, any sum may become chargeable as a debt against that capital sum.

(9)If the policy does not secure a capital sum in the event of death occurring before the age of 16 or some lower age, it must not provide for the payment in that event of an amount exceeding the total premiums previously paid under it.

(10)References in this paragraph to a capital sum payable on any event include references to a capital sum or series of capital sums payable by reason of that event, but where what is so payable is either an amount consisting of one sum or an amount made up of two or more sums, any reference in sub-paragraphs (5) to (7) above to 75 per cent. of the total premiums payable in any circumstances shall be compared with the smaller or smallest amount so payable; and for the purposes of those sub-paragraphs a policy secures a capital sum payable either on death or on disability notwithstanding that the amount may vary with the event.

(11)For the purposes of sub-paragraphs (5) to (7) and (10) above, in the case of a policy which provides for any such payments as are referred to in sub-paragraph (3) above (“interim payments”), the amount of the capital sum which is payable on any event shall be taken to be increased—

(a)in the case of a policy which secures such a capital sum as is referred to in sub-paragraph (5) above, by the total of the interim payments which would be payable if the death of the relevant beneficiary (within the meaning of that sub-paragraph) occurred at the age of 75; and

(b)in the case of a policy which secures such a capital sum as is referred to in sub-paragraph (6) or (7) above, by the total of the interim payments which would be payable if the policy were to run for the specified term referred to in that sub-paragraph.

4(1)The provisions of this paragraph have effect notwithstanding anything in paragraph 3 above.

(2)In determining whether a policy—

(a)which affords provision for sickness or other infirmity (whether bodily or mental), and

(b)which also affords assurance for a gross sum independent of sickness or other infirmity, and

(c)under which not less than 60 per cent. of the amount of the premiums is attributable to the provision referred to in paragraph (a) above,

is a qualifying policy, the conditions referred to in paragraph 3(1)(b) above shall be deemed to be fulfilled with respect to it.

(3)A policy shall cease to be a qualifying policy—

(a)if it falls within sub-paragraph (1) of paragraph 3 above and there is such a variation of its terms that any of the conditions referred to in that sub-paragraph ceases to be fulfilled; or

(b)if—

(i)for any purpose it falls within paragraph (1) of Schedule 1 to the [1974 c. 46.] Friendly Societies Act 1974 or paragraph 1 of Schedule 1 to the [1970 c. 31 (N.I.).] Friendly Societies Act (Northern Ireland) 1970,

(ii)it was issued by a new society, and

(iii)the rights conferred by it are surrendered in whole or in part.

5Section 466 shall apply for the interpretation of paragraphs 3 and 4 above as it applies for the interpretation of sections 460 to 465.

6(1)A policy which was issued by any friendly society, or branch of a friendly society, in the course of tax exempt life or endowment business (as defined in section 466) in respect of insurances made before 19th March 1985 and which has not been varied on or after that date is a qualifying policy notwithstanding that it does not comply with the conditions specified in paragraph 1 or 2 above.

(2)Notwithstanding paragraphs 3 to 5 or sub-paragraph (1) above, if, on or after 19th March 1985, a person becomes in breach of the limits in section 464, the policy effected by that contract which causes those limits to be exceeded shall not be a qualifying policy; and in any case where—

(a)the limits in that section are exceeded as a result of the aggregation of the sums assured or premiums payable under two or more contracts, and

(b)at a time immediately before one of those contracts was entered into (but not immediately after it was entered into) the sums assured by or, as the case may be, the premiums payable under the contract or contracts which were then in existence did not exceed the limits in that section,

only those policies effected by contracts made after that time shall be treated as causing the limits to be exceeded.

(ii) Industrial assurance policies

7(1)A policy issued in the course of an industrial assurance business, and not constituting a qualifying policy by virtue of paragraph 1 or 2 above, is nevertheless a qualifying policy if—

(a)the sums guaranteed by the policy, together with those guaranteed at the time the assurance is made by all other policies issued in the course of such a business to the same person and not constituting qualifying policies apart from this paragraph, do not exceed £1,000;

(b)it satisfies the conditions with respect to premiums specified in paragraph 1(2) above;

(c)except by reason of death or surrender, no capital sum other than one falling within paragraph (d) below can become payable under the policy earlier than ten years after the making of the assurance; and

(d)where the policy provides for the making of a series of payments during its term—

(i)the first such payment is due not earlier than five years after the making of the assurance, and the others, except the final payment, at intervals of not less than five years, and

(ii)the amount of any payment, other than the final payment, does not exceed four-fifths of the premiums paid in the interval before its payment; or

(e)the policy was issued before 6th April 1976, or was issued before 6th April 1979 and is in substantially the same form as policies so issued before 6th April 1976.

(2)For the purposes of this paragraph, the sums guaranteed by a policy do not include any bonuses, or in the case of a policy providing for a series of payments during its term, any of those payments except the first, or any sum payable on death during the term by reference to one or more of those payments except so far as that sum is referable to the first such payment.

8Where a policy issued in respect of an insurance made after 1st April 1976 in the course of an industrial assurance business is not a qualifying policy by virtue of paragraph 1 or 2 above but is a policy with respect to which the conditions in paragraph 7(1)(b) and (c) above are satisfied, it shall be a qualifying policy whether or not the condition in paragraph 7(1)(a) above is satisfied with respect to it; but where that condition is not satisfied, relief under section 266 in respect of premiums paid under the policy shall be given only on such amount (if any) as would have been the amount of those premiums had that condition been satisfied.

(iii) Family income policies and mortgage protection policies

9(1)The following provisions apply to any policy which is not a qualifying policy apart from those provisions, and the benefits secured by which consist of or include the payment on or after a person’s death of—

(a)one capital sum which does not vary according to the date of death, plus a series of capital sums payable if the death occurs during a specified period, or

(b)a capital sum, the amount of which is less if the death occurs in a later part of a specified period than if it occurs in an earlier part of that period.

(2)A policy falling within sub-paragraph (1)(a) above is a qualifying policy if—

(a)it would be one if it did not secure the series of capital sums there referred to, and the premiums payable under the policy were such as would be chargeable if that were in fact the case, and

(b)it would also be one if it secured only that series of sums, and the premiums thereunder were the balance of those actually so payable.

(3)A policy falling within sub-paragraph (1)(b) above is a qualifying policy if—

(a)it would be one if the amount of the capital sum there referred to were equal throughout the period to its smallest amount, and the premiums payable under the policy were such as would be chargeable if that were in fact the case, and

(b)it would also be one if it secured only that capital sum so far as it from time to time exceeds its smallest amount, and the premiums payable thereunder were the balance of those actually so payable.

Other special provisions

(i) Short-term assurances

10A policy which secures a capital sum payable only on death or payable either on death or on earlier disability shall not be a qualifying policy if the capital sum is payable only if the event in question happens before the expiry of a specified term ending less than one year after the making of the insurance.

(ii) Personal accident insurance

11(1)A policy which evidences a contract of insurance to which sub-paragraph (3) below applies shall not be a qualifying policy unless it also evidences a contract falling within Class I or Class III in Schedule 1 to the [1982 c. 50.] Insurance Companies Act 1982.

(2)A policy which evidences a contract of insurance to which sub-paragraph (4) below applies shall not be a qualifying policy unless it also evidences a contract falling within section 83(2)(a) of the [1974 c. 49.] Insurance Companies Act 1974.

(3)This sub-paragraph applies to contracts of insurance issued in respect of insurances made on or after 25th March 1982 against risks of persons dying as a result of an accident or an accident of a specified class, not being contracts which—

(a)are expressed to be in effect for a period of not less than five years or without limit of time; and

(b)either are not expressed to be terminable by the insurer before the expiration of five years from their taking effect or are expressed to be so terminable before the expiration of that period only in special circumstances therein mentioned.

(4)This sub-paragraph applies to contracts of insurance issued in respect of insurances made before 25th March 1982 against risks of persons dying as a result of an accident or an accident of a specified class, not being contracts falling within section 83(2)(b) of the [1974 c. 49.] Insurance Companies Act 1974.

(iii) Exceptional mortality risk

12For the purpose of determining whether any policy is a qualifying policy, there shall be disregarded—

(a)so much of any premium thereunder as is charged on the grounds that an exceptional risk of death is involved; and

(b)any provision under which, on those grounds, any sum may become chargeable as a debt against the capital sum guaranteed by the policy on death.

(iv) Connected policies

13Subject to paragraph 14 below, where the terms of any policy provide that it is to continue in force only so long as another policy does so, neither policy is a qualifying policy unless, if they had constituted together a single policy issued in respect of an insurance made at the time of the insurance in respect of which the first-mentioned policy was issued, that single policy would have been a qualifying policy.

14(1)A policy shall not be a qualifying policy if the policy is connected with another policy and the terms of either policy provide benefits which are greater than would reasonably be expected if any policy connected with it were disregarded.

(2)For the purposes of this paragraph a policy is connected with another policy if they are at any time simultaneously in force and either of them is issued with reference to the other, or with a view to enabling the other to be issued on particular terms or facilitating its being issued on those terms.

(3)In this paragraph “policy” means a policy effected in the course of long term business, as defined in section 1 of the [1982 c. 50.] Insurance Companies Act 1982, and includes any such policy issued outside the United Kingdom.

(4)Where any person issues a policy—

(a)which by virtue of this paragraph is not a qualifying policy, or

(b)the issue of which causes another policy to cease by virtue of this paragraph to be a qualifying policy,

he shall within three months of issuing the policy give notice of that fact to the Board.

(5)The Board may, by notice, require any person who is, or appears to them to be, concerned in the issue of any such policy as is mentioned in sub-paragraph (4) above, to furnish them within such time (not being less than 30 days) as may be specified in the notice with such particulars as they think necessary for the purposes of this paragraph and as the person to whom the notice is addressed has or can reasonably obtain; but no solicitor shall be deemed for the purposes of this sub-paragraph to have been concerned in the issue of a policy by reason only that he has given professional advice to a client in connection with that policy.

(6)This paragraph shall apply to policies issued in respect of insurances made before 23rd August 1983 in accordance with sub-paragraphs (7) and (8) below.

(7)Where—

(a)a policy is issued in respect of an insurance made before 23rd August 1983, and

(b)a policy is issued in respect of an insurance made on or after that date which is connected with it within the meaning of this paragraph,

sub-paragraphs (1) to (6) above shall apply to the policy issued in respect of an insurance made before that date.

(8)Sub-paragraphs (1) to (7) above shall apply to policies issued in respect of insurances made before 23rd August 1983 (other than policies which, disregarding this paragraph, fall within sub-paragraph (7)) with the substitution—

(a)in sub-paragraph (1) for the words “and the terms of either policy” of the words “the terms of which”;

(b)in sub-paragraph (3) for the words from “long term business” to “1982” of the words “ordinary long-term insurance business within the meaning of section 83(2) of the Insurance Companies Act 1974 (as enacted) or, in relation to a policy made after 25th March 1982, section 96(1) of the Insurance Companies Act 1982”; and

(c)in sub-paragraphs (6) and (7) for the words “23rd August 1983” of the words “26th March 1980”.

(9)In any case where payments made—

(a)after 22nd August 1983, and

(b)by way of premium or other consideration in respect of a policy issued in respect of an insurance made before that date,

exceed £5 in any period of 12 months, the policy shall be treated for the purposes of this paragraph as if it were issued in respect of an insurance made after 22nd August 1983; but nothing in this paragraph shall apply with respect to any premium paid in respect of it before that date.

(10)Sub-paragraphs (8) and (9) above do not apply in relation to policies issued in the course of industrial assurance business.

(v) Premiums paid out of sums due under previous policies

15(1)Where, in the case of a policy under which a single premium only is payable, liability for the payment of that premium is discharged in accordance with sub-paragraph (2) below, the policy is a qualifying policy notwithstanding anything in paragraph 1(2) or (3) or paragraph 2(1)(b) or (c) above; and where, in the case of any other policy, liability for the payment of the first premium thereunder, or of any part of that premium, is so discharged, the premium or part shall be disregarded for the purposes of paragraphs 1(2)(b) and (3)(b) and 2(1)(c) above.

(2)Liability for the payment of a premium is discharged in accordance with this sub-paragraph if it is discharged by the retention by the company with which the insurance is made of the whole or a part of any sum which has become payable on the maturity of, or on the surrender more than ten years after its issue of the rights conferred by, a policy—

(a)previously issued by the company to the person making the insurance, or, if it is made by trustees, to them or any predecessors in office; or

(b)issued by the company when the person making the insurance was an infant, and securing a capital sum payable either on a specified date falling not more than one month after his attaining 25, or on the anniversary of the policy immediately following his attainment of that age,

being, unless it is a policy falling within paragraph (b) above and the premium in question is a first premium only, a policy which was itself a qualifying policy, or which would have been a qualifying policy had it been issued in respect of an insurance made after 19th March 1968.

(iv) Additional premiums under section 72(9) of the [1984 c. 43.] Finance Act 1984

16In determining whether a policy is a qualifying policy, no account shall be taken of any amount recovered, as if it were an additional premium, in pursuance of section 72(9) of the Finance Act 1984.

(vii) Substitutions and variations

17(1)Subject to paragraph 19 below, where one policy (“the new policy”) is issued in substitution for, or on the maturity of and in consequence of an option conferred by, another policy (“the old policy”), the question whether the new policy is a qualifying policy shall, to the extent provided by the rules in sub-paragraph (2) below, be determined by reference to both policies.

(2)The rules (for the purposes of which, the question whether the old policy was a qualifying policy shall be determined in accordance with this Part of this Schedule, whatever the date of the insurance in respect of which it was issued), are as follows—

(a)if the new policy would apart from this paragraph be a qualifying policy but the old policy was, the new policy is not a qualifying policy unless the person making the insurance in respect of which it is issued was an infant when the old policy was issued, and the old policy was one securing a capital sum payable either on a specified date falling not later than one month after his attaining 25 or on the anniversary of the policy immediately following his attainment of that age;

(b)if the new policy would apart from this paragraph be a qualifying policy, and the old policy was also a qualifying policy, the new policy is a qualifying policy unless—

(i)it takes effect before the expiry of ten years from the making of the insurance in respect of which the old policy was issued, and

(ii)subject to sub-paragraph (4) below, the highest total of premiums payable thereunder for any period of 12 months expiring before that time is less than one half of the highest total paid for any period of 12 months under the old policy, or under any related policy issued less than ten years before the issue of the new policy (“related policy” meaning any policy in relation to which the old policy was a new policy within the meaning of this paragraph, any policy in relation to which that policy was such a policy, and so on);

(c)if the new policy would not apart from this paragraph be a qualifying policy, and would fail to be so by reason only of paragraph 1(2) or (3) or 2(1)(a), (b) or (c) above, it is nevertheless a qualifying policy if the old policy was a qualifying policy and—

(i)the old policy was issued in respect of an insurance made more than ten years before the taking effect of the new policy, and, subject to sub-paragraph (4) below, the premiums payable for any period of 12 months under the new policy do not exceed the smallest total paid for any such period under the old policy; or

(ii)the old policy was issued outside the United Kingdom, and the circumstances are as specified in sub-paragraph (3) below.

(3)The circumstances are—

(a)where the new policy referred to in sub-paragraph (2)(c) above is issued after 22nd February 1984, that the policy holder under the new policy became resident in the United Kingdom during the 12 months ending with the date of its issue;

(b)where paragraph (a) above does not apply, that the person in respect of whom the new insurance is made became resident in the United Kingdom during the 12 months ending with the date of its issue;

(c)that the issuing company certify that the new policy is in substitution for the old, and that the old was issued either by a branch or agency of theirs outside the United Kingdom or by a company outside the United Kingdom with whom they have arrangements for the issue of policies in substitution for ones held by persons coming to the United Kingdom; and

(d)that the new policy confers on the holder benefits which are substantially equivalent to those which he would have enjoyed if the old policy had continued in force.

(4)Where the new policy is one issued on or after 1st April 1976 then, in determining under sub-paragraph (2) above whether that policy would or would not (apart from sub-paragraphs (1) to (3) above) be a qualifying policy, there shall be left out of account so much of the first premium payable thereunder as is accounted for by the value of the old policy.

18(1)Subject to paragraph 19 below and to the provisions of this paragraph, where the terms of a policy are varied, the question whether the policy after the variation is a qualifying policy shall be determined in accordance with the rules in paragraph 17 above, with references in those rules to the new policy and the old policy construed for that purpose as references respectively to the policy after the variation and the policy before the variation, and with any other necessary modifications.

(2)In applying any of those rules by virtue of this paragraph, the question whether a policy after a variation would be a qualifying policy apart from the rule shall be determined as if any reference in paragraphs 1 to 9, 12 and 13 above to the making of an insurance, or to a policy’s term, were a reference to the taking effect of the variation or, as the case may be, to the term of the policy as from the variation.

(3)This paragraph does not apply by reason of—

(a)any variation which, whether or not of a purely formal character, does not affect the terms of a policy in any significant respect, or

(b)any variation effected before the end of the year 1968 for the sole purpose of converting into a qualifying policy any policy issued (but not one treated, by virtue of paragraph 8(1) and (2) of Schedule 14, as issued) in respect of an insurance made after 19th March 1968.

19(1)The following provisions of this paragraph shall have effect for determining for the purposes of this Schedule whether a policy has been varied or whether a policy which confers on the person to whom it is issued an option to have another policy substituted for it or to have any of its terms changed is a qualifying policy.

(2)If the policy is one issued in respect of an insurance made before 1st April 1976—

(a)any such option shall, until it is exercised, be disregarded in determining whether the policy is a qualifying policy; and

(b)any change in the terms of the policy which is made in pursuance of such an option shall be deemed to be a variation of the policy.

(3)If the policy is one issued in respect of an insurance made on or after 1st April 1976, the policy shall not be a qualifying policy unless it satisfies the conditions applicable to it under this Schedule before any such option is exercised and—

(a)each policy that might be substituted for it in pursuance of such an option would satisfy those conditions under the rules of paragraph 17 above; and

(b)the policy would continue to satisfy those conditions under the rules of that paragraph as applied by paragraph 18 above if each or any of the changes capable of being made in pursuance of such an option had been made and were treated as a variation;

and it shall not be treated as being varied by reason only of any change made in pursuance of such an option.

20(1)Where, as a result of a variation in the life or lives for the time being assured, a qualifying policy (“the earlier policy”) is replaced by a new policy (“the later policy”) which in accordance with the rules in paragraph 17 above is also a qualifying policy, then, subject to sub-paragraph (2) below, for the purposes of—

(a)sections 268 to 270 and 540 and 541; and

(b)any second or subsequent application of this paragraph;

the later policy and the earlier policy shall be treated as a single policy issued in respect of an insurance made at the time of the making of the insurance in respect of which the earlier policy was issued; and, accordingly, so long as the later policy continues to be a qualifying policy, the single policy shall also be treated as a qualifying policy for those purposes.

(2)Sub-paragraph (1) above does not apply unless—

(a)any sum which would otherwise become payable by the insurer on or in connection with the coming to an end of the earlier policy is retained by the insurer and applied in the discharge of some or all of the liability for any premium becoming due under the later policy; and

(b)no consideration in money or money’s worth (other than the benefits for which provision is made by the later policy) is receivable by any person on or in connection with the coming to an end of the earlier policy or the coming into existence of the later policy.

(3)Any sum which is applied as mentioned in sub-paragraph (2)(a) above—

(a)shall be left out of account in determining, for the purposes of sections 268 to 270 and 540 and 541, the total amount which at any time has been paid by way of premiums under the single policy referred to in sub-paragraph (1) above; and

(b)shall not be regarded, in relation to that single policy, as a relevant capital payment, within the meaning of section 541.

(4)This paragraph applies where the later policy comes into existence on or after 25th March 1982.

PART IICERTIFICATION OF QUALIFYING POLICIES

Policies issued in respect of insurances made on or after 1st April 1976 or varied on or after that date

21(1)A policy of life insurance issued in respect of an insurance made on or after 1st April 1976 or varied on or after that date (other than one to which paragraph 22(2)(c) below applies) shall not be a qualifying policy unless—

(a)it is certified by the Board as being a qualifying policy; or

(b)it conforms with a form which at the time the policy is issued or varied is either—

(i)a standard form certified by the Board as a standard form of qualifying policy; or

(ii)a form varying from a standard form so certified in no other respect than by making such additions thereto as are, at the time the policy is issued, certified by the Board as compatible with a qualifying policy when made to that standard form and satisfy any conditions subject to which they are so certified;

and any certificate issued in pursuance of paragraph (a) above shall be conclusive evidence that the policy is a qualifying policy.

(2)In issuing a certificate in pursuance of sub-paragraph (1) above the Board may disregard any provision of the policy, standard form or addition which appears to them insignificant.

(3)Where the Board refuse to certify a policy as being a qualifying policy, the person to whom it is issued may appeal to the General Commissioners or, if he so elects, to the Special Commissioners.

(4)Sub-paragraphs (1) to (3) above do not apply in relation to such a policy as is mentioned in paragraphs 3 to 6 above.

22(1)A body which issues or which, after 5th April 1979, has issued any policy of life insurance (other than one to which sub-paragraph (2)(c) below applies)—

(a)which is certified by the Board as being a qualifying policy; or

(b)which conforms with such a form as is mentioned in paragraph 21(1)(b) above, and is in the opinion of the body issuing it a qualifying policy,

shall, within three months of receipt of a request in writing by the policy holder, give to the policy holder a duly authenticated certificate to that effect, specifying in the certificate the name of the policy holder, the name of the person whose life is assured, the reference number or other means of identification allocated to the policy, the reference number of the relevant Inland Revenue certificate (if any), the capital sum or sums assured and the amounts and dates for payment of the premiums.

(2)Subject to sub-paragraph (3) below, where a policy of life insurance is varied after 5th April 1979, and, after the variation—

(a)it is certified by the Board as a qualifying policy, or

(b)it conforms with such a form as is referred to in sub-paragraph (1) above and is in the opinion of the body by whom it was issued a qualifying policy, or

(c)in the case of a policy issued in respect of an insurance made before 1st April 1976, it is in the opinion of the body by whom it was issued a qualifying policy,

that body shall, within three months of receipt of a request in writing by the policy holder, give to the policy holder a like certificate with respect to the policy as varied.

(3)Sub-paragraph (2) above shall not apply by reason of—

(a)any variation which, whether or not of a purely formal character, does not affect the terms of a policy in any significant respect; or

(b)any variation of a policy issued in respect of an insurance made on or before 19th March 1968, other than a variation by virtue of which the policy falls, under paragraph 8(1) and (2) of Schedule 14, to be treated as issued in respect of an insurance made after that date.

PART IIIPOLICIES ISSUED BY NON-RESIDENT COMPANIES

23In this Part—

(a)any reference to a paragraph is a reference to that paragraph of this Schedule; and

(b)“the old policy” and “the new policy” have the same meanings as in paragraph 17.

24(1)This paragraph applies to a policy of life insurance—

(a)which is issued in respect of an insurance made after 17th November 1983; and

(b)which is so issued by a company resident outside the United Kingdom;

and in the following provisions of this paragraph such a policy is referred to as “a new non-resident policy” and the company by which it is issued is referred to as “the issuing company”.

(2)Notwithstanding anything in paragraph 21—

(a)a new non-resident policy shall not be certified under sub-paragraph (1)(a) of that paragraph, and

(b)a new non-resident policy which conforms with such a form as is mentioned in sub-paragraph (1)(b) of that paragraph shall not be a qualifying policy,

until such time as the conditions in either sub-paragraph (3) or sub-paragraph (4) below are fulfilled with respect to it.

(3)The conditions first referred to in sub-paragraph (2) above are—

(a)that the issuing company is lawfully carrying on in the United Kingdom life assurance business (as defined in section 431(2)); and

(b)that the premiums under the policy are payable to a branch in the United Kingdom of the issuing company, being a branch through which the issuing company carries on its life assurance business; and

(c)the premiums under the policy form part of those business receipts of the issuing company which arise through that branch.

(4)The conditions secondly referred to in sub-paragraph (2) above are—

(a)that the policy holder is resident in the United Kingdom; and

(b)that the income of the issuing company from the investments of its life assurance fund is, by virtue of section 445, charged to corporation tax under Case III of Schedule D;

and expressions used in paragraph (b) above have the same meaning as in section 445(1).

25(1)In the application of paragraph 17 in any case where—

(a)the old policy was issued in respect of an insurance made after 17th November 1983 and could not be a qualifying policy by virtue of paragraph 24, and

(b)the new policy is not a new non-resident policy as defined in that paragraph,

the rules for the determination of the question whether the new policy is a qualifying policy shall apply with the modifications in sub-paragraph (2) below.

(2)The modifications are the following—

(a)if, apart from paragraph 24, the old policy and any related policy (within the meaning of paragraph 17(2)(b)) of which account falls to be taken would have been, or would have been capable of being certified as, a qualifying policy under paragraph 21, that policy shall be assumed to have been a qualifying policy for the purposes of paragraph 17(2); and

(b)if, apart from this paragraph, the new policy would be, or would be capable of being certified as, a qualifying policy, it shall not be such a policy or, as the case may be, be capable of being so certified unless the circumstances are as specified in paragraph 17(3); and

(c)in paragraph 17(3)(b) the words “either by a branch or agency of theirs outside the United Kingdom or” shall be omitted.

(3)In the application of paragraph 17 in any case where—

(a)the old policy is a qualifying policy which was issued in respect of an insurance made on or before 17th November 1983 but, if the insurance had been made after that date, the policy could not have been a qualifying policy by virtue of paragraph 24, and

(b)the new policy is issued after that date and is not a new non-resident policy, as defined in paragraph 24,

the rules for the determination of the question whether the new policy is a qualifying policy shall apply with the modification in sub-paragraph (2)(c) above.

26If, in the case of a substitution of policies falling within paragraph 25(1) or (3), the new policy confers such an option as results in the application to it of paragraph 19(3), the new policy shall be treated for the purposes of paragraph 19(3) as having been issued in respect of an insurance made on the same day as that on which was made the insurance in respect of which the old policy was issued.

27(1)For the purposes of Part I and paragraphs 21 and 24, a policy of life insurance which was issued—

(a)in respect of an insurance made on or before 17th November 1983, and

(b)by a company resident outside the United Kingdom,

shall be treated as issued in respect of an insurance made after that date if the policy is varied after that date so as to increase the benefits secured or to extend the term of the insurance.

(2)If a policy of life insurance which was issued as mentioned in sub-paragraph (1)(a) and (b) above confers on the person to whom it is issued an option to have another policy substituted for it or to have any of its terms changed, then for the purposes of that sub-paragraph any change in the terms of the policy which is made in pursuance of the option shall be deemed to be a variation of the policy.

Section 350(4).

SCHEDULE 16COLLECTION OF INCOME TAX ON COMPANY PAYMENTS WHICH ARE NOT DISTRIBUTIONS

Interpretation

1In this Schedule “relevant payment” means any payment to which section 350(4)(a) applies.

Duty to make returns

2(1)A company shall for each of its accounting periods make, in accordance with this Schedule, returns to the collector of the relevant payments made by it in that period and of the income tax for which it is accountable in respect of those payments.

(2)A return shall be made for—

(a)each complete quarter falling within the accounting period, that is to say, each of the periods of three months ending with 31st March, 30th June, 30th September and 31st December which falls within that period;

(b)each part of the accounting period which is not a complete quarter and ends on the first (or only), or begins immediately after the last (or only), of those dates which falls within the accounting period;

(c)if none of those dates falls within the accounting period, the whole accounting period.

(3)A return for any period for which a return is required to be made under this paragraph shall be made within 14 days from the end of that period.

Contents of returns

3The return made by a company for any period shall show—

(a)the amount of any relevant payments made by the company in that period; and

(b)the income tax in respect of those payments for which the company is accountable.

Payment of tax

4(1)Subject to sub-paragraph (4) below, income tax in respect of any payment required to be included in a return under this Schedule shall be due at the time by which the return is to be made, and income tax so due—

(a)shall be payable by the company without the making of any assessment; and

(b)may be assessed on the company (whether or not it has been paid when the assessment is made) if it, or any part of it, is not paid on or before the due date.

(2)If it appears to the inspector that there is a relevant payment which ought to have been and has not been included in a return, or if the inspector is dissatisfied with any return, he may make an assessment on the company to the best of his judgment; and any income tax due under an assessment made by virtue of this sub-paragraph shall be treated for the purposes of interest on unpaid tax as having been payable at the time when it would have been payable if a correct return had been made.

(3)Where a payment has been included in a return under Schedule 13 by virtue of paragraph 7(1)(b) of that Schedule and it becomes apparent that the payment is not a qualifying distribution but a relevant payment—

(a)sub-paragraph (1)(a) above shall not apply to that payment; and

(b)income tax shall be assessed in respect of it on the company.

Set-off of income tax borne on company income against tax payable

5(1)Where in any accounting period a company receives any payment on which it bears income tax by deduction the company may claim to have the income tax thereon set against any income tax which it is liable to pay under this Schedule in respect of payments made by it in that period.

(2)Any such claim shall be included in a return made under paragraph 2 above for the accounting period in question and (where necessary) income tax paid by the company under this Schedule for that accounting period and before the claim is allowed shall be repaid accordingly.

6(1)Where a claim has been made under paragraph 5 above no proceedings for collecting tax which would fall to be discharged if the claim were allowed shall be instituted pending the final determination of the claim, but this sub-paragraph shall not affect the date when the tax is due.

(2)When the claim is finally determined any tax underpaid in consequence of sub-paragraph (1) above shall be paid.

(3)Where proceedings are instituted for collecting tax assessed, or interest on tax assessed, under any provision of paragraph 4 above, effect shall not be given to any claim made after the institution of the proceedings so as to affect or delay the collection or recovery of the tax charged by the assessment or of interest thereon, until the claim has been finally determined.

(4)When the claim is finally determined any tax overpaid in consequence of sub-paragraph (3) above shall be repaid.

(5)References in this paragraph to proceedings for the collection of tax include references to proceedings by way of distraint or poinding for tax.

7Income tax set against other tax under paragraph 5 above shall be treated as paid or repaid, as the case may be, and the same tax shall not be taken into account both under this Schedule and under section 7(2).

Items included in error

8Where any item has been included in a return or claim under this Schedule as a relevant payment but should have been included in a return under Schedule 13, the inspector may make such assessments, adjustments or set-offs as may be required for securing that the resulting liabilities to tax (including interest on unpaid tax) whether of the company or of any other person are the same as they would have been if the item had been included in the right return.

Relevant payment made otherwise than in accounting period

9Where a company makes a relevant payment on a date which does not fall within an accounting period the company shall make a return of that payment within 14 days from that date, and the income tax for which the company is accountable in respect of that payment shall be due at the time by which the return is to be made.

Assessments and due date of tax

10(1)All the provisions of the Income Tax Acts as to the time within which an assessment may be made, so far as they refer or relate to the year of assessment for which an assessment is made, or the year to which an assessment relates, shall apply in relation to any assessment under this Schedule notwithstanding that, under this Schedule, the assessment may be said to relate to a quarter or other period which is not a year of assessment, and the provisions of sections 36 and 37 of the Management Act as to the circumstances in which an assessment may be made out of time shall apply accordingly on the footing that any such assessment relates to the year of assessment in which the quarter or other period ends.

(2)Income tax assessed on a company under this Schedule shall be due within 14 days after the issue of the notice of assessment (unless due earlier under paragraph 4(1) or 9 above).

(3)Sub-paragraph (2) above has effect subject to any appeal against the assessment, but no such appeal shall affect the date when tax is due under paragraph 4(1) or 9 above.

(4)On the determination of an appeal against an assessment under this Schedule any tax overpaid shall be repaid.

(5)Any tax assessable under any one or more of the provisions of this Schedule may be included in one assessment if the tax so included is all due on the same date.

Saving

11Nothing in paragraphs 1 to 10 above shall be taken to prejudice any powers conferred by the Income Tax Acts for the recovery of income tax by means of an assessment or otherwise; and any assessment in respect of tax payable under paragraph 9 above shall be treated for the purposes of the provisions mentioned in paragraph 10(1) above as relating to the year of assessment in which the payment is made.

Section 404.

SCHEDULE 17DUAL RESIDENT INVESTING COMPANIES

PART IDIVISION OF ACCOUNTING PERIODS COVERING 1st APRIL 1987

1(1)This Part of this Schedule has effect in the circumstances set out in section 404(3)(a).

(2)In this Part of this Schedule—

(a)“the straddling period” means the accounting period of the dual resident investing company which begins before and ends on or after 1st April 1987; and

(b)“dual resident investing company” has the same meaning as in section 404.

(3)It shall be assumed for the purposes of this Chapter (except section 404(3) to (6)) and Part II of this Schedule—

(a)that an accounting period of the company ends on 31st March 1987; and

(b)that a new accounting period begins on 1st April 1987, the new accounting period to end with the end of the straddling period.

(4)In this Part of this Schedule “the component accounting periods” means the two accounting periods referred to in sub-paragraph (3) above.

2Subject to paragraph 5 below, for the purposes referred to in paragraph 1(3) above, the losses and other amounts of the straddling period of a dual resident investing company, excluding any such excess of charges on income as is referred to in section 403(7), shall be apportioned to the component accounting periods on a time basis according to their lengths.

3If, in the straddling period of a dual resident investing company, the company has paid any amount by way of charges on income, then, for the purposes referred to in paragraph 1(3) above, the excess of that amount referred to in section 403(7) shall be apportioned to the component accounting periods—

(a)according to the dates on which, subject to paragraph 6 below, the interest or other payments giving rise to those charges were paid (or were treated as paid for the purposes of section 338); and

(b)in proportion to the amounts of interest or other payments paid (or treated as paid) on those dates.

PART IIEARLY PAYMENTS OF INTEREST ETC. AND CHARGES ON INCOME

Interpretation

4In this Part of this Schedule—

(a)a “1986 accounting period” means an accounting period which begins or ends (or begins and ends) in the financial year 1986;

(b)a “post-1986 accounting period” means an accounting period which begins on or after 1st April 1987; and

(c)“dual resident investing company” has the same meaning as in section 404.

Early payment of interest etc.

5(1)If the conditions in sub-paragraph (2) or (3) below are fulfilled and if the Board so direct, this paragraph applies in relation to a 1986 accounting period of a dual resident investing company.

(2)The conditions in this sub-paragraph are applicable only if the company is carrying on a trade in the 1986 accounting period, and those conditions are—

(a)that in that accounting period the company has incurred a loss, computed as for the purposes of section 393(2), in carrying on that trade; and

(b)that in that period the company has made a payment falling within section 404(6)(a)(iii); and

(c)that the payment referred to in paragraph (b) above either did not fall due in that period or would not have fallen due in that period but for the making, on or after 5th December 1986, of arrangements varying the due date for payment.

(3)The conditions in this sub-paragraph are applicable only if the company is an investment company in the 1986 accounting period, and those conditions are—

(a)that for that accounting period the company has (apart from this paragraph) such an excess as is referred to in section 403(4); and

(b)that one or more of the sums which for that accounting period may be deducted as expenses of management under section 75(1) either did not fall due in that period or would not have fallen due in that period but for the making, on or after 5th December 1986, of arrangements varying the due date for payment.

(4)The Board shall not give a direction under this paragraph with respect to a 1986 accounting period of a dual resident investing company unless it appears to the Board that the sole or main benefit that might be expected to accrue from the early payment or, as the case may be, from the arrangements was that (apart from this paragraph) the company would, for that period, have an amount or, as the case may be, a larger amount available for surrender by way of group relief.

(5)If this paragraph applies in relation to a 1986 accounting period of a dual resident investing company which is carrying on a trade then, for the purposes of this Chapter and, where appropriate, any apportionment under paragraph 2 above—

(a)the loss (if any) of the company for that period shall be computed (as mentioned in section 403(1)) as if any payment falling within sub-paragraph (2)(b) above had not been made in that period; and

(b)the loss (if any) of the company for its first post-1986 accounting period shall be computed as if any such payment were made in that period.

(6)If this paragraph applies in relation to a 1986 accounting period of a dual resident investing company which is an investment company, then, for the purposes referred to in sub-paragraph (5) above—

(a)the amount which may be deducted as expenses of management for that period, as mentioned in section 403(4), shall be computed as if any sum falling within sub-paragraph (3)(b) above had not been disbursed; and

(b)the amount which may be so deducted as expenses of management for the first of the company’s post-1986 accounting periods shall be computed as if any such sum were disbursed in that period.

Early payment of charges on income

6(1)If, in the case of a dual resident investing company, either of the following conditions is fulfilled—

(a)that any interest or other payment which is, or is treated as, a charge on income falls due in a post-1986 accounting period but is paid (or treated for the purposes of section 338 as paid) in a 1986 accounting period, or

(b)that, on or after 5th December 1986, arrangements have been made such that any such interest or other payment which, but for the arrangements, would have fallen due in a post-1986 accounting period, fell due in a 1986 accounting period,

the interest or other payment shall, if the Board so direct, be treated for the purposes of this Chapter and, where appropriate, paragraph 3 above as paid in the post-1986 accounting period referred to in paragraph (a) or, as the case may be, paragraph (b) above.

(2)The Board shall not give a direction under this paragraph unless it appears to them that the sole or main benefit that might be expected to accrue from the early payment or, as the case may be, from the arrangements was that (apart from the direction) the interest or other payment would be attributed or apportioned to a 1986 accounting period rather than a post-1986 accounting period, so that, for the 1986 accounting period, the dual resident investing company would have an amount or, as the case may be, a larger amount available for surrender by way of group relief.

Appeals

7Notice of the giving of a direction under paragraph 5 or 6 above shall be given to the dual resident investing company concerned; and any company to which such a notice is given may, by giving notice of appeal to the Board within 60 days of the date of the notice given to the company, appeal to the Special Commissioners against the direction on either or both of the following grounds—

(a)that the conditions applicable to the company under paragraph 5(2) or (3) above are not fulfilled or, as the case may be, that neither of the conditions in paragraph 6(1) above is fulfilled;

(b)that the sole or main benefit that might be expected to accrue from the early payment or, as the case may be, the arrangements was not that stated in paragraph 5(4) or, as the case may be, paragraph 6(2) above.

PART IIIGENERAL

8(1)Parts I and II of this Schedule have effect in priority to section 409 and, accordingly, each of the component accounting periods resulting from the operation of Part I of this Schedule shall be regarded as a true accounting period for the purposes of that section.

(2)References in this Schedule to this Chapter do not include any provision of this Schedule.

Section 413(10).

SCHEDULE 18GROUP RELIEF: EQUITY HOLDERS AND PROFITS OR ASSETS AVAILABLE FOR DISTRIBUTION

1(1)For the purposes of section 413(7) to (9) and this Schedule, an equity holder of a company is any person who—

(a)holds ordinary shares in the company, or

(b)is a loan creditor of the company in respect of a loan which is not a normal commercial loan,

and any reference in that section to profits or assets available for distribution to a company’s equity holders does not include a reference to any profits or assets available for distribution to any equity holder otherwise than as an equity holder.

(2)For the purposes of sub-paragraph (1)(a) above “ordinary shares” means all shares other than fixed-rate preference shares.

(3)In this Schedule “fixed-rate preference shares” means shares which—

(a)are issued for consideration which is or includes new consideration; and

(b)do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities; and

(c)do not carry any right to dividends other than dividends which—

(i)are of a fixed amount or at a fixed rate per cent. of the nominal value of the shares, and

(ii)represent no more than a reasonable commercial return on the new consideration received by the company in respect of the issue of the shares; and

(d)on repayment do not carry any rights to an amount exceeding that new consideration except in so far as those rights are reasonably comparable with those general for fixed dividend shares listed in the Official List of the Stock Exchange.

(4)Subsection (7) of section 417 shall apply for the purposes of sub-paragraph (1)(b) above as it applies for the purposes of Part XI, but with the omission of the reference to subsection (9) of that section.

(5)In sub-paragraph (1)(b) above “normal commercial loan” means a loan of or including new consideration and—

(a)which does not carry any right either to conversion into shares or securities of any other description or to the acquisition of additional shares or securities; and

(b)which does not entitle that loan creditor to any amount by way of interest which depends to any extent on the results of the company’s business or any part of it or on the value of any of the company’s assets or which exceeds a reasonable commercial return on the new consideration lent; and

(c)in respect of which the loan creditor is entitled, on repayment, to an amount which either does not exceed the new consideration lent or is reasonably comparable with the amount generally repayable (in respect of an equal amount of new consideration) under the terms of issue of securities listed in the Official List of the Stock Exchange.

(6)Notwithstanding anything in sub-paragraphs (1) to (5) above but subject to sub-paragraph (7) below, where—

(a)any person has, directly or indirectly, provided new consideration for any shares or securities in the company, and

(b)that person, or any person connected with him, uses for the purposes of his trade assets which belong to the company and in respect of which there is made to the company—

(i)a first-year allowance within the meaning of Chapter I of Part III of the [1971 c. 68.] Finance Act 1971 (“the 1971 Act”) in respect of expenditure incurred by the company on the provision of machinery or plant;

(ii)a writing-down allowance within the meaning of Chapter II of Part I of the 1968 Act or, as the case may be, Chapter I of Part III of the 1971 Act in respect of expenditure incurred by the company on the provision of machinery or plant; or

(iii)an allowance under section 91 of the 1968 Act in respect of expenditure incurred by the company on scientific research;

then, for the purposes of this Schedule, that person, and no other, shall be treated as being an equity holder in respect of those shares or securities and as being beneficially entitled to any distribution of profits or assets attributable to those shares or securities.

(7)In any case where sub-paragraph (6) above applies in relation to a bank in such circumstances that—

(a)the only new consideration provided by the bank as mentioned in paragraph (a) of that sub-paragraph is provided in the normal course of its banking business by way of a normal commercial loan as defined in sub-paragraph (5) above; and

(b)the cost to the company concerned of assets falling within paragraph (b) of that sub-paragraph which are used as mentioned in that paragraph by the bank or a person connected with the bank is less than the amount of that new consideration,

references in sub-paragraph (6) above, other than the reference in paragraph (a), to shares or securities in the company shall be construed as references to so much only of the loan referred to paragraph (a) above as is equal to the cost referred to in paragraph (b) above.

(8)In this paragraph “new consideration” has the same meaning as in section 254 and any question whether one person is connected with another shall be determined in accordance with section 839.

2(1)Subject to the following provisions of this Schedule, for the purposes of section 413(7) to (9) the percentage to which one company is beneficially entitled of any profits available for distribution to the equity holders of another company means the percentage to which the first company would be so entitled in the relevant accounting period on a distribution in money to those equity holders of—

(a)an amount of profits equal to the total profits of the other company which arise in that accounting period (whether or not any of those profits are in fact distributed); or

(b)if there are no profits of the other company in that accounting period, profits of £100;

and in the following provisions of this Schedule that distribution is referred to as “the profit distribution”.

(2)For the purposes of the profit distribution, it shall be assumed that no payment is made by way of repayment of share capital or of the principal secured by any loan unless that payment is a distribution.

(3)Subject to sub-paragraph (2) above, where an equity holder is entitled as such to a payment of any description which, apart from this sub-paragraph, would not be treated as a distribution, it shall nevertheless be treated as an amount to which he is entitled on the profit distribution.

3(1)Subject to the following provisions of this Schedule, for the purposes of section 413(7) to (9) the percentage to which one company would be beneficially entitled of any assets of another company available for distribution to its equity holders on a winding-up means the percentage to which the first company would be so entitled if the other company were to be wound up and on that winding-up the value of the assets available for distribution to its equity holders (that is to say, after deducting any liabilities to other persons) were equal to—

(a)the excess, if any, of the total amount of the assets of the company, as shown in the balance sheet relating to its affairs as at the end of the relevant accounting period, over the total amount of those of its liabilities as so shown which are not liabilities to equity holders as such; or

(b)if there is no such excess or if the company’s balance sheet is prepared to a date other than the end of the relevant accounting period, £100.

(2)In the following provisions of this Schedule a winding-up on the basis specified in sub-paragraph (1) above is referred to as “the notional winding-up”.

(3)If, on the notional winding-up, an equity holder would be entitled as such to an amount of assets of any description which, apart from this sub-paragraph, would not be treated as a distribution of assets, it shall nevertheless be treated, subject to sub-paragraph (4) below, as an amount to which the equity holder is entitled on the distribution of assets on the notional winding up.

(4)If an amount (“the returned amount”) which corresponds to the whole or any part of the new consideration provided by an equity holder of a company for any shares or securities in respect of which he is an equity holder is applied by the company, directly or indirectly, in the making of a loan to, or in the acquisition of any shares or securities in, the equity holder or any person connected with him, then, for the purposes of this Schedule—

(a)the total amount referred to in sub-paragraph (1)(a) above shall be taken to be reduced by a sum equal to the returned amount; and

(b)the amount of assets to which the equity holder is beneficially entitled on the notional winding-up shall be taken to be reduced by a sum equal to the returned amount.

(5)In sub-paragraph (4) above “new consideration” has the same meaning as in section 254 and any question whether one person is connected with another shall be determined in accordance with section 839.

4(1)This paragraph applies if any of the equity holders—

(a)to whom the profit distribution is made, or

(b)who is entitled to participate in the notional winding-up,

holds, as such an equity holder, any shares or securities which carry rights in respect of dividend or interest or assets on a winding-up which are wholly or partly limited by reference to a specified amount or amounts (whether the limitation takes the form of the capital by reference to which a distribution is calculated or operates by reference to an amount of profits or otherwise).

(2)Where this paragraph applies there shall be determined—

(a)the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled, and

(b)the percentage of assets to which, on the notional winding-up, the first company referred to in paragraph 3(1) above would be entitled,

if, to the extent that they are limited as mentioned in sub-paragraph (1) above, the rights of every equity holder falling within that sub-paragraph (including the first company concerned if it is such an equity holder) had been waived.

(3)If, on the profit distribution, the percentage of profits determined as mentioned in sub-paragraph (2)(a) above is less than the percentage of profits determined under paragraph 2(1) above without regard to that sub-paragraph, the lesser percentage shall be taken for the purposes of section 413(7) to (9) to be the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled as mentioned in that paragraph.

(4)If, on the notional winding-up, the percentage of assets determined as mentioned in sub-paragraph (2)(b) above is less than the percentage of assets determined under paragraph 3(1) above without regard to that sub-paragraph, the lesser percentage shall be taken for the purposes of section 413(7) to (9) to be the percentage to which, on the notional winding-up, the first company mentioned in paragraph 3(1) above would be entitled of any assets of the other company available for distribution to its equity holders on a winding-up.

5(1)This paragraph applies if, at any time in the relevant accounting period, any of the equity holders—

(a)to whom the profit distribution is made, or

(b)who is entitled to participate in the notional winding-up,

holds, as such an equity holder, any shares or securities which carry rights in respect of dividend or interest or assets on a winding-up which are of such a nature (as, for example, if any shares will cease to carry a right to a dividend at a future time) that if the profit distribution or the notional winding-up were to take place in a different accounting period the percentage to which, in accordance with paragraphs 1 to 4 above, that equity holder would be entitled of profits on the profit distribution or of assets on the notional winding-up would be different from the percentage determined in the relevant accounting period.

(2)Where this paragraph applies, there shall be determined—

(a)the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled, and

(b)the percentage of assets to which, on the notional winding-up, the first company referred to in paragraph 3(1) above would be entitled,

if the rights of the equity holders in the relevant accounting period were the same as they would be in the different accounting period referred to in sub-paragraph (1) above.

(3)If in the relevant accounting period an equity holder holds, as such, any shares or securities in respect of which arrangements exist by virtue of which, in that or any subsequent accounting period, the equity holder’s entitlement to profits on the profit distribution or to assets on the notional winding-up could be different as compared with his entitlement if effect were not given to the arrangements, then for the purposes of this paragraph—

(a)it shall be assumed that effect would be given to those arrangements in a later accounting period, and

(b)those shares or securities shall be treated as though any variation in the equity holder’s entitlement to profits or assets resulting from giving effect to the arrangements were the result of the operation of such rights attaching to the shares or securities as are referred to in sub-paragraph (1) above.

In this sub-paragraph “arrangements” means arrangements of any kind whether in writing or not.

(4)Sub-paragraph (3) and (4) of paragraph 4 above shall apply for the purposes of this paragraph as they apply for the purposes of that paragraph and, accordingly, references therein to sub-paragraphs (2)(a) and (2)(b) of that paragraph shall be construed as references to sub-paragraphs (2)(a) and (2)(b) of this paragraph.

(5)In any case where paragraph 4 above applies as well as this paragraph, that paragraph shall be applied separately (in relation to the profit distribution and the notional winding-up)—

(a)on the basis specified in sub-paragraph (2) above, and

(b)without regard to that sub-paragraph,

and sub-paragraphs (3) and (4) of that paragraph shall apply accordingly in relation to the percentages so determined as if for the word “lesser” there were substituted the word “lowest”.

6For the purposes of section 413(7) to (9) and paragraphs 2 to 5 above—

(a)the percentage to which one company is beneficially entitled of any profits available for distribution to the equity holders of another company, and

(b)the percentage to which one company would be beneficially entitled of any assets of another company on a winding-up,

means the percentage to which the first company is, or would be, so entitled either directly or through another body corporate or other bodies corporate or partly directly and partly through another body corporate or other bodies corporate.

7(1)In this Schedule “the relevant accounting period” means—

(a)in a case falling within subsection (7) of section 413, the accounting period current at the time in question; and

(b)in a case falling within subsection (8) of that section, the accounting period in relation to which the share in the consortium falls to be determined.

(2)For the purposes of this Schedule, a loan to a company shall be treated as a security, whether or not it is a secured loan, and, if it is a secured loan, regardless of the nature of the security.

Section 423.

SCHEDULE 19APPORTIONMENT OF INCOME OF CLOSE COMPANIES

PART IDETERMINATION OF RELEVANT INCOME AND DISTRIBUTIONS

Relevant income

1(1)Subject to the provisions of this Part of this Schedule, the relevant income of a company for an accounting period is—

(a)in the case of a company which is a trading company or a member of a trading group, so much of its distributable income, other than trading income, for that period as can be distributed without prejudice to the requirements of the company’s business;

(b)in the case of a company not within paragraph (a) above whose distributable income for that period consists of or includes estate or trading income—

(i)so much of the estate or trading income as can be distributed without prejudice to the requirements of the company’s business so far as concerned with the activities or assets giving rise to estate or trading income; and

(ii)its distributable income, if any, other than estate or trading income;

(c)in the case of any other company, its distributable income for that period.

(2)In arriving at the relevant income for any accounting period—

(a)where under sub-paragraph (1) above regard is to be had to the requirements of a company’s business, regard shall be had not only to the current requirements of the business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business but, for this purpose, the provisions of paragraph 8 below shall apply;

(b)the amount of the estate or trading income shall be taken as the amount included in respect of it in the distributable income.

(3)In arriving at the relevant income for any accounting period of a company which is a trading company or a member of a trading group, regard shall be had not only to the current requirements of the company’s business and to such requirements as may be necessary or advisable for the maintenance and development of that business as fall within sub-paragraph (2)(a) above, but also to any other requirements necessary or advisable for the acquisition of a trade or of a controlling interest in a trading company or in a company which is a member of a trading group by virtue of paragraph 7(2)(a) below; but, for this purpose, paragraph 9 below shall apply.

(4)For the purposes of sub-paragraph (3) above, the acquisition of a controlling interest in a company means the acquisition, whether on a single occasion or otherwise, of such ordinary share capital of that company as enables the acquiring company to exercise the greater part of the voting power in that company.

(5)For the purposes of sub-paragraph (3) above, the requirements of a company’s business which are necessary or advisable for such an acquisition as is mentioned in that sub-paragraph include such requirements as are necessary or advisable for—

(a)the redemption or repayment of any share or loan capital or debt (including any premium thereon) issued or incurred in or towards payment for that acquisition, or issued or incurred for the purpose of raising money to be applied in or towards payment therefor, or

(b)meeting any obligation of the company in respect of that acquisition,

so far as any sum so expended or applied, or intended to be expended or applied, does not fall to be treated for the purposes of this Chapter as a distribution by the company.

Maximum amount of relevant income

2(1)Subject to paragraphs 10 and 12 below, the relevant income of a company shall in no case be taken to exceed the company’s distributable investment income for the accounting period plus 50 per cent. of the estate or trading income for the period.

(2)In the application of sub-paragraph (1) above to a company which is a trading company or a member of a trading group, the trading income shall be disregarded; and in the application of that sub-paragraph to a trading company, the estate income—

(a)if it is less than the appropriate fraction of the relevant maximum amount, shall be treated as reduced by one-half of the amount required to make it up to that fraction of the relevant maximum amount; or

(b)if it is less than the appropriate fraction of the relevant minimum amount, shall be disregarded;

and in this sub-paragraph the appropriate fraction is—

(3)The relevant maximum and minimum amounts referred to above shall be determined as follows—

(a)where the company has no associated company in the accounting period, those amounts are £75,000 and £25,000 respectively;

(b)where the company has one or more associated companies in the accounting period—

(i)the relevant maximum amount is—

(ii)the relevant minimum amount is—

(4)In applying sub-paragraphs (2) and (3) above to any accounting period of a trading company, an associated company shall be disregarded if—

(a)it was not a trading company, or has not carried on any trade, at any time in that accounting period; or

(b)where it was an associated company during part only of that accounting period, it was not a trading company, or has not carried on any trade, at any time in that part of that accounting period;

and for the purposes of this paragraph a company is to be treated as an associated company of another at a given time if at that time one of the two has control of the other or both are under the control of the same person or persons.

(5)In determining how many associated companies a trading company has in an accounting period or whether a trading company has an associated company in an accounting period, an associated company shall be counted even if it was an associated company for part only of the accounting period, and two or more associated companies shall be counted even if they were associated companies for different parts of the accounting period.

(6)For an accounting period of less than 12 months the relevant maximum and minimum amounts determined in accordance with sub-paragraphs (1) to (5) above shall be proportionately reduced.

Distributions

3(1)For the purposes of this Chapter the distributions of a company for an accounting period shall, subject to sub-paragraphs (2) to (4) and paragraph 12 below, be taken to consist of—

(a)any dividends which are declared in respect of the period and are paid during the period or within a reasonable time thereafter;

(b)all distributions made in the period except dividends which, in relation to any previous period, would fall under paragraph (a) above; and

(c)anything that would be a distribution but for section 213 or 219 (or both).

(2)Where a period of account is not an accounting period, dividends which, if it were an accounting period, would be treated under sub-paragraph (1)(a) above as distributions for that accounting period shall be apportioned to any accounting period or part of an accounting period falling within the period of account in proportion to the distributable income of each such period or part.

(3)For the purposes of determining whether there is any such excess as is referred to in section 424(1), no account shall be taken of a distribution which, in relation to the company making it, is a bonus distribution unless—

(a)it is made to a person other than a close company, or

(b)it is made to a close company and the share capital or security of which it consists is subsequently distributed, by that or any other close company, by a distribution falling within section 14(2)(b) to a person other than a close company.

(4)Where a bonus distribution has occurred and, by virtue of paragraph (a) or paragraph (b) of sub-paragraph (3) above, it falls to be taken into account for the purpose of determining whether there is any such excess as is referred to in section 424(1), no account shall be taken for that purpose of a qualifying distribution which consists of the repayment of the share capital or, as the case may be, the principal of the security, which constituted the bonus distribution.

(5)In sub-paragraphs (3) and (4) above “bonus distribution” means a distribution which in relation to the company making it is a distribution by virtue only of paragraph (c) of section 209(2).

Distributable income and estate or trading income

4(1)For the purposes of this Chapter, the distributable income of a company for an accounting period shall be the amount of its distributable profits for the period exclusive of the part attributable to chargeable gains; and for the purposes of this sub-paragraph—

(a)the distributable profits of a company for an accounting period shall be the aggregate of the following amounts, that is to say—

(i)the amount of any profits on which corporation tax falls finally to be borne, less the amount of that tax;

(ii)an amount equal to the qualifying distributions comprised in any franked investment income, other than franked investment income against which relief is given under section 242 or 243; and

(iii)an amount equal to any group income;

(b)the part of a company’s distributable profits attributable to chargeable gains shall be taken to be the amount of the chargeable gains on which corporation tax is finally borne less the amount of that tax; and

(c)the amount on which corporation tax falls finally to be borne (but not the amount of that tax) shall be computed as if section 242 did not include subsection (5) or (6) of that section (and as if section 243 did not apply section 242(5));

and for the purposes of sub-paragraph (a)(ii) above relief under section 242 or 243 shall be treated as having been given first against franked investment income which is not trading income and secondly, so far as it cannot be so given, against franked investment income which is trading income.

(2)For the purposes of this Chapter, the distributable investment income of a company for an accounting period shall be the amount of the distributable income, exclusive of the part attributable to estate or trading income, and less whichever is the smaller of—

(a)10 per cent. of the estate or trading income; and

(b)£1,000 or, if the company is a trading company or a member of a trading group, £3,000 or (in either case) if the accounting period is of less than 12 months, a proportionately reduced amount.

5(1)For the purposes of this Chapter, “estate or trading income” means estate income and trading income.

(2)For those purposes “estate income” means income which is chargeable to tax under Schedule A or Schedule B, and income (other than yearly or other interest) which is chargeable to tax under Schedule D, and which arises from the ownership or occupation of land (including any interest in or right over land) or from the letting furnished of any building or part of a building, but does not include trading income.

(3)For those purposes “trading income” means income which is not investment income for the purposes of paragraph 7(1) below; and, where the following conditions are satisfied with respect to a close company, that is to say—

(a)that its activities consist wholly or mainly of the carrying on of a trade; and

(b)that the trade consists wholly or mainly of one or more of the following, that is to say, life assurance business (within the meaning of section 431), insurance business of any other class, banking, money lending, financing of hire-purchase or similar transactions, or dealing in securities;

its income incidental to that trade shall also be trading income.

(4)For the purposes of sub-paragraph (3) above income of a company is incidental to its trade if, and only if—

(a)it is derived from investments (other than investments in a 51 per cent. subsidiary) or is interest on a debt; and

(b)any profit on the sale of the investments would be a trading receipt, and the debt, if proved to be a bad debt, would be allowed as a deduction in computing the company’s trading income for the purposes of corporation tax.

6(1)The amount for part of an accounting period of any description of income referred to in paragraph 4 or 5 above shall be a proportionate part of the amount for the whole period.

(2)In determining the amount for any period of any description of income referred to in paragraph 4 or 5 above, any deduction from the company’s profits for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description shall be treated as made—

(a)first, from the company’s income charged to corporation tax other than estate or trading income;

(b)secondly, so far as it cannot be made under paragraph (a) above, from the company’s estate or trading income so charged;

(c)thirdly, so far as it cannot be made under paragraph (a) or (b) above, from the amount included in the company’s profits in respect of chargeable gains.

(3)In the application of sub-paragraph (2) above to a company which is a trading company or a member of a trading group there shall be substituted for paragraph (b) the following paragraphs—

“(b)secondly, so far as it cannot be made under (a) above, from the company’s estate income so charged;

(bb)thirdly, so far as it cannot be made under (a) or (b) above, from the company’s trading income so charged;”

and in paragraph (c) for “thirdly” there shall be substituted “fourthly”, and for “(a) or (b)” there shall be substituted “(a), (b) or (bb)”.

Meaning of “trading company” and “member of a trading group”

7(1)For the purposes of this Chapter, a “trading company” is any company which exists wholly or mainly for the purpose of carrying on a trade, and any other company whose income does not consist wholly or mainly of investment income, that is to say, income which, if the company were an individual, would not be earned income; but for this purpose any amount which is apportioned to a company under section 423(1) shall be deemed to be income of the company and to be investment income.

(2)Subject to sub-paragraph (3) below, for the purposes of this Chapter, a company is to be treated as a member of a trading group if, but only if—

(a)it exists wholly or mainly for the purpose of co-ordinating the administration of a group of two or more companies each of which is under its control and exists wholly or mainly for the purpose of carrying on a trade; or

(b)it is under the control of another company resident in the United Kingdom and not itself under the control of a third company, and it exists wholly or mainly for the purpose of a trade or trades carried on by that other company or by a group which, consisting of that other company and a company or companies also under its control and resident in the United Kingdom, exists wholly or mainly for the purpose of carrying on that trade or trades.

(3)A company shall not be treated as a member of a trading group by reason only of any company having the control of another if that control is exercised through a company which is not resident in the United Kingdom or through a company whose control depends on a holding a profit on the sale of which would be treated as a trading receipt of the company.

Requirements of a company’s business

8(1)For the purposes of paragraph 1(2) above there shall be regarded as income available for distribution and not as having been applied, or as being applicable, to the current requirements of a company’s business, or to such other requirements as may be necessary or advisable for the maintenance and development of that business—

(a)any sum expended or applied, or intended to be expended or applied, out of the income of the company—

(i)in or towards payment for the business, undertaking or property which the company was formed to acquire or which was the first business, undertaking or property of a substantial character in fact acquired by the company, or

(ii)in redemption or repayment of any share or loan capital or debt (including any premium thereon) issued or incurred in or towards payment for any such business, undertaking or property, or issued or incurred for the purpose of raising money applied or to be applied in or towards payment therefor, or

(iii)in meeting any obligations of the company in respect of the acquisition of any such business, undertaking or property, or

(iv)in redemption or repayment of any share or loan capital or debt (including any premium thereon) issued or incurred otherwise than for adequate consideration; and

(b)any sum expended or applied, or intended to be expended or applied, in pursuance or in consequence of any fictitious or artificial transactions; and

(c)in the case of a company which is neither a trading company nor a member of a trading group, any sum expended or applied, or available to be expended or applied, out of the income of the company in or towards the redemption, repayment or discharge of any loan capital or debt (including any premium thereon) in respect of which any person is a loan creditor of the company; and

(d)in the case of a company which is neither a trading company nor a member of a trading group, any sum expended or applied, or available to be expended or applied, out of the income of the company in or towards the acquisition of an estate or interest in land or the construction or extension of a building, not being a construction or extension which constitutes an improvement or development of farm land or market garden land.

Sub-paragraph (d) above does not apply where the acquisition, construction or extension concerned was made in pursuance of a contract entered into before 24th March 1973.

(2)For the purposes of sub-paragraph (1)(a)(iv) above, share or loan capital or debt shall be deemed to be issued or incurred otherwise than for adequate consideration if—

(a)it is issued or incurred for consideration the value of which to the company is substantially less than the amount of the capital or debt (including any premium thereon); or

(b)it is issued or incurred in or towards, or for the purpose of raising money applied or to be applied in or towards, the redemption or repayment of any share or loan capital or debt which itself was issued or incurred for such consideration as is mentioned in paragraph (a) above or which represents, directly or indirectly, any share or loan capital or debt which itself was issued or incurred for such consideration.

(3)In relation to any loan capital or debt mentioned in sub-paragraph (1)(c) above which was issued or incurred by the company for money borrowed by it for the purpose of financing expenditure on any acquisition, construction or extension falling within sub-paragraph (1)(d) above, the expression “loan creditor” in sub-paragraph (1)(c) above shall be construed as if, in the definition of that expression in subsections (7) to (9) of section 417, subsection (9) were omitted.

(4)References in sub-paragraphs (1)(a) and (2)(b) above to the redemption or repayment of a company’s share capital shall be construed as including references to the purchase by the company of its own shares.

(5)References in sub-paragraphs (1) to (4) above to money applied or to be applied for any purpose shall be deemed to include references to money applied or to be applied in or towards the replacement of that money.

9(1)Paragraph 1(3) above shall not apply to—

(a)the acquisition of a trade, or of an asset to be used in a trade, or of an interest in any such asset, which at the date of the acquisition or at any time within one year previously was owned by an associated company of the acquiring company; or

(b)the intended acquisition of a trade, or of such an asset or interest as is referred to in paragraph (a) above, which, at the end of the accounting period for which the acquiring company’s relevant income is to be ascertained, is owned by a company which is then an associated company of the acquiring company;

and, where the trade, asset or interest was, or is, in part owned as mentioned above, paragraph 1(3) above shall not apply with respect to that part.

(2)Paragraph 1(3) above shall not apply to—

(a)the acquisition of shares which at the date of the acquisition or at any time within one year previously were owned by an associated company of the acquiring company or by a person who then had control of the acquiring company; or

(b)the intended acquisition of shares which at the end of the accounting period for which the acquiring company’s relevant income is to be ascertained are owned by a company which is then an associated company of the acquiring company or by a person who has control of the acquiring company;

and where shares were, or are, in part owned as mentioned above, paragraph 1(3) above shall not apply with respect to that part.

(3)Paragraph 1(3) above shall not apply to—

(a)the acquisition of shares in a company which immediately before the acquisition or at any time within one year previously was an associated company of the acquiring company; or

(b)the intended acquisition of shares in a company which, at the end of the accounting period for which the acquiring company’s relevant income is to be ascertained, is an associated company of the acquiring company.

(4)Section 416(1)—

(a)shall not apply for the purposes of paragraph (a) of sub-paragraphs (1), (2) and (3) above; and

(b)shall apply for the purposes of paragraph (b) of each of those sub-paragraphs with the omission of the words “or at any time within one year previously”.

(5)For the purposes of paragraph (a) of sub-paragraphs (1), (2) and (3) above, another company is an associated company of the acquiring company if—

(a)the acquiring company controlled that other company or that other company controlled the acquiring company either at the date of the acquisition of the trade, asset or interest or at any time within one year previously; or

(b)a person who had control of the acquiring company at that date also controlled that other company either at that date or at any time within one year previously.

(6)In ascertaining for the purposes of sub-paragraphs (2) and (5) above or for the purposes of section 416(1) as it applies for the purposes of paragraph (b) of sub-paragraphs (1), (2) and (3) above, whether any person has control of a company—

(a)there shall be left out of account for the purposes of section 416(2)(c) the rights of another company as loan creditor in respect of a debt incurred or redeemable loan capital issued in connection with the acquisition from that company of any trade, any asset to be used in a trade, or any interest in any such asset;

(b)section 417(3)(a) shall have effect as if the reference to a partner of a participator were omitted;

(c)section 417(3)(a) and (b) shall have effect as if the expression “relative” did not have the meaning assigned to it by section 417(4) but meant husband or wife or, in the case of a director of the company, husband or wife or any child or remoter issue who is an infant; and

(d)section 417(3)(c) shall have effect as if the reference to any other person interested were a reference (and a reference only) to the trustees or to the personal representatives as defined in section 701.

(7)For the purposes of this paragraph the time of acquisition of a trade, asset or interest, or shares, acquired under a contract shall be—

(a)the time at which the contract is made, or

(b)if it is conditional (and in particular if it is conditional on the exercise of an option), the time at which the condition is satisfied,

and not, if different, the time at which the trade, asset, interest or shares is or are conveyed or transferred.

(8)For the purposes of paragraph 1(3) above there shall be regarded as income available for distribution and not as having been applied, or as being applicable, to such requirements of a company’s business as may be necessary or advisable for such an acquisition as is mentioned in paragraph 1(3) above any sum expended or applied, or intended to be expended or applied, as mentioned in paragraph 8(1)(a)(iv) or (b) above; and paragraph 8(2) and (5) above shall apply for the purposes of this sub-paragraph as they apply for the purposes of paragraph 8.

Cessations and liquidations

10(1)Where a close company ceases to carry on the trade, or the business of holding investments, in which its activities wholly or mainly consisted, the relevant income of the company for any accounting period in which that event occurs, or which ends in or within the 12 months ending with that event, shall be calculated as if—

(a)paragraph 1(1)(a) and (b)(i) above referred respectively to the whole of the company’s distributable income other than trading income and to the whole of the estate or trading income and not to so much thereof as can be distributed without prejudice to the requirements there mentioned, and paragraphs 1(2)(a) and 8 above were omitted;

(b)in paragraph 2(1) above the words “50 per cent. of” were omitted.

(2)Where sub-paragraph (1) above applies for an accounting period and the company could not make distributions without prejudice to the claims of creditors (excluding those mentioned in sub-paragraph (3) below), the excess mentioned in section 424(1) shall be disregarded to the extent to which the company could not make distributions up to the amount of its relevant income without prejudice to those claims.

(3)Subject to sub-paragraph (4) below, the creditors to be excluded for the purposes of sub-paragraph (2) above are all participators and associates of participators, and all creditors in respect of debts originally created in favour of or due to a person who was then a participator or associate of a participator.

(4)A creditor is not to be excluded in respect of any debt which either—

(a)arose in the ordinary course of the company’s trade or the company’s business of holding investments and also in the ordinary course of a trade or profession of the creditor or, as the case may be, of the participator or associate who was the original creditor; or

(b)is a debt for remuneration chargeable to income tax under Schedule E; or

(c)is a debt for any rent or other payment due for the use of tangible property or of copyright in a literary, dramatic, musical or artistic work within the meaning of the [1956 c. 74.] Copyright Act 1956 (or any corresponding right under the law of a country to which that Act does not extend), and not representing more than a reasonable commercial consideration for that use.

(5)Where sub-paragraph (1) above applies for any accounting period, there shall be disregarded for the purposes of any apportionment made by virtue of section 424(2) so much of the relevant income of the company for that period as is equal to the amount which would be disregarded under sub-paragraph (2) above.

(6)Where a resolution is passed or an order is made for the winding up of a close company, or where any other act is done for a like purpose in the case of a winding up otherwise than under the [1986 c. 45.] Insolvency Act 1986, sub-paragraphs (1) to (5) above shall apply for any accounting period ending in or with the 12 months ending with the passing of the resolution or other event, or for any later accounting period, as they apply, in a case falling within sub-paragraph (1) above, for an accounting period in which a close company ceases to carry on a trade.

Legal restrictions on distributions

11(1)Subject to paragraph 12 below, where a company is subject to any restriction imposed by law as regards the making of distributions, the excess mentioned in section 424(1) shall be disregarded to the extent to which the company could not make distributions up to the amount of its relevant income without contravening that restriction.

(2)Except where paragraph 10(1) above applies, there shall be disregarded for the purposes of any apportionment made by virtue of section 424(2) so much of the relevant income of the company as is equal to any amount which would be disregarded under sub-paragraph (1) above.

Stock dividends

12(1)Where a company issues to a close company any relevant share capital, sub-paragraphs (2) and (3) below shall apply as regards that share capital, and in this paragraph—

• “the relevant accounting period” means the accounting period of the close company in which the due date of issue falls;

• “relevant share capital” means share capital to which section 249 applies; and

• “appropriate amount in cash” has the meaning given by section 251(2).

(2)The relevant income of the close company for the relevant accounting period, as determined under paragraph 1 above, and the amount which, under paragraph 2 above (read, where appropriate, with paragraph 10 above) the relevant income of the close company for that period cannot exceed, shall each be increased by an amount equal to the appropriate amount in cash (or, if it would otherwise be nil, be treated as equal to the appropriate amount in cash).

(3)The amount, if any, which would otherwise be disregarded under paragraph 11(1) above shall be reduced by an amount equal to the appropriate amount in cash.

(4)Where a close company issues any relevant share capital in a case falling within section 249(4), (5) or (6) or sub-paragraph (1) above (read in each case with section 249(3)), the company shall be treated for the purposes of paragraph 3(1) and (2) above—

(a)as if a dividend of an amount equal to the appropriate amount in cash had been paid on the due date of issue; and

(b)where, in relation to that share capital, “the appropriate amount in cash” has the meaning given by section 251(2)(a), as if that dividend had been declared in respect of the accounting period (if any) in respect of which the relevant cash dividend (as defined in section 251(3)) was declared.

PART IIPROCEDURE

Notice of amount to be apportioned

13(1)Where in the case of any company the inspector proposes to apportion an amount under section 423 he shall serve on the company a notice showing the amount to be apportioned and, subject to any appeal under this paragraph and to paragraph 15 below, that notice shall be treated as conclusively establishing, both in relation to the company and for the purposes of any assessment under section 426, that an apportionment can be made in respect of that amount.

(2)After a notice under sub-paragraph (1) above has been served on the company it shall not be altered except on appeal or in accordance with paragraph 15 below.

(3)The company may by giving notice of appeal to the inspector within 30 days of the date of any notice under sub-paragraph (1) above appeal against that notice; and any notice under that sub-paragraph shall state the time within which notice of appeal may be given under this sub-paragraph.

(4)Subject to paragraph 18(2) below, any appeal under this paragraph shall be to the General Commissioners except that the company may elect (in accordance with section 46(1) of the Management Act) to bring the appeal before the Special Commissioners instead of the General Commissioners.

(5)The notice of appeal shall specify the grounds of appeal, but on the hearing of the appeal the Commissioners may allow the appellant to put forward any ground not specified in the notice, and take it into consideration if satisfied that the omission was not wilful or unreasonable.

(6)If a company fails or refuses, on being required to do so under paragraph 17 below, to furnish a statement of any amount which in the case of that company could be apportioned under section 423, or renders a statement with which the inspector is not satisfied, the inspector may make an estimate of that amount to the best of his judgment, and any relevant decision taken by the inspector under this sub-paragraph may be reviewed on appeal under this paragraph.

(7)Sections 113(1B) and (3) and 114(2) of the Management Act (supplementary provisions as to assessments and notices of assessment) shall apply to any notice under sub-paragraph (1) above as if the determination of the amount to be shown therein were the making of an assessment and the notice were a notice of assessment.

Notice of manner of apportionment

14(1)Where notice has been served on a company under paragraph 13 above showing an amount to be apportioned, the inspector shall serve on the company a notice showing the manner in which that amount is apportioned, (that is to say, the sum apportioned or sub-apportioned to each participator or, if the inspector thinks fit, to each class of share) and, subject to any appeal under this paragraph and to paragraph 15 below, that notice shall be treated, in relation to the company, as conclusively establishing the manner of apportionment.

(2)Paragraph 13(2) to (5) and (7) above shall apply also to a notice under this paragraph, but any appeal against such a notice by virtue of this sub-paragraph shall be to the Special Commissioners.

(3)The manner of apportionment shown in a notice under this paragraph may also be questioned on an appeal against any assessment made under section 426; and any relevant decision taken by the inspector under section 425(2) or (3) may be reviewed on an appeal under this paragraph or on an appeal against any such assessment.

Revision of apportionment

15(1)If the inspector discovers that the amount apportioned in the case of any company is or has become insufficient, he shall serve on the company a further notice under paragraph 13(1) above showing the further amount which ought in his opinion to be apportioned, and a further notice relating to that amount shall then be served under paragraph 14 above.

(2)Where the amount shown in a notice under sub-paragraph (1) of paragraph 13 above is excessive because the company’s distributable income is smaller than it was taken to be for the purposes of that notice or because the company’s distributions were greater than they were taken to be for those purposes, the inspector shall serve on the company a further notice under that sub-paragraph showing a reduced amount; and where such a notice is served—

(a)a further notice shall also be served under paragraph 14 above making such amendments in any previous notice under that paragraph as may be required to take account of the reduction in the amount apportioned; and

(b)there shall be made such adjustments by repayment or discharge of tax as may be required to secure that liabilities to tax under sections 426 to 430 are what they would have been if the notices originally served under paragraphs 13 and 14 above had been as amended by further notices served by virtue of this paragraph.

Protection by transmission of accounts

16(1)A close company may, at any time after the general meeting at which the accounts for any period of account are adopted, forward to the inspector a copy of those accounts, together with a copy of the report (if any) of the directors for that period and such further information (if any) as it may think fit, and may request the inspector to proceed under this paragraph in relation to any accounting period comprised in that period of account.

(2)Sub-paragraph (1) above shall not apply if the company is neither a trading company nor a member of a trading group and has no estate or trading income.

(3)Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, then, subject to sub-paragraph (4) below, he shall, within three months after receipt of the request, intimate to the company whether or not he proposes to make an apportionment in respect of the company for the accounting period under section 423.

(4)On receiving a request made in accordance with sub-paragraph (1) above the inspector may, not later than three months after the receipt of the request, call on the company to furnish him with such further particulars as he may reasonably require; and, if the inspector does so, the time for giving the intimation required by sub-paragraph (3) above shall not expire before three months after he has been furnished with those particulars.

(5)Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, and does not within the time limited by sub-paragraphs (3) and (4) above intimate his intention to make an apportionment in respect of the period, no such apportionment shall be made unless either—

(a)the information accompanying the request, and any further particulars furnished to the inspector in connection therewith, are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to him, or

(b)within 12 months of the end of the period any of the provisions of paragraph 10 above have effect in relation to the company.

Information

17(1)The inspector may, by notice, require any company which is, or appears to him to be, a close company to furnish him within such time (not being less than 30 days) as may be specified in the notice with such particulars as he thinks necessary for the purposes of this Chapter.

(2)If for those purposes any person in whose name any shares are registered is so required by notice by the inspector, he shall state whether or not he is the beneficial owner of the shares and, if not the beneficial owner of the shares or any of them, shall furnish the name and address of the person or persons on whose behalf the shares are registered in his name.

(3)Sub-paragraph (2) above shall apply in relation to loan capital as it applies in relation to shares.

(4)The inspector may, for the purposes of this Chapter, by notice require—

(a)any company which appears to him to be a close company to furnish him with particulars of any bearer securities issued by the company, and the names and addresses of the persons to whom the securities were issued and the respective amounts issued to each person; and

(b)any person to whom securities were so issued, or to or through whom such securities were subsequently sold or transferred, to furnish him with such further information as he may require with a view to enabling him to ascertain the names and addresses of the persons beneficially interested in the securities.

In this sub-paragraph “securities” includes shares, stocks, bonds, debentures and debenture stock and also any promissory note or other instrument evidencing indebtedness to a loan creditor of the company.

(5)Any power which the inspector may exercise under this paragraph for the purposes of this Chapter may also be exercised for the purposes of sections 419 to 422.

Exercise of functions by the Board

18(1)Any functions conferred by this Chapter on the inspector may also be exercised by the Board; and references in this Chapter to the inspector shall be construed accordingly.

(2)Where by virtue of this paragraph a notice is served by the Board under paragraph 13(1) above any appeal under that paragraph shall be to the Special Commissioners.

Section 506.

SCHEDULE 20CHARITIES: QUALIFYING INVESTMENTS AND LOANS

PART IQUALIFYING INVESTMENTS

1Investments specified in any of the following paragraphs of this Part of this Schedule are qualifying investments for the purposes of section 506.

2Any investment falling within Part I, Part II, apart from paragraph 13 (mortgages etc.) or Part III of Schedule 1 to the [1961 c. 62.] Trustee Investments Act 1961.

3Any investment in a common investment fund established under section 22 of the [1960 c. 58.] Charities Act 1960 or section 25 of the [1964 c. 33 (N.I.).] Charities Act (Northern Ireland) 1964 or in any similar fund established for the exclusive benefit of charities by or under any enactment relating to any particular charities or class of charities.

4Any interest in land, other than an interest held as security for a debt of any description.

5Shares in, or securities of, a company which are quoted on a recognised stock exchange, or which are dealt in on the Unlisted Securities Market.

6Units, or other shares of the investments subject to the trusts, of a unit trust scheme within the meaning of the [1986 c. 60.] Financial Services Act 1986.

7(1)Deposits with an institution authorised under the [1987 c. 22.] Banking Act 1987 in respect of which interest is payable at a commercial rate.

(2)A deposit mentioned in sub-paragraph (1) above is not a qualifying investment if it is made as part of an arrangement under which a loan is made by the authorised institution to some other person.

8Certificates of deposit as defined in section 56(5).

9(1)Any loan or other investment as to which the Board are satisfied, on a claim made to them in that behalf, that the loan or other investment is made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person).

(2)The reference in sub-paragraph (1) above to a loan includes a loan which is secured by a mortgage or charge of any kind over land.

PART IIQUALIFYING LOANS

10For the purposes of section 506, a loan which is not made by way of investment is a qualifying loan if it consists of—

(a)a loan made to another charity for charitable purposes only; or

(b)a loan to a beneficiary of the charity which is made in the course of carrying out the purposes of the charity; or

(c)money placed on current account with an institution authorised under the [1987 c. 22.] Banking Act 1987 otherwise than as part of such an arrangement as is mentioned in paragraph 7(2) above; or

(d)any other loan as to which the Board are satisfied, on a claim made to them in that behalf, that the loan is made for the benefit of the charity and not for the avoidance of tax (whether by the charity or by some other person).

PART IIIATTRIBUTION OF EXCESS NON-QUALIFYING EXPENDITURE TO EARLIER CHARGEABLE PERIODS

11This Part of this Schedule applies in the circumstances specified in subsection (6) of section 506 and in this Part—

(a)“the primary period” means the chargeable period of the charity concerned in which there is such an excess as is mentioned in that subsection;

(b)“unapplied non-qualifying expenditure” means so much of the excess referred to in that subsection as does not exceed the non-qualifying expenditure of the primary period; and

(c)“earlier period”, in relation to an amount of unapplied non-qualifying expenditure, means any chargeable period of the charity concerned which ended not more than six years before the end of the primary period.

12(1)So much of the unapplied non-qualifying expenditure as is not shown by the charity to be the expenditure of non-taxable sums received by the charity in the primary period shall be treated in accordance with paragraph 13 below as non-qualifying expenditure of earlier periods.

(2)In sub-paragraph (1) above “non-taxable sums” means donations, legacies and other sums of a similar nature which, apart from section 505(1) of this Act and section 145 of the 1979 Act, are not within the charge to tax.

13(1)Where, in accordance with paragraph 12 above, an amount of unapplied non-qualifying expenditure (“the excess expenditure”) falls to be treated as non-qualifying expenditure of earlier periods—

(a)it shall be attributed only to those earlier periods (if any) which, apart from the attribution, (but taking account of any previous operation of this paragraph) the relevant income and gains exceed the aggregate of the qualifying and non-qualifying expenditure incurred in that period; and

(b)the amount to be attributed to any such earlier period shall not be greater than the excess of that period referred to in paragraph (a) above.

(2)Where there is more than one earlier period to which the excess expenditure can be attributed in accordance with sub-paragraph (1) above, it shall be attributed to later periods in priority to earlier periods.

(3)In so far as any of the excess expenditure cannot be attributed to earlier periods in accordance with this paragraph, it shall be disregarded for the purposes of section 506(6) (and this Part of this Schedule).

14All such adjustments shall be made, whether by way of the making of assessments or otherwise, as may be required in consequence of the provisions of this Part of this Schedule.

Sections 570 and 572.

SCHEDULE 21TAX RELIEF IN CONNECTION WITH SCHEMES FOR RATIONALIZING INDUSTRY AND OTHER REDUNDANCY SCHEMES

PART IPRELIMINARY

1(1)In this Schedule—

• “scheme” means a scheme which is for the time being certified or has at any time been certified by the Secretary of State under section 568;

• “payment” means a payment made under a scheme, being a payment made to a person carrying on a trade to which the scheme relates and not being a payment made by way of repayment of contributions;

• “the person chargeable” means, in relation to any such payment, the person liable to pay any tax which may fall to be paid by reason of the receipt of the payment;

• “damage” includes any loss, liability, expense or other burden, and references to the amount of any damage are references to the sum which would be fair compensation for that damage;

• “contribution” includes part of a contribution, and “deductible contribution” means a contribution allowed to be deducted under section 568, any reduction under Part III of this Schedule being left out of account; and

• “asset” includes part of an asset.

(2)For the purposes of this Schedule, a sum received by any person by way of repayment of contributions shall be deemed to be by way of repayment of the last contribution paid by him, and, if the sum exceeds the amount of that contribution, by way of repayment of the penultimate contribution so paid, and so on.

PART IIRELIEF IN RESPECT OF CERTAIN PAYMENTS

2The question whether any, and if so, what, relief is to be given shall be determined separately in relation to each payment made under the scheme in respect of the trade, but for the purpose of determining that question regard shall be had, as provided by the following provisions of this Part of this Schedule, to the sum (“the total payment”) produced by adding the amount of the payment to the amount of any payments previously so made.

3No relief shall be given in respect of the payment unless the person chargeable shows—

(a)the amount of the damage in respect of which the total payment has been made; and

(b)how much of that amount is referable to damage in respect of which no relief may be given under the Tax Acts.

4No relief shall be given in respect of the payment unless the total payment, or the amount of the damage in respect of which the total payment has been made, whichever is the smaller, exceeds the aggregate amount of the deductible contributions which have been paid in furtherance of the scheme in respect of the trade in question before the payment is made, exclusive of any contributions which have been repaid before the payment is made.

5The amount of the reduction to be made in respect of the payment shall be arrived at by—

(a)ascertaining the sum which bears to the excess mentioned in paragraph 4 above the same proportion that the amount mentioned in paragraph 3(b) above bears to the amount mentioned in paragraph 3(a); and

(b)deducting from that sum the total amount of any reductions which have been or fall to be made under this Schedule in respect of payments previously made under the scheme in respect of the trade.

6(1)For the purposes of this Schedule, and subject to sub-paragraph (2) below, damage shall be deemed to be damage in respect of which relief may be given under the Tax Acts if and only if—

(a)the damage is attributable to any of the following events, that is to say, the demolition, destruction or putting out of use of any asset, or the disposition or termination of an interest in any asset, and, by reason of that event, an allowance falls to be made under Chapter I or Chapter II of Part I of the 1968 Act in taxing the trade; or

(b)the damage consists of any loss, liability, expense or other burden in respect of which an allowance may be made in computing the profits or gains of the trade for the purposes of the Tax Acts.

(2)Where an allowance under Chapter I of Part I of the 1968 Act in respect of any damage falls to be reduced in the proportion specified in section 3(4) of that Act, only a proportionately reduced amount of the damage shall be treated as being referable to damage in respect of which relief may be given under the Tax Acts.

(3)Where any event occurs which would give rise to an allowance under the Tax Acts in respect of any asset in taxing, or computing the profits or gains of, a trade but for any of the following matters, that is to say—

(a)that there are no profits or gains against which the allowance could be made, or

(b)that account is required to be taken of allowances previously made or deemed to have been made in respect of the asset; or

(c)that account is required to be taken of any sum which falls to be written off the expenditure incurred on the asset for the purpose of determining whether any and if so what allowance may be given by reason of the event; or

(d)that account is required to be taken of any sum falling to be taken into account as sale, insurance, salvage or compensation moneys, the like consequences shall ensue under this Schedule as if an allowance had fallen to be made by reason of that event.

(4)Where any damage is attributable to a permanent change in the purposes for which an asset is used, or the temporary or permanent putting out of use of an asset, the question whether the damage is damage in respect of which relief may be given under the Tax Acts shall be determined as if the damage had been attributable to a sale of the asset on the date upon which the change or putting out of use took place.

PART IIIEXCLUSION OF RELIEF IN RESPECT OF CONTRIBUTIONS PAID AFTER RELIEF HAS BEEN GIVEN UNDER PART II

7The provisions of this Part of this Schedule shall have effect where—

(a)a contribution is paid under a scheme in respect of a trade; and

(b)before the contribution is paid, payments have been made under the scheme to the person carrying on the trade; and

(c)reductions have been made, under Part II of this Schedule, in the amounts which, by reason of those payments, are to be treated as trading receipts of the trade.

8There shall be ascertained—

(a)the total amount of those reductions; and

(b)the sum by which that total would have been decreased if the contribution, and any previous contributions to which this Part of this Schedule applies, had been paid before any of the payments were made.

9For the purpose of determining what deduction is to be made in respect of the contribution under section 568, the contribution shall be deemed to be reduced by the sum specified in paragraph 8(b) above, but—

(a)for the purpose of the application of paragraph 8 above in relation to contributions subsequently paid under the scheme in respect of the trade, the total amount of the reductions referred to in that paragraph shall be treated as decreased by that sum; and

(b)for the purpose of the application of paragraph 5 above in relation to payments subsequently made under the scheme in respect of the trade, the total amount of the reductions referred to in that paragraph shall be treated as decreased by that sum.

10When two or more contributions are paid at the same time, the provisions of this Part of this Schedule shall have effect as if they were a single contribution.

Section 603.

SCHEDULE 22REDUCTION OF PENSION FUND SURPLUSES

1(1)The Board may make regulations providing for this Schedule to apply, as from a prescribed date, in relation to any exempt approved scheme which is of a prescribed kind.

(2)The Board may make regulations providing for prescribed provisions of this Schedule to apply, as from a prescribed date, in prescribed circumstances, and subject to any prescribed omissions or modifications, in relation to any exempt approved scheme of another prescribed kind.

(3)In this Schedule “prescribed” means prescribed by regulations made by the Board.

2(1)The administrator of a scheme in relation to which this Schedule applies shall, in prescribed circumstances and at a prescribed time, either produce to the Board a written valuation such as is mentioned in sub-paragraph (2) below or give to the Board a certificate such as is mentioned in sub-paragraph (3) below.

(2)The valuation must be a valuation of the assets held for the purposes of the scheme and the liabilities of the scheme, must be determined in accordance with prescribed principles and fulfil prescribed requirements, and must be signed by a person with qualifications of a prescribed kind.

(3)The certificate must state whether or not the value of the assets (as determined in accordance with prescribed principles) exceeds the value of the liabilities (as so determined) by a percentage which is more than a prescribed maximum, must be in a prescribed form, and must be signed by a person with qualifications of a prescribed kind.

3(1)Subject to paragraph 4(4) below, where a valuation produced under paragraph 2 shows, or a certificate given under that paragraph states, that the value of the assets exceeds the value of the liabilities by a percentage which is more than the prescribed maximum, the administrator of the scheme shall within a prescribed period submit to the Board for their approval proposals which comply with sub-paragraph (2) below.

(2)The proposals must be proposals for reducing (or, subject to paragraph (b) below, eliminating) the excess in a way or ways set out in the proposals and falling within sub-paragraph (3) below; and they must be such as to secure that—

(a)by the end of a prescribed period the percentage (if any) by which the value of the assets exceeds the value of the liabilities is no more than the prescribed maximum; and

(b)if the way, or one of the ways, set out in the proposals falls within sub-paragraph (3)(a) below, there remains an excess which is of a level not less than the prescribed minimum.

(3)Subject to sub-paragraph (4) below, the permitted ways of reducing or eliminating the excess are—

(a)making payments to an employer;

(b)suspending for a period (of five years or less) set out in the proposals an employer’s obligation to pay contributions under the scheme or reducing for such a period the amount of an employer’s contributions under the scheme;

(c)suspending for a period (of five years or less) set out in the proposals the obligation of employees to pay contributions under the scheme or reducing for such a period the amount of employees' contributions under the scheme;

(d)improving existing benefits provided under the scheme;

(e)providing new benefits under the scheme;

(f)such other ways as may be prescribed.

(4)In prescribed circumstances sub-paragraph (3) above shall apply subject to such omissions or modifications as may be prescribed.

(5)Subject to paragraph 4(4) below, if the administrator of the scheme fails to submit proposals to the Board within the period mentioned in subparagraph (1) above, or if the proposals submitted to them within that period are not approved by the Board within a further prescribed period, paragraph 7 below shall apply.

4(1)Where a valuation has been produced under paragraph 2 above, the Board may serve on the administrator of the scheme a notice requiring him to furnish the Board, within a prescribed period, with such particulars relating to the valuation as may be specified in the notice.

(2)Where a certificate has been given under paragraph 2 above, the Board may serve on the administrator of the scheme a notice requiring him to produce to the Board, within a prescribed period, a written valuation such as is mentioned in paragraph 2(2) above.

(3)Where a valuation has been produced in compliance with a notice served under sub-paragraph (2) above, the Board may serve on the administrator of the scheme a further notice requiring him to furnish the Board, within a prescribed period, with such particulars relating to the valuation as may be specified in the notice.

(4)Where a notice is served on the administrator of a scheme under sub-paragraph (1) or (2) above, paragraph 3(1) and (5) above shall cease to apply.

5(1)Where particulars have been furnished under paragraph 4 above, or a valuation has been produced under that paragraph, the Board shall, within a prescribed period, serve on the administrator of the scheme a notice—

(a)stating that they accept the valuation produced under paragraph 2 or, as the case may be, 4 above; or

(b)stating that they do not accept the valuation so produced, and specifying their estimate of the value of the liabilities of the scheme at the relevant time and their estimate of the value of the assets held for the purposes of the scheme at that time.

(2)For the purposes of sub-paragraph (1)(b) above, the relevant time is the time specified in the valuation produced under paragraph 2 or 4 above as the time by reference to which the values of the assets and liabilities are determined.

(3)Where—

(a)in a case falling within sub-paragraph (1)(a) above, the valuation shows that the value of the assets exceeds the value of the liabilities by a percentage which is more than the prescribed maximum; or

(b)in a case falling within sub-paragraph (1)(b) above, the value of the assets as estimated by the Board exceeds the value of the liabilities as so estimated by a percentage which is more than the prescribed maximum;

the administrator of the scheme shall within a prescribed period submit to the Board for their approval proposals which comply with paragraph 3(2) to (4) above.

(4)If the administrator of the scheme fails to submit proposals to the Board within the period mentioned in sub-paragraph (3) above, or if proposals submitted to them within that period are not approved by the Board within a further prescribed period, paragraph 7 below shall apply.

6(1)Where proposals are submitted to the Board under paragraph 3(1) or 5(3) above and they approve them within the further prescribed period mentioned in paragraph 3(5) or 5(4) above, the administrator of the scheme shall carry out the proposals within the period mentioned in paragraph 3(2) above.

(2)If the administrator fails to carry out the proposals within that period, paragraph 7 below shall apply.

7(1)Where this paragraph applies the Board may specify a percentage equivalent to the fraction—

(2)For the purposes of this paragraph the relevant time is the time specified—

(a)in the valuation produced or certificate given under paragraph 2 above; or

(b)where a valuation has been produced under paragraph 4 above, in that valuation,

as the time by reference to which the values of the assets and liabilities are determined.

(3)Where a percentage has been so specified—

(a)section 592(2) shall apply only to that percentage of any income derived in the relevant period from the assets held for the purposes of the scheme;

(b)section 592(3) shall apply only to that percentage of any underwriting commissions applied in the relevant period for the purposes of the scheme;

(c)section 56 shall by virtue of subsection (3)(b) of that section not apply only to that percentage of any profits or gains arising to the scheme in the relevant period; and

(d)section 149B(1)(g) of the 1979 Act (capital gains tax exemption) shall apply only to that percentage of any gain accruing on the disposal in the relevant period of any of those assets.

(4)Sub-paragraphs (5) to (8) below shall apply where a percentage has been so specified, securities are transferred in the relevant period, and the transferor or transferee is such that, if he became entitled to any interest on them, exemption could be allowed under section 592(2).

(5)Section 715(1)(k) shall not apply.

(6)Where, in consequence of sub-paragraph (5) above, section 713(2)(a) or (3)(b) applies, the sum concerned shall be treated as reduced by an amount equal to the specified percentage of itself.

(7)Where, in consequence of sub-paragraph (5) above, section 713(2)(b) or (3)(a) applies, the relief concerned shall be treated as reduced by an amount equal to the specified percentage of itself.

(8)For the purposes of section 714(5), the amount of interest falling to be reduced by the amount of the allowance shall be treated as the amount found after applying section 592(2).

(9)In sub-paragraphs (4) to (8) above expressions which also appear in sections 710 to 728 have the same meanings as in those sections.

(10)In this paragraph “the relevant period” means the period begining at the relevant time and ending when it is proved to the satisfaction of the Board that the value of the assets (as determined in accordance with prescribed principles) exceeds the value of the liabilities (as so determined) by a percentage which is no more than the prescribed maximum.

8(1)The Board may make regulations providing that an appeal may be brought against a notice under paragraph 5(1)(b) above as if it were notice of the decision of the Board on a claim made by the administrator of the scheme concerned.

(2)Regulations under this paragraph may include—

(a)provision that bringing an appeal shall suspend the operation of paragraph 5(3) and (4) above; and

(b)other provisions consequential on the provision that an appeal may be brought (including provisions modifying this Schedule).

Section 609.

SCHEDULE 23OCCUPATIONAL PENSION SCHEMES: SCHEMES APPROVED BEFORE 23rd JULY 1987

Preliminary

1(1)This Schedule shall be deemed to have come into force on 17th March 1987 and, subject to sub-paragraphs (2) and (3) below, applies in relation to any retirement benefits scheme approved by the Board before the passing of the [1987 c. 51] Finance (No.2) Act 1987 (23rd July 1987).

(2)The Board may by regulations provide that this Schedule, or any provision of it, shall not apply in relation to a scheme or to an employee—

(a)in circumstances prescribed in the regulations;

(b)in any case where in the opinion of the Board the facts are such that it would be appropriate for this Schedule, or the provision in question, not to apply.

(3)This Schedule shall not apply to a retirement benefits scheme if, before the end of 1987, the administrator of the scheme gave notice to the Board that it is not to apply.

(4)Where a notice is given to the Board under sub-paragraph (3) above, the scheme shall, with effect from 17th March 1987 or (if later) the date with effect from which it was approved, cease to be approved.

Accelerated accrual

2(1)This paragraph applies where an employee becomes a member of the scheme on or after 17th March 1987.

(2)Notwithstanding anything to the contrary in the rules of the scheme, they shall have effect as if they did not allow the provision for the employee of a pension exceeding one-thirtieth of his relevant annual remuneration for each year of service up to a maximum of 20.

3(1)This paragraph applies where an employee becomes a member of the scheme on or after 17th March 1987 and the scheme allows him to commute his pension or part of it for a lump sum or sums.

(2)If the employee’s full pension (that is, the pension before any commutation) is equal to or less than a basic rate commutable pension, the rules of the scheme shall have effect (notwithstanding anything in them to the contrary) as if they did not allow him to obtain by way of commutation a lump sum or sums exceeding in all a basic rate lump sum.

(3)If the employee’s full pension is greater than a basic rate commutable pension but less than a maximum rate commutable pension, the rules of the scheme shall have effect (notwithstanding anything in them to the contrary) as if they did not allow him to obtain by way of commutation a lump sum or sums exceeding in all the aggregate of—

(a)a basic rate lump sum, and

(b)an amount equal to the relevant percentage of the difference between a basic rate lump sum and a maximum rate lump sum.

(4)In this paragraph, as it applies in relation to an employee—

(a)a “basic rate commutable pension” means a pension of one-sixtieth of his relevant annual remuneration for each year of service up to a maximum of 40;

(b)a “maximum rate commutable pension” means a pension of one-thirtieth of his relevant annual remuneration for each year of service up to a maximum of 20;

(c)a “basic rate lump sum” means a lump sum of three-eightieths of his relevant annual remuneration for each year of service up to a maximum of 40;

(d)a “maximum rate lump sum” means a lump sum of such amount as may be determined by or under regulations made by the Board for the purposes of this paragraph and paragraph 4 below;

(e)“the relevant percentage” means the difference between a basic rate commutable pension and the employee’s full pension expressed as a percentage of the difference between a basic rate commutable pension and a maximum rate commutable pension.

4(1)This paragraph applies where an employee becomes a member of the scheme on or after 17th March 1987 and the scheme provides a lump sum or sums for him otherwise than by commutation of his pension or part of it.

(2)If the employee’s pension is equal to or less than a basic rate non-commutable pension, the rules of the scheme shall have effect (notwithstanding anything in them to the contrary) as if they did not allow the payment to him, otherwise than by way of commutation, of a lump sum or sums exceeding in all a basic rate lump sum.

(3)If the employee’s pension is greater than a basic rate non-commutable pension but less than a maximum rate non-commutable pension the rules of the scheme shall have effect (notwithstanding anything in them to the contrary) as if they did not allow the payment to him, otherwise than by way of commutation, of a lump sum or sums exceeding in all the aggregate of—

(a)a basic rate lump sum, and

(b)an amount equal to the relevant percentage of the difference between a basic rate lump sum and a maximum rate lump sum.

(4)In this paragraph, as it applies in relation to an employee—

(a)a “basic rate non-commutable pension” means a pension of one-eightieth of his relevant annual remuneration for each year of service up to a maximum of 40,

(b)a “maximum rate non-commutable pension” means a pension of one-fortieth of his relevant annual remuneration for each year of service up to a maximum of 20,

(c)“basic rate lump sum” and “maximum rate lump sum” have the same meanings as in paragraph 3 above, and

(d)“the relevant percentage” means the difference between a basic rate non-commutable pension and the employee’s actual pension expressed as a percentage of the difference between a basic rate non-commutable pension and a maximum rate non-commutable pension.

Final remuneration

5(1)This paragraph applies where an employee who is a member of the scheme retires on or after 17th March 1987.

(2)The rules of the scheme shall have effect as if they provided that in determining the employee’s relevant annual remuneration for the purpose of calculating benefits, no account should be taken of anything excluded from the definition of “remuneration” in section 612(1).

(3)In the case of an employee—

(a)whose employer is a company and who at any time in the last ten years of his service is a controlling director of the company, or

(b)whose relevant annual remuneration for the purpose of calculating benefits, so far as the remuneration is ascertained by reference to years beginning on or after 6th April 1987, would (apart from this Schedule) exceed the permitted maximum,

the rules of the scheme shall have effect as if they provided that his relevant annual remuneration must not exceed his highest average annual remuneration for any period of three or more years ending within the period of ten years which ends with the date on which his service ends.

(4)In the case of an employee within paragraph (b) of sub-paragraph (3) above who retires before 6th April 1991, the rules of the scheme shall have effect as if they provided that his relevant annual remuneration must not exceed the higher of—

(a)the average annual remuneration referred to in that sub-paragraph, and

(b)his remuneration (within the meaning given by section 612(1)) assessable to income tax under Schedule E for the year of assessment 1986-87.

(5)For the purposes of this paragraph a person is a controlling director of a company if—

(a)he is a director (as defined in section 612), and

(b)he is within paragraph (b) of section 417(5),

in relation to the company.

Lump sums

6(1)This paragraph applies where an employee becomes a member of the scheme on or after 17th March 1987.

(2)If the rules of the scheme allow the employee to obtain, (by commutation of his pension or otherwise), a lump sum or sums calculated by reference to his relevant annual remuneration, they shall have effect as if they included a rule that in calculating a lump sum any excess of that remuneration over the permitted maximum should be disregarded.

Additional voluntary contributions

7(1)This paragraph applies where—

(a)the rules of the scheme make provision for the payment by employees of voluntary contributions, and

(b)on or after 8th April 1987 an employee enters into arrangements to pay such contributions.

(2)Notwithstanding anything in the rules of the scheme, they shall have effect as if they did not allow the payment to the employee of a lump sum in commutation of a pension if or to the extent that the pension is secured by the voluntary contributions.

8(1)This paragraph applies where an employee who is a member of the scheme (“the main scheme”) is also a member of an approved scheme (“the voluntary scheme”) which provides additional benefits to supplement those provided by the main scheme and to which no contributions are made by any employer of his.

(2)Any rules of the main scheme imposing a limit on the amount of a benefit provided for the employee shall have effect (notwithstanding anything in them to the contrary) as if they provided for the limit to be reduced by the amount of any like benefit provided for the employee by the voluntary scheme.

Supplementary

9In this Schedule “relevant annual remuneration” means final remuneration or, if the scheme provides for benefits to be calculated by reference to some other annual remuneration, that other annual remuneration.

Section 747(6).

SCHEDULE 24ASSUMPTIONS FOR CALCULATING CHARGEABLE PROFITS, CREDITABLE TAX AND CORRESPONDING UNITED KINGDOM TAX OF FOREIGN COMPANIES

General

1(1)The company shall be assumed to be resident in the United Kingdom.

(2)Nothing in sub-paragraph (1) above requires it to be assumed that there is any change in the place or places at which the company carries on its activities.

(3)For the avoidance of doubt, it is hereby declared that, if any sums forming part of the company’s profits for an accounting period have been received by the company without any deduction of or charge to tax by virtue of section 47 or 48 the effect of the assumption in sub-paragraph (1) above is that those sums are to be brought within the charge to tax for the purposes of calculating the company’s chargeable profits or corresponding United Kingdom tax.

(4)In any case where—

(a)it is at any time necessary for any purpose of Chapter IV of Part XVII to determine the chargeable profits of the company for an accounting period, and

(b)at that time no direction has been given under section 747(1) with respect to that or any earlier accounting period of the company,

it shall be assumed, for the purpose of any of the following provisions of this Schedule which refer to the first accounting period in respect of which a direction is given under that section, that such a direction has been given for that period (but not for any earlier period).

(5)Nothing in this Schedule affects any liability for, or the computation of, corporation tax in respect of a trade which is carried on by a company resident outside the United Kingdom through a branch or agency in the United Kingdom.

2(1)The company shall be assumed to have become resident in the United Kingdom (and, accordingly, within the charge to corporation tax) at the beginning of the first accounting period in respect of which a direction is given under section 747(1) and that United Kingdom residence shall be assumed to continue throughout subsequent accounting periods of the company (whether or not a direction is given in respect of all or any of them) until the company ceases to be controlled by persons resident in the United Kingdom.

(2)Except in so far as the following provisions of this Schedule otherwise provide, for the purposes of calculating a company’s chargeable profits or corresponding United Kingdom tax for any accounting period which is not the first such period referred to in sub-paragraph (1) above (and, in particular, for the purpose of applying any relief which is relevant to two or more accounting periods), it shall be assumed that a calculation of chargeable profits or, as the case may be, corresponding United Kingdom tax has been made for every previous accounting period throughout which the company was, by virtue of sub-paragraph (1) above, assumed to have been resident in the United Kingdom.

3The company shall be assumed not to be a close company.

4(1)Subject to sub-paragraph (2) below, where any relief under the Corporation Tax Acts is dependent upon the making of a claim or election, the company shall be assumed to have made that claim or election which would give the maximum amount of relief and to have made that claim or election within any time limit applicable to it.

(2)If, by notice given to the Board at any time not later than the expiry of the time for the making of an appeal under section 753 or within such longer period as the Board may in any particular case allow, the United Kingdom resident company which has or, as the case may be, any two or more United Kingdom resident companies which together have, a majority interest in the company so request, the company shall be assumed—

(a)not to have made any claim or election specified in the notice; or

(b)to have made a claim or election so specified, being different from one assumed by sub-paragraph (1) above but being one which (subject to compliance with any time limit) could have been made in the case of a company within the charge to corporation tax; or

(c)to have disclaimed or required the postponement, in whole or in part, of an allowance if (subject to compliance with any time limit) a company within the charge to corporation tax could have disclaimed the allowance or, as the case may be, required such a postponement.

(3)For the purposes of this paragraph, a United Kingdom resident company has, or two or more United Kingdom resident companies together have, a majority interest in the company if on the apportionment of the company’s chargeable profits for the relevant accounting period under section 747(3) more than half of the amount of those profits—

(a)which are apportioned to all United Kingdom resident companies, and

(b)which give rise to an assessment on any such companies under subsection (4)(a) of that section,

are apportioned to the United Kingdom resident company or companies concerned.

(4)In sub-paragraph (3) above “the relevant accounting period” means the accounting period or, as the case may be, the first accounting period in which the relief in question is or would be available in accordance with sub-paragraph (1) above.

Group relief etc.

5The company shall be assumed to be neither a member of a group of companies nor a member of a consortium for the purposes of any provision of the Tax Acts.

6(1)In relation to section 247 it shall be assumed—

(a)that the conditions for the making of an election under subsection (1) are not fulfilled with respect to dividends paid or received by the company; and

(b)that the conditions for the making of an election under subsection (4) are not fulfilled with respect to payments made or received by the company.

(2)References in sub-paragraph (1) above to dividends or payments received by the company apply to any received by another person on behalf of or in trust for the company, but not to any received by the company on behalf of or in trust for another person.

7The company shall be assumed not to be a subsidiary to which the benefit of any advance corporation tax may be surrendered under section 240.

Company reconstructions

8Without prejudice to the operation of section 343 in a case where the company is the predecessor, within the meaning of that section, and a company resident in the United Kingdom is the successor, within the meaning of that section—

(a)the assumption that the company is resident in the United Kingdom shall not be regarded as requiring it also to be assumed that the company is within the charge to tax in respect of a trade for the purposes of that section, and

(b)except in so far as the company is actually within that charge (by carrying on the trade through a branch or agency in the United Kingdom), it shall accordingly be assumed that the company can never be the successor, within the meaning of that section, to another company (whether resident in the United Kingdom or not).

Losses in pre-direction accounting periods

9(1)Subject to sub-paragraph (2) below, this paragraph applies in any case where the company incurred a loss in a trade in an accounting period—

(a)which precedes the first accounting period in respect of which a direction is given under section 747(1) (“the starting period”); and

(b)which ended less than six years before the beginning of the starting period; and

(c)in which the company was not resident in the United Kingdom;

and in this paragraph any such accounting period is referred to as a “pre-direction period”.

(2)This paragraph does not apply in any case where a declaration is made under paragraph 11(3) below specifying an accounting period of the company which begins before, or is the same as, the first pre-direction period in which the company incurred a loss as mentioned in sub-paragraph (1) above.

(3)If a claim is made for the purpose by the United Kingdom resident company or companies referred to in paragraph 4(2) above, the chargeable profits (if any) of the company for accounting periods beginning with that pre-direction period which is specified in the claim and in which a loss is incurred as mentioned in sub-paragraph (1) above shall be determined (in accordance with the provisions of this Schedule other than this paragraph) on the assumption that that pre-direction period was the first accounting period in respect of which a direction was given under section 747(1).

(4)A claim under sub-paragraph (3) above shall be made by notice given to the Board within 60 days of the date of the notice under subsection (1) or subsection (3) of section 753 relating to the starting period or within such longer period as the Board may in any particular case allow.

(5)For the purposes of a claim under sub-paragraph (3) above, it shall be assumed that Chapter IV of Part XVII was in force before the beginning of the first of the pre-direction periods.

(6)In determining for the purposes of this paragraph which accounting period of the company is the starting period, no account should be taken of the effect of any declaration under paragraph 11(3) below.

Capital allowances

10(1)Subject to paragraphs 11 and 12 below, if, in an accounting period falling before the beginning of the first accounting period in respect of which a direction is given under section 747(1), the company incurred any capital expenditure on the provision of machinery or plant for the purposes of its trade, that machinery or plant shall be assumed, for the purposes of Chapter I of Part III of the [1971 c. 68.] Finance Act 1971, to have been provided for purposes wholly other than those of the trade and not to have been brought into use for the purposes of that trade until the beginning of that first accounting period, and paragraph 7 of Schedule 8 to that Act (expenditure treated as equivalent to market value at the time the machinery or plant is brought into use) shall apply accordingly.

(2)This paragraph shall be construed as one with Chapter I of Part III of the Finance Act 1971.

11(1)This paragraph applies in any case where it appears to the Board that the reason why no direction was given under section 747(1) in respect of an accounting period which precedes the starting period was that the effect of any allowance which would be assumed for that preceding period by virtue of this Schedule would be such that—

(a)the company would not have been considered to be subject in that accounting period to a lower level of taxation in the territory in which it was resident; or

(b)the company would have had no chargeable profits for that accounting period; or

(c)the chargeable profits of the company for that accounting period would not have exceeded £20,000 or such smaller amount as was appropriate in accordance with section 748(1)(d).

(2)In this paragraph “the starting period” means the first accounting period in respect of which a direction is given under section 747(1) and, in a case where a claim is made under sub-paragraph (3) of paragraph 9 above, no account shall be taken of the effect of that sub-paragraph in determining which accounting period is the starting period for the purposes of this paragraph.

(3)If, in a case where this paragraph applies, the Board so declare by notice given to every company to which, in accordance with section 753(1), notice of the making of the direction relating to the starting period is required to be given, the chargeable profits of that period and every subsequent accounting period and the corresponding United Kingdom tax for every subsequent accounting period shall be determined (in accordance with the provisions of this Schedule other than this paragraph) on the assumption that the accounting period specified in the declaration was the first accounting period in respect of which a direction was given and, accordingly, as if allowances had been assumed in respect of that accounting period and any subsequent accounting period which precedes the starting period.

(4)Nothing in sub-paragraph (3) above affects the operation of paragraph 9(3) above in a case where the accounting period specified in a claim under paragraph 9(3) above begins before the period specified in a declaration under sub-paragraph (3) above.

(5)Subject to sub-paragraph (6) below, the Board shall not make a declaration under sub-paragraph (3) above with respect to an accounting period which precedes the starting period unless the facts are such that—

(a)assuming the company to have been subject in that period to a lower level of taxation in the territory in which it was resident, and

(b)assuming the company to have had in that period chargeable profits of such an amount that the condition in section 748(1)(d) would not be fulfilled,

a direction could have been given in respect of that period under section 747(1).

(6)In its application to a company falling within section 749(3), sub-paragraph (5) above shall have effect with the omission of paragraph (a).

(7)In this paragraph “allowance” means an allowance under Chapter I of Part I of the 1968 Act or Chapter I of Part III of the [1971 c. 68.] Finance Act 1971.

Unremittable overseas income

12For the purposes of the application of section 584 to the company’s income it shall be assumed—

(a)that any reference in paragraph (a) or paragraph (b) of subsection (1) of that section to the United Kingdom is a reference to both the United Kingdom and the territory in which the company is in fact resident; and

(b)that a notice under subsection (2) of that section (expressing a wish to be assessed in accordance with that subsection) may be given on behalf of the company by the United Kingdom resident company or companies referred to in paragraph 4(2) above.

Section 748.

SCHEDULE 25CASES EXCLUDED FROM DIRECTION-MAKING POWERS

PART IACCEPTABLE DISTRIBUTION POLICY

1The provisions of this Part of this Schedule have effect for the purposes of paragraph (a) of subsection (1) of section 748.

2(1)Subject to sub-paragraph (2) below, a controlled foreign company pursues an acceptable distribution policy in respect of a particular accounting period if, and only if—

(a)a dividend which is not paid out of specified profits is paid for that accounting period or for some other period which, in whole or in part, falls within that accounting period; and

(b)the dividend is paid during, or not more than eighteen months after the expiry of, the period for which it is paid or at such later time as the Board may, in any particular case, allow; and

(c)the dividend is paid at a time when the company is not resident in the United Kingdom (whether or not it is at that time a controlled foreign company); and

(d)the proportion of the dividend or, if there is more than one, of the aggregate of those dividends which is paid to persons resident in the United Kingdom represents at least 50 per cent. of the company’s available profits for the accounting period referred to in paragraph (a) above or, where sub-paragraph (4) or (5) below applies, of the appropriate portion of those profits;

and for the purposes of this sub-paragraph a dividend which is not paid for a specified period shall be treated as paid for the period or periods the profits of which are, in relation to the dividend, the relevant profits for the purposes of section 799.

(2)In the case of a controlled foreign company which is not a trading company, sub-paragraph (1) above shall have effect with the substitution of 90 per cent. for 50 per cent.

(3)For the purposes of this Part of this Schedule, a dividend represents those profits of the controlled foreign company in question which in relation to that dividend are the relevant profits for the purposes of section 799 and, accordingly, where those profits are the profits of a period which falls partly within and partly outside an accounting period of that company, the necessary apportionment shall be made to determine what proportion of those profits is attributable to that accounting period.

(4)This sub-paragraph applies where—

(a)throughout the accounting period in question all the issued shares of the controlled foreign company are of a single class, and

(b)at the end of that accounting period some of those shares are held by persons resident outside the United Kingdom, and

(c)at no time during that accounting period does any person have an interest in the company other than an interest derived from the issued shares of the company;

and in a case where this sub-paragraph applies the appropriate portion for the purposes of sub-paragraph (1)(d) above is the fraction of which the denominator is the total number of the issued shares of the company at the end of the accounting period in question and, subject to sub-paragraph (8) below, the numerator is the number of those issued shares by virtue of which persons resident in the United Kingdom have interests in the company at that time.

(5)This sub-paragraph applies where—

(a)throughout the accounting period in question there are only two classes of issued shares of the controlled foreign company and, of those classes, one (“non-voting shares”) consists of non-voting fixed-rate preference shares and the other (“voting shares”) consists of shares which carry the right to vote in all circumstances at general meetings of the company; and

(b)at the end of that accounting period some of the issued shares of the company are held by persons resident outside the United Kingdom; and

(c)at no time during that accounting period does any person have an interest in the company other than an interest derived from non-voting or voting shares;

and in a case where this sub-paragraph applies the appropriate portion of the profits referred to in sub-paragraph (1)(d) above is the amount determined in accordance with sub-paragraph (6) below.

(6)The amount referred to in sub-paragraph (5) above is that given by the formula—

(7)For the purposes of sub-paragraph (5)(a) above, non-voting fixed-rate preference shares are shares—

(a)which are fixed-rate preference shares as defined in paragraph 1 of Schedule 18; and

(b)which either carry no right to vote at a general meeting of the company or carry such a right which is contingent upon the non-payment of a dividend on the shares and which has not in fact become exercisable at any time prior to the payment of a dividend for the accounting period in question.

(8)In any case where the immediate interests held by persons resident in the United Kingdom who have indirect interests in a controlled foreign company at the end of a particular accounting period do not reflect the proportion of the shares or, as the case may be, shares of a particular class in the company by virtue of which they have those interests (as in the case where they hold, directly or indirectly, part of the shares in a company which itself holds, directly or indirectly, some or all of the shares in the controlled foreign company) the number of those shares shall be treated as reduced for the purposes of sub-paragraph (4) or (6) above, as the case may be, to such number as may be appropriate having regard to—

(a)the immediate interests held by the persons resident in the United Kingdom; and

(b)any intermediate shareholdings between those interests and the shares in the controlled foreign company.

(9)The definition of “profits” in section 747(6)(b) does not apply to any reference in this paragraph to specified profits or to relevant profits for the purposes of section 799.

3(1)Subject to sub-paragraphs (2) and (5) below, for the purposes of this Part of this Schedule, the available profits of a controlled foreign company for any accounting period shall be ascertained by—

(a)determining what would be the relevant profits of that period for the purposes of section 799 if a dividend were paid for that period; and

(b)deducting so much of those relevant profits as consists of an excess of capital profits over capital losses.

(2)If, for any accounting period of the controlled foreign company which is of less than 12 months duration, the available profits, as ascertained under sub-paragraph (1) above, are less than the chargeable profits (determined on the additional assumptions in section 750(3)(a)) then, if the Board so declare, for the purposes of this Part of this Schedule the available profits for the accounting period shall be those chargeable profits.

(3)The definition of “profits” in section 747(6)(b) does not apply to the reference in sub-paragraph (1)(a) above to relevant profits for the purposes of section 799.

(4)In sub-paragraph (1)(b) above “capital profits” means gains—

(a)which accrue on the disposal of assets; and

(b)which, if the company were within the charge to corporation tax in respect of the activities giving rise to those disposals, would not be taken into account as receipts in computing the company’s income or profits or gains or losses for the purposes of the Income Tax Acts;

and the expression “capital losses” shall be construed accordingly.

(5)In any case where—

(a)a controlled foreign company pays a dividend for any period out of specified profits, and

(b)those profits represent dividends received by the company, directly or indirectly, from another controlled foreign company,

so much of those specified profits as is equal to the dividend referred to in paragraph (a) above shall be left out of account in determining, for the purposes of this Part of this Schedule, the available profits of the controlled foreign company referred to in that paragraph for any accounting period.

4(1)For the purposes of this Part of this Schedule, where—

(a)a controlled foreign company pays a dividend (“the initial dividend”) to another company which is also not resident in the United Kingdom, and

(b)that other company or another company which is related to it pays a dividend (“the subsequent dividend”) to a United Kingdom resident, and

(c)the subsequent dividend is paid at a time when the company paying it is not resident in the United Kingdom; and

(d)the subsequent dividend is paid out of profits which are derived, directly or indirectly, from the whole or part of the initial dividend,

so much of the initial dividend as is represented by the subsequent dividend shall be regarded as paid to the United Kingdom resident.

(2)For the purposes of this paragraph, one company is related to another if the other—

(a)controls directly or indirectly, or

(b)is a subsidiary of a company which controls directly or indirectly,

at least 10 per cent. of the voting power in the first-mentioned company; and where one company is so related to another and that other is so related to a third company, the first company is for the purposes of this paragraph related to the third, and so on where there is a chain of companies, each of which is related to the next.

PART IIEXEMPT ACTIVITIES

5(1)The provisions of this Part of this Schedule have effect for the purposes of paragraph (b) of subsection (1) of section 748.

(2)In the case of a controlled foreign company—

(a)which is, by virtue of section 749(3), presumed to be resident in a territory in which it is subject to a lower level of taxation, and

(b)the business affairs of which are, throughout the accounting period in question, effectively managed in a territory outside the United Kingdom other than one in which companies are liable to tax by reason of domicile, residence or place of management,

references in the following provisions of this Part of this Schedule to the territory in which that company is resident shall be construed as references to the territory falling within paragraph (b) above, or, if there is more than one, to that one of them which may be notified to the Board by the United Kingdom resident company or companies referred to in paragraph 4(2) of Schedule 24.

6(1)Throughout an accounting period a controlled foreign company is engaged in exempt activities if, and only if, each of the following conditions is fulfilled—

(a)that, throughout that accounting period, the company has a business establishment in the territory in which it is resident; and

(b)that, throughout that accounting period, its business affairs in that territory are effectively managed there; and

(c)that any of sub-paragraphs (2) to (4) below applies to the company.

(2)This sub-paragraph applies to a company if—

(a)at no time during the accounting period in question does the main business of the company consist of either—

(i)investment business, or

(ii)dealing in goods for delivery to or from the United Kingdom or to or from connected or associated persons; and

(b)in the case of a company which is mainly engaged in wholesale, distributive or financial business in that accounting period, less than 50 per cent. of its gross trading receipts from that business is derived directly or indirectly from connected or associated persons.

(3)This sub-paragraph applies to a company which is a holding company if at least 90 per cent. of its gross income during the accounting period in question is derived directly from companies which it controls and which, throughout that period—

(a)are resident in the territory in which the holding company is resident; and

(b)are not themselves holding companies, but otherwise are, in terms of this Schedule, engaged in exempt activities;

and a holding company to which this sub-paragraph applies is in this Part of this Schedule referred to as a “local holding company”.

(4)This sub-paragraph applies to a company which is a holding company, but not a local holding company, if at least 90 per cent. of its gross income during the accounting period in question is derived directly from companies which it controls and which, throughout that period—

(a)are local holding companies; or

(b)are not themselves holding companies (whether local or not), but otherwise are, in terms of this Schedule, engaged in exempt activities.

(5)Any reference in sub-paragraph (3) or (4) above to a company which a holding company controls includes a reference to a trading company in which the holding company holds the maximum amount of ordinary share capital which is permitted under the law of the territory—

(a)in which the trading company is resident; and

(b)from whose laws the trading company derives its status as a company.

(6)The following provisions of this Part of this Schedule have effect in relation to sub-paragraphs (1) to (4) above.

7(1)For the purposes of paragraph 6(1)(a) above, a “business establishment”, in relation to a controlled foreign company, means premises—

(a)which are, or are intended to be, occupied and used with a reasonable degree of permanence; and

(b)from which the company’s business in the territory in which it is resident is wholly or mainly carried on.

(2)For the purposes of sub-paragraph (1) above the following shall be regarded as premises—

(a)an office, shop, factory or other building or part of a building; or

(b)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; or

(c)a building site or the site of a construction or installation project;

but such a site as is referred to in paragraph (c) above shall not be regarded as premises unless the building work or the project, as the case may be, has a duration of at least twelve months.

8(1)Subject to sub-paragraph (4) below, the condition in paragraph 6(1)(b) above shall not be regarded as fulfilled unless—

(a)the number of persons employed by the company in the territory in which it is resident is adequate to deal with the volume of the company’s business; and

(b)any services provided by the company for persons resident outside that territory are not in fact performed in the United Kingdom.

(2)For the purposes of sub-paragraph (1)(a) above, persons who are engaged wholly or mainly in the business of the company and whose remuneration is paid by a person connected with, and resident in the same territory as, the company shall be treated as employed by the company.

(3)In the case of a holding company, sub-paragraph (2) above shall apply with the omission of the words “wholly or mainly”.

(4)For the purposes of sub-paragraph (1)(b) above, no account shall be taken of services—

(a)provided through a branch or agency of the controlled foreign company if the profits or gains of the business carried on through the branch or agency are within the charge to tax in the United Kingdom; or

(b)provided through any other person whose profits or gains from the provision of the services are within the charge to tax in the United Kingdom and who provides the services for a consideration which is, or which is not dissimilar from what might reasonably be expected to be, determined under a contract entered into at arm’s length; or

(c)which are no more than incidental to services provided outside the United Kingdom.

9(1)Subject to sub-paragraph (3) below, for the purposes of paragraph 6(2)(a)(i) above, each of the following activities constitutes investment business—

(a)the holding of securities, patents or copyrights;

(b)dealing in securities, other than in the capacity of a broker;

(c)the leasing of any description of property or rights; and

(d)the investment in any manner of funds which would otherwise be available, directly or indirectly, for investment by or on behalf of any person (whether resident in the United Kingdom or not) who has, or is connected or associated with a person who has, control, either alone or together with other persons, of the controlled foreign company in question.

(2)In sub-paragraph (1)(b) above “broker” includes any person offering to sell securities to, or purchase securities from, members of the public generally.

(3)For the purposes of paragraph 6(2) above, in the case of a company which is mainly engaged in banking or any similar business falling within paragraph 11(1)(c) below, nothing in sub-paragraph (1) above shall require the main business of the company to be regarded as investment business.

10Goods which are actually delivered into the territory in which the controlled foreign company is resident shall not be taken into account for the purposes of paragraph 6(2)(a)(ii) above.

11(1)For the purposes of paragraph 6(2)(b) above, each of the following activities constitutes wholesale, distributive or financial business—

(a)dealing in any description of goods wholesale rather than retail;

(b)the business of shipping or air transport, that is to say, the business carried on by an owner of ships or the business carried on by an owner of aircraft (“owner” including, for this purpose, any charterer);

(c)banking or any similar business involving the receipt of deposits, loans or both and the making of loans or investments;

(d)the administration of trusts;

(e)dealing in securities in the capacity of a broker, as defined in paragraph 9(2) above;

(f)dealing in commodity or financial futures; and

(g)insurance business which is long-term business or general business, as defined in section 1 of the [1982 c. 50.] Insurance Companies Act 1982.

(2)In a case where the gross trading receipts of a company include an amount in respect of the proceeds of sale of any description of property or rights, the cost to the company of the purchase of that property or those rights shall be a deduction in calculating the company’s gross trading receipts for the purposes of paragraph 6(2)(b) above.

(3)In the case of a controlled foreign company engaged in a banking or other business falling within sub-paragraph (1)(c) above—

(a)no payment of interest received from a company resident in the United Kingdom shall be regarded for the purposes of paragraph 6(2)(b) above as a receipt derived directly or indirectly from connected or associated persons, but

(b)it shall be conclusively presumed that the condition in paragraph 6(2)(b) above is not fulfilled if, at any time during the accounting period in question, the amount by which the aggregate value of the capital interests in the company held directly or indirectly by—

(i)the persons who have control of the company, and

(ii)any person connected or associated with those persons,

exceeds the value of the company’s fixed assets is 15 per cent. or more of the amount by which the company’s outstanding capital exceeds that value.

(4)For the purposes of this paragraph, in relation to a controlled foreign company—

(a)“capital interest” means an interest in the issued share capital or reserves of the company or in a loan to or deposit with the company or the liability of a guarantor under a guarantee given to or for the benefit of the company;

(b)except in the case of the liability of a guarantor, the value of a capital interest is its value as shown in the company’s accounts;

(c)in the case of the liability of a guarantor, the value shall be taken to be the market value of the benefit which the controlled foreign company derives from the provision of the guarantee;

(d)the value of the company’s fixed assets means the value, as shown in the company’s accounts, of the plant, premises and trade investments employed in the company’s business; and

(e)“outstanding capital” means the total value of all the capital interests in the company, less the value, as shown in the company’s accounts, of any advances made by the company to persons resident outside the United Kingdom and falling within paragraph (i) or paragraph (ii) of sub-paragraph (3)(b) above.

(5)For the purposes of sub-paragraph (4) above—

(a)“trade investments”, in relation to a controlled foreign company, means securities any profit on the sale of which would not be brought into account as a trading receipt in computing the chargeable profits of an accounting period in which that profit arose; and

(b)the reference in paragraph (e) to advances made to a person by the controlled foreign company includes, in the case of a company which is a person resident outside the United Kingdom and falling within paragraph (i) or paragraph (ii) of sub-paragraph (3)(b) above, any securities of that company which are held by the controlled foreign company but are not trade investments, as defined in paragraph (a) above;

and in this sub-paragraph “securities” includes stocks and shares.

(6)In the application of paragraph 6(2)(b) above in the case of a controlled foreign company engaged in insurance business of any kind—

(a)the reference to gross trading receipts which are derived directly or indirectly from connected or associated persons is a reference to those which, subject to sub-paragraph (7) below, are attributable, directly or indirectly, to liabilities undertaken in relation to any of those persons or their property;

(b)the only receipts to be taken into account are commissions and premiums received under insurance contracts;

(c)so much of any such commission or premium as is returned is not to be taken into account; and

(d)when a liability under an insurance contract is reinsured, in whole or in part, the amount of the premium which is attributable, directly or indirectly, to that liability shall be treated as reduced by so much of the premium under the reinsurance contract as is attributable to that liability.

(7)In determining, in relation to a controlled foreign company to which sub-paragraph (6) above applies, the gross trading receipts referred to in paragraph (a) of that sub-paragraph, there shall be left out of account any receipts under a local reinsurance contract which are attributable to liabilities which—

(a)are undertaken under an insurance contract made in the territory in which the company is resident; and

(b)are not reinsured under any contract other than a local reinsurance contract; and

(c)relate either to persons who are resident in that territory and are neither connected nor associated with the company or to property which is situated there and belongs to persons who are not so connected or associated;

and in paragraph (a) above “insurance contract” does not include a reinsurance contract.

(8)In sub-paragraph (7) above “local reinsurance contract” means a reinsurance contract—

(a)which is made in the territory in which the controlled foreign company is resident; and

(b)the parties to which are companies which are resident in that territory.

(9)For the purposes of sub-paragraphs (7) and (8) above, any question as to the territory in which a company is resident shall be determined in accordance with section 749 and, where appropriate, paragraph 5(2) above; and, for the purpose of the application of those provisions in accordance with this sub-paragraph, the company shall be assumed to be a controlled foreign company.

12(1)Subject to sub-paragraph (2) below, in paragraphs 6 and 8(3) above and sub-paragraphs (4) and (5) below “holding company” means—

(a)a company the business of which consists wholly or mainly in the holding of shares or securities of companies which are either local holding companies and its 90 per cent. subsidiaries or trading companies and either its 51 per cent. subsidiaries or companies falling within paragraph 6(5) above; or

(b)a company which would fall within paragraph (a) above if there were disregarded so much of its business as consists in the holding of property or rights of any description for use wholly or mainly by companies which it controls and which are resident in the territory in which it is resident.

(2)In determining whether a company is a holding company for the purposes of paragraph 6(3) above (and, accordingly, whether the company is or may be a local holding company), sub-paragraph (1) above shall have effect with the omission from paragraph (a) thereof of the words “either local holding companies and its 90 per cent. subsidiaries or”.

(3)In its application for the purposes of this paragraph, section 838 shall have effect with the omission of—

(a)in subsection (1)(a), the words “or indirectly”; and

(b)subsection (2).

(4)For the purposes of sub-paragraph (3) or (4), as the case may be, of paragraph 6 above, as it applies in relation to a holding company part of whose business consists of activities other than the holding of shares or securities or the holding of property or rights as mentioned in paragraph (a) or (b) of sub-paragraph (1) above, the company’s gross income during any accounting period shall be determined as follows—

(a)there shall be left out of account so much of what would otherwise be the company’s gross income as is derived from any activity which, if it were the business in which the company is mainly engaged, would be such that paragraph 6(2) above would apply to the company; and

(b)to the extent that the receipts of the company from any other activity include receipts from the proceeds of sale of any description of property or rights, the cost to the company of the purchase of that property or those rights shall (to the extent that the cost does not exceed the receipts) be a deduction in calculating the company’s gross income, and no other deduction shall be made in respect of that activity.

(5)For the purposes of sub-paragraphs (3) and (4) of paragraph 6 above, so much of the income of a holding company as—

(a)is derived directly from another company which it controls and which is not a holding company but otherwise is, in terms of this Schedule, engaged in exempt activities, and

(b)was or could have been paid out of any non-trading income of that other company which is derived directly or indirectly from a third company connected or associated with it,

shall be treated, in relation to the holding company, as if it were not derived directly from companies which it controls.

(6)The reference in sub-paragraph (5) above to the non-trading income of a company is a reference to so much of its income as, if the company were carrying on its trade in the United Kingdom, would not be within the charge to corporation tax under Case I of Schedule D.

PART IIITHE PUBLIC QUOTATION CONDITION

13(1)The provisions of this Part of this Schedule have effect for the purposes of section 748(1)(c).

(2)Subject to paragraph 14 below, a controlled foreign company fulfils the public quotation condition with respect to a particular accounting period if—

(a)shares in the company carrying not less than 35 per cent. of the voting power in the company (and not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) have been allotted unconditionally to, or acquired unconditionally by, the public and, throughout that accounting period, are beneficially held by the public; and

(b)within the period of 12 months ending at the end of the accounting period, any such shares have been the subject of dealings on a recognised stock exchange situated in the territory in which the company is resident; and

(c)within that period of 12 months the shares have been quoted in the official list of such a recognised stock exchange.

14(1)The condition in paragraph 13(2) above is not fulfilled with respect to an accounting period of a controlled foreign company if at any time in that period the total percentage of the voting power in the company possessed by all of the company’s principal members exceeds 85 per cent.

(2)For the purposes of paragraph 13(2) above shares in a controlled foreign company shall be deemed to be beneficially held by the public if they are held by any person other than—

(a)a person connected or associated with the company; or

(b)a principal member of the company;

and a corresponding construction shall be given to the reference to shares which have been allotted unconditionally to, or acquired unconditionally by, the public.

15(1)References in this Part of this Schedule to shares held by any person include references to any shares the rights or powers attached to which could, for the purposes of section 416, be attributed to that person under subsection (5) of that section.

(2)For the purposes of this Part of this Schedule—

(a)a person is a principal member of a controlled foreign company if he possesses a percentage of the voting power in the company of more than 5 per cent. and—

(i)where there are more than five such persons, if he is one of the five persons who possess the greatest percentages, or

(ii)if, because two or more persons possess equal percentages of the voting power in the company, there are no such five persons, he is one of six or more persons (so as to include those two or more who possess the equal percentages) who possess the greatest percentages; and

(b)a principal member’s holding consists of the shares which carry the voting power possessed by him.

(3)In arriving at the voting power which a person possesses, there shall be attributed to him any voting power which, for the purposes of section 416, would be attributed to him under subsection (5) or (6) of that section.

(4)In this Part of this Schedule “shares” include “stock”.

PART IVREDUCTIONS IN UNITED KINGDOM TAX AND DIVERSION OF PROFITS

16(1)The provisions of this Part of this Schedule have effect for the purposes of section 748(3).

(2)Any reference in paragraphs 17 and 18 below to a transaction—

(a)is a reference to a transaction reflected in the profits arising in an accounting period of a controlled foreign company; and

(b)includes a reference to two or more such transactions taken together.

17(1)A transaction achieves a reduction in United Kingdom tax if, had the transaction not been effected, any person—

(a)would have been liable for any such tax or for a greater amount of any such tax; or

(b)would not have been entitled to a relief from or repayment of any such tax or would have been entitled to a smaller relief from or repayment of any such tax.

(2)In this Part of this Schedule and section 748(3) “United Kingdom tax” means income tax, corporation tax or capital gains tax.

18It is the main purpose or one of the main purposes of a transaction to achieve a reduction in United Kingdom tax if this is the purpose or one of the main purposes—

(a)of the controlled foreign company concerned; or

(b)of a person who has an interest in that company at any time during the accounting period concerned.

19(1)The existence of a controlled foreign company achieves a reduction in United Kingdom tax by a diversion of profits from the United Kingdom in an accounting period if it is reasonable to suppose that, had neither the company nor any company related to it been in existence—

(a)the whole or a substantial part of the receipts which are reflected in the controlled foreign company’s profits in that accounting period would have been received by a company or individual resident in the United Kingdom; and

(b)that company or individual or any other person resident in the United Kingdom either—

(i)would have been liable for any United Kingdom tax or for a greater amount of any such tax; or

(ii)would not have been entitled to a relief from or repayment of any such tax or would have been entitled to a smaller relief from or repayment of any such tax.

(2)For the purposes of sub-paragraph (1) above, a company is related to a controlled foreign company if—

(a)it is resident outside the United Kingdom; and

(b)it is connected or associated with the controlled foreign company; and

(c)in relation to any company or companies resident in the United Kingdom, it fulfils or could fulfil, directly or indirectly, substantially the same functions as the controlled foreign company.

(3)Any reference in sub-paragraph (1) above to a company resident in the United Kingdom includes a reference to such a company which, if the controlled foreign company in question were not in existence, it is reasonable to suppose would have been established.

Section 754(5).

SCHEDULE 26RELIEFS AGAINST LIABILITY FOR TAX IN RESPECT OF CHARGEABLE PROFITS

Trading losses and group relief etc.

1(1)In any case where—

(a)an amount of chargeable profits is apportioned to a company resident in the United Kingdom, and

(b)the company is entitled, or would on the making of a claim be entitled, in computing its profits for the appropriate accounting period, to a deduction in respect of any relevant allowance, and

(c)for the appropriate accounting period the company has no profits against which a deduction could be made in respect of that allowance or, as the case may be, the amount of that allowance exceeds the profits against which a deduction falls to be made in respect of it,

then, on the making of a claim, a sum equal to corporation tax at the appropriate rate on so much of the relevant allowance or, as the case may be, of the excess of it referred to in paragraph (c) above as is specified in the claim shall be set off against the company’s liability to tax under section 747(4)(a) in respect of the chargeable profits apportioned to it.

(2)In this paragraph—

(a)“the appropriate accounting period” means the accounting period for which, by virtue of section 754(2), the company is regarded as assessed to corporation tax in respect of the chargeable profits concerned; and

(b)“the appropriate rate” means the rate of corporation tax applicable to profits of the appropriate accounting period or, if there is more than one such rate, the average rate over the whole accounting period.

(3)In this paragraph “relevant allowance” means—

(a)any loss to which section 393(2) applies;

(b)any charge on income to which section 338(1) applies;

(c)any expenses of management to which section 75(1) applies;

(d)so much of any allowance to which section 74 of the 1968 Act applies as falls within subsection (3) of that section; and

(e)any amount available to the company by way of group relief.

(4)In any case where, for the appropriate accounting period, an amount would have been available to the company by way of group relief if a claim had been made under section 412, such a claim may be made for the purposes of this paragraph at any time before the end of the accounting period following that in which the assessment under section 747(4)(a) is made, notwithstanding that the period of two years referred to in section 412(1)(c) has expired.

(5)Where, by virtue of sub-paragraph (1) above, a sum is set off against a liability to tax, so much of the relevant allowance as gives rise to the amount set off shall be regarded for the purposes of the Tax Acts as having been allowed as a deduction against the company’s profits in accordance with the appropriate provisions of those Acts.

(6)In its application to a claim under this paragraph, section 43 of the Management Act (time limit for making claims) shall have effect as if, in subsection (2)—

(a)any reference to an assessment to income tax were a reference to an assessment under section 747(4)(a); and

(b)any reference to a year of assessment were a reference to an accounting period.

Advance corporation tax

2(1)In any case where—

(a)an amount of chargeable profits is apportioned to a company resident in the United Kingdom, and

(b)the company has an amount of advance corporation tax which, apart from this paragraph, would, in relation to the appropriate accounting period, be surplus advance corporation tax for the purposes of section 239(3),

then, on the making of a claim, so much of that advance corporation tax as is specified in the claim and does not exceed the relevant maximum shall be set against the company’s liability to tax under section 747(4)(a) in respect of the chargeable profits apportioned to it, to the extent that that liability has not or could not have been relieved by virtue of paragraph 1 above.

(2)So much of any advance corporation tax as, by virtue of this paragraph, is set against the company’s liability to tax under section 747(4)(a) in respect of chargeable profits shall be regarded for the purposes of the Tax Acts as not being surplus advance corporation tax within the meaning of section 239.

(3)In this paragraph “the appropriate accounting period” has the same meaning as in paragraph 1 above and “the relevant maximum”, in relation to the liability to tax referred to in sub-paragraph (1) above, is the amount of advance corporation tax that would have been payable (apart from section 241) in respect of a distribution made at the end of the appropriate accounting period of an amount which, together with the advance corporation tax in respect of it, is equal to—

(a)that amount of the chargeable profits apportioned to the company on which it is chargeable to corporation tax for that accounting period,

less

(b)any amount which, for that accounting period, is to be regarded, by virtue of paragraph 1(5) above, as having been allowed as a deduction against the company’s profits.

Gains on disposal of shares in controlled foreign companies

3(1)This paragraph applies in any case where—

(a)a direction has been given under subsection (1) of section 747 in respect of an accounting period of a controlled foreign company (“the direction period”); and

(b)the company’s chargeable profits for the direction period have been apportioned among the persons in subsection (3) of that section; and

(c)a company resident in the United Kingdom (“the claimant company”) disposes of—

(i)shares in the controlled foreign company, or

(ii)shares in another company which, in whole or in part, give rise to the claimant company’s interest in the controlled foreign company,

being, in either case, shares acquired before the end of the direction period; and

(d)by virtue of the apportionment referred to in paragraph (b) above, a sum is, under section 747(4)(a), assessed on and recoverable from the claimant company as if it were an amount of corporation tax; and

(e)the claimant company makes a claim for relief under this paragraph;

and in this paragraph the disposal mentioned in paragraph (c) above is referred to as “the relevant disposal”.

(2)Subject to the following provisions of this paragraph, in the computation under Chapter II of Part II of the 1979 Act of the gain accruing on the relevant disposal, the appropriate fraction of the sum referred to in sub-paragraph (1)(d) above shall be allowable as a deduction; but to the extent that any sum has been allowed as a deduction under this sub-paragraph it shall not again be allowed as a deduction on any claim under this paragraph (whether made by the claimant company or another company).

(3)In relation to the relevant disposal, the appropriate fraction is—

(4)Where, before the relevant disposal—

(a)a dividend is paid by the controlled foreign company, and

(b)the profits out of which the dividend is paid are those from which the chargeable profits referred to in sub-paragraph (1)(b) above are derived, and

(c)at least one of the two conditions in sub-paragraph (5) below is fulfilled,

this paragraph does not apply in relation to a sum assessed and recoverable in respect of so much of the chargeable profits as corresponds to the profits which the dividend represents.

(5)The conditions referred to in sub-paragraph (4) above are—

(a)that the effect of the payment of the dividend is such that the value of the shares disposed of by the relevant disposal is less after the payment than it was before it; and

(b)that, in respect of a dividend paid or payable on the shares disposed of by the relevant disposal, the claimant company is, by virtue of paragraph 4(2) below, entitled under Part XVIII to relief (by way of underlying tax) by reference to sums which include the sum referred to in sub-paragraph (1)(d) above.

(6)A claim for relief under this paragraph shall be made before the expiry of the period of three months beginning—

(a)at the end of the accounting period in which the relevant disposal occurs; or

(b)if it is later, on the date on which the assessment to tax for which the claimant company is liable by virtue of section 747(4)(a) becomes final and conclusive.

(7)In identifying for the purposes of this paragraph shares in a company with shares of the same class which are disposed of by the relevant disposal, shares acquired at an earlier time shall be deemed to be disposed of before shares acquired at a later time.

Dividends from the controlled foreign company

4(1)This paragraph applies in any case where—

(a)a direction has been given under subsection (1) of section 747 in respect of an accounting period of a controlled foreign company, and

(b)the company’s chargeable profits for that period have been apportioned among the persons referred to in subsection (3) of that section, and

(c)the controlled foreign company pays a dividend in whole or in part out of the total profits from which (in accordance with subsection (6)(a) of that section) those chargeable profits are derived.

(2)Subject to paragraphs 5 and 6 below, where this paragraph applies, the aggregate of the sums assessed on and recoverable from companies resident in the United Kingdom in accordance with section 747(4)(a) in respect of the chargeable profits referred to in sub-paragraph (1)(b) above shall be treated for the purposes of Part XVIII as if it were an amount of tax paid in respect of the profits concerned under the law of the territory in which the controlled foreign company was resident and, accordingly, as underlying tax for the purposes of Chapter II of that Part.

(3)In the following provisions of this paragraph and in paragraphs 5 and 6 below, the aggregate of the sums which, under sub-paragraph (2) above, fall to be treated as underlying tax is referred to as the “gross attributed tax”.

(4)If, in the case of a person who receives the dividend, section 796 or section 797 has the effect of reducing the amount which (apart from that section) would have been the amount of the credit for foreign tax which is to be allowed to that person, then, for the purposes of sub-paragraph (5) below, the amount of that reduction shall be determined and so much of it as does not exceed the amount of the foreign tax, exclusive of underlying tax, for which credit is to be allowed in respect of the dividend is in that sub-paragraph referred to as “the wasted relief”.

(5)Except for the purpose of determining the amount of the wasted relief, the gross attributed tax shall be treated as reduced by the aggregate of the wasted relief arising in the case of all the persons falling within sub-paragraph (4) above and, on the making of a claim by any of the companies referred to in sub-paragraph (2) above—

(a)the amount of tax assessed on and recoverable from the company in accordance with section 747(4)(a) in respect of the chargeable profits referred to in sub-paragraph (1) (b) above shall, where appropriate, be reduced; and

(b)all such adjustments (whether by repayment of tax or otherwise) shall be made as are appropriate to give effect to any reduction under paragraph (a) above.

5(1)In so far as any provision of—

(a)arrangements having effect by virtue of section 788, or

(b)section 790,

makes relief which is related to foreign dividends received by a company resident in the United Kingdom conditional upon that company either having a particular degree of control of the company paying the dividend or being a subsidiary of another company which has that degree of control, that condition shall be treated as fulfilled in considering whether any such company is by virtue of paragraph 4(2) above entitled to relief under Part XVIII in respect of any of the gross attributed tax.

(2)Notwithstanding anything in paragraph 4(2) above, in section 795(2)(b) the expression “underlying tax” does not include gross attributed tax.

(3)In a case where the controlled foreign company pays a dividend otherwise than out of specified profits and, on the apportionment referred to in paragraph 4(1) above, less than the whole of the chargeable profits of the controlled foreign company concerned is apportioned to companies which are resident in the United Kingdom and liable for tax thereon as mentioned in section 747(4)(a)—

(a)the gross attributed tax shall be regarded as attributable to a corresponding proportion of the profits in question, and in this sub-paragraph the profits making up that proportion are referred to as “taxed profits”;

(b)so much of the dividend as is received by, or by a successor in title of, any such company shall be regarded as paid primarily out of taxed profits; and

(c)so much of the dividend as is received by any other person shall be regarded as paid primarily out of profits which are not taxed profits.

(4)The reference in sub-paragraph (3)(b) above to a successor in title of a company resident in the United Kingdom is a reference to a person who is such a successor in respect of the whole or any part of that interest in the controlled foreign company by virtue of which an amount of its chargeable profits was apportioned to that company.

6(1)In any case where—

(a)on a claim for relief under paragraph 3 above, the whole or any part of any sum has been allowed as a deduction on a disposal of shares in any company; and

(b)that sum forms part of the gross attributed tax in relation to a dividend paid by that company; and

(c)a person receiving the dividend in respect of the shares referred to in paragraph (a) above (“the primary dividend”) or any other relevant dividend is, by virtue of paragraph 4(2) above, entitled under Part XVIII to relief (by way of underlying tax) by reference to the whole or any part of the gross attributed tax;

the amount which, apart from this paragraph, would be available by way of any such relief to the person referred to in paragraph (c) above shall be reduced or, as the case may be, extinguished by deducting therefrom the amount allowed by way of relief as mentioned in paragraph (a) above.

(2)For the purposes of sub-paragraph (1)(c) above, in relation to the primary dividend, another dividend is a relevant dividend if—

(a)it is a dividend in respect of shares in a company which is resident outside the United Kingdom; and

(b)it represents profits which, directly or indirectly, consist of or include the primary dividend.

Section 760.

SCHEDULE 27DISTRIBUTING FUNDS

PART ITHE DISTRIBUTION TEST

Requirements as to distributions

1(1)For the purposes of this Chapter, an offshore fund pursues a full distribution policy with respect to an account period if—

(a)a distribution is made for that account period or for some other period which, in whole or in part, falls within that account period; and

(b)subject to Part II of this Schedule, the amount of the distribution which is paid to the holders of material and other interests in the fund—

(i)represents at least 85 per cent. of the income of the fund for that period, and

(ii)is not less than 85 per cent. of the fund’s United Kingdom equivalent profits for that period; and

(c)the distribution is made during that account period or not more than six months, or such longer period as the Board may in any particular case allow, after the expiry of it; and

(d)the form of the distribution is such that, if any sum forming part of it were received in the United Kingdom by a person resident there and did not form part of the profits of a trade, profession or vocation, that sum would fall to be chargeable to tax under Case IV or V of Schedule D;

and any reference in this sub-paragraph to a distribution made for an account period includes a reference to any two or more distributions so made or, in the case of paragraph (b), the aggregate of them.

(2)Subject to sub-paragraph (3) below, with respect to any account period for which—

(a)there is no income of the fund, and

(b)there are no United Kingdom equivalent profits of the fund,

the fund shall be treated as pursuing a full distribution policy notwithstanding that no distribution is made as mentioned in sub-paragraph (1) above.

(3)For the purposes of this Chapter, an offshore fund shall be regarded as not pursuing a full distribution policy with respect to an account period for which the fund does not make up accounts.

(4)For the purposes of this paragraph—

(a)where a period for which an offshore fund makes up accounts includes the whole or part of two or more account periods of the fund, then, subject to paragraph (c) below, income shown in those accounts shall be apportioned between those account periods on a time basis according to the number of days in each period which are comprised in the period for which the accounts are made up;

(b)where a distribution is made for a period which includes the whole or part of two or more account periods of the fund, then, subject to sub-paragraph (5) below, the distribution shall be apportioned between those account periods on a time basis according to the number of days in each period which are comprised in the period for which the distribution is made;

(c)where a distribution is made out of specified income but is not made for a specified period, that income shall be attributed to the account period of the fund in which it in fact arose and the distribution shall be treated as made for that account period; and

(d)where a distribution is made neither for a specified period nor out of specified income, then, subject to sub-paragraph (5) below, it shall be treated as made for the last account period of the fund which ended before the distribution was made.

(5)If, apart from this sub-paragraph, the amount of a distribution made, or treated by virtue of sub-paragraph (4) above as made, for an account period would exceed the income of that period, then, for the purposes of this paragraph—

(a)if the amount of the distribution was determined by apportionment under sub-paragraph (4)(b) above, the excess shall be re-apportioned, as may be just and reasonable, to any other account period which, in whole or in part, falls within the period for which the distribution was made or, if there is more than one such period, between those periods; and

(b)subject to paragraph (a) above, the excess shall be treated as an additional distribution or series of additional distributions made for preceding account periods in respect of which the distribution or, as the case may be, the aggregate distributions would otherwise be less than the income of the period, applying the excess to later account periods before earlier ones, until it is exhausted.

(6)In any case where—

(a)for a period which is or includes an account period, an offshore fund is subject to any restriction as regards the making of distributions, being a restriction imposed by the law of any territory outside the United Kingdom; and

(b)the fund is subject to that restriction by reason of an excess of losses over profits (applying the concepts of “profits” and “losses” in the sense in which and to the extent to which they are relevant for the purposes of the law in question);

then in determining for the purposes of the preceding provisions of this paragraph the amount of the fund’s income for that account period, there shall be allowed as a deduction any amount which, apart from this sub-paragraph, would form part of the income of the fund for that account period and which cannot be distributed by virtue of the restriction.

Funds operating equalisation arrangements

2(1)In the case of an offshore fund which throughout any account period operates equalisation arrangements, on any occasion in that period when there is a disposal to which this sub-paragraph applies, the fund shall be treated for the purposes of this Part of this Schedule as making a distribution of an amount equal to so much of the consideration for the disposal as, in accordance with this paragraph, represents income accrued to the date of the disposal.

(2)Sub-paragraph (1) above applies to a disposal—

(a)which is a disposal of a material interest in the offshore fund concerned; and

(b)which is a disposal to which this Chapter applies (whether by virtue of section 758(3) or otherwise) or is one to which this Chapter would apply if subsections (5) and (6) of that section applied generally and not only for the purpose of determining whether, by virtue of subsection (3) of that section, there is a disposal to which this Chapter applies; and

(c)which is not a disposal with respect to which the conditions in subsection (4) of that section are fulfilled; and

(d)which is a disposal to the fund itself or to the persons concerned in the management of the fund (“the managers”) in their capacity as such.

(3)On a disposal to which sub-paragraph (1) above applies, the part of the consideration which represents income accrued to the date of the disposal is, subject to sub-paragraph (4) and paragraph 4(4) below, the amount which would be credited to the equalisation account of the offshore fund concerned in respect of accrued income if, on the date of the disposal, the material interest which is disposed of were acquired by another person by way of initial purchase.

(4)If, after the beginning of the period by reference to which the accrued income referred to in sub-paragraph (3) above is calculated, the material interest disposed of by a disposal to which sub-paragraph (1) above applies was acquired by way of initial purchase (whether or not by the person making the disposal)—

(a)there shall be deducted from the amount which, in accordance with sub-paragraph (3) above, would represent income accrued to the date of the disposal, the amount which on that acquisition was credited to the equalisation account of the fund in respect of accrued income; and

(b)if in that period there has been more than one such acquisition of that material interest by way of initial purchase, the deduction to be made under this sub-paragraph shall be the amount so credited to the equalisation account on the latest such acquisition prior to the disposal in question.

(5)Where, by virtue of this paragraph, an offshore fund is treated for the purposes of this Part of this Schedule as making a distribution on the occasion of a disposal, the distribution shall be treated for those purposes—

(a)as complying with paragraph 1(1)(d) above; and

(b)as made out of the income of the fund for the account period in which the disposal occurs; and

(c)as paid, immediately before the disposal, to the person who was then the holder of the interest disposed of.

(6)In any case where—

(a)a distribution in respect of an interest in an offshore fund is made to the managers of the fund, and

(b)their holding of that interest is in their capacity as such, and

(c)at the time of the distribution, the fund is operating equalisation arrangements,

the distribution shall not be taken into account for the purposes of paragraph 1(1) above except to the extent that the distribution is properly referable to that part of the period for which the distribution is made during which that interest has been held by the managers of the fund in their capacity as such.

(7)Subsection (2) of section 758 applies for the purposes of this paragraph as it applies for the purposes of that section.

Income taxable under Case IV or Case V of Schedule D

3(1)Sub-paragraph (2) below applies if any sums which form part of the income of an offshore fund falling within section 759(1)(b) or (c) are of such a nature that—

(a)the holders of interests in the fund who are either companies resident in the United Kingdom or individuals domiciled and resident there—

(i)are chargeable to tax under Case IV or Case V of Schedule D in respect of such of those sums as are referable to their interests; or

(ii)if any of that income is derived from assets within the United Kingdom, would be so chargeable had the assets been outside the United Kingdom; and

(b)the holders of interests who are not such companies or individuals would be chargeable as mentioned in sub-paragraph (i) or (ii) above if they were resident in the United Kingdom or, in the case of individuals, if they were domiciled and both resident and ordinarily resident there.

(2)To the extent that sums falling within sub-paragraph (1) above do not actually form part of a distribution complying with paragraphs 1(1)(c) and (d) above, they shall be treated for the purposes of this Part of this Schedule—

(a)as a distribution complying with those paragraphs and made out of the income of which they form part; and

(b)as paid to the holders of the interests to which they are referable.

Commodity income

4(1)To the extent that the income of an offshore fund for any account period includes profits from dealing in commodities, one half of those profits shall be left out of account in determining for the purposes of paragraphs 1(1)(b) and 5 below—

(a)the income of the fund for that period; and

(b)the fund’s United Kingdom equivalent profits for that period;

but in any account period in which an offshore fund incurs a loss in dealing in commodities the amount of that loss shall not be varied by virtue of this paragraph.

(2)In this paragraph “dealing in commodities” shall be construed as follows—

(a)“commodities” does not include currency, securities, debts or other assets of a financial nature but, subject to that, means tangible assets which are dealt with on a commodity exchange in any part of the world; and

(b)“dealing” includes dealing by way of futures contracts and traded options.

(3)Where the income of an offshore fund for any account period consists of profits from dealing in commodities and other income, then—

(a)in determining whether the condition in paragraph 1(1)(b) above is fulfilled with respect to that account period, the expenditure of the fund shall be apportioned in such manner as is just and reasonable between the profits from dealing in commodities and the other income; and

(b)in determining whether, and to what extent, any expenditure is deductible under section 416 in computing the fund’s United Kingdom equivalent profits for that period, so much of the business of the fund as does not consist of dealing in commodities shall be treated as a business carried on by a separate company.

(4)Where there is a disposal to which paragraph 2(1) above applies, then, to the extent that any amount which was or would be credited to the equalisation account in respect of accrued income, as mentioned in sub-paragraph (3) or (4) of that paragraph, represents profits from dealing in commodities, one half of that accrued income shall be left out of account in determining under those sub-paragraphs the part of the consideration for the disposal which represents income accrued to the date of the disposal.

United Kingdom equivalent profits

5(1)Any reference in this Schedule to the United Kingdom equivalent profits of an offshore fund for an account period is a reference to the amount which, on the assumptions in sub-paragraph (3) below, would be the total profits of the fund for that period on which, after allowing for any deductions available against those profits, corporation tax would be chargeable.

(2)In this paragraph the expression “profits” does not include chargeable gains.

(3)The assumptions referred to in sub-paragraph (1) above are—

(a)that the offshore fund is a company which, in the account period in question, but not in any other account period, is resident in the United Kingdom; and

(b)that the account period is an accounting period of that company; and

(c)that any dividends or distributions which, by virtue of section 208, should be left out of account in computing income for corporation tax purposes are nevertheless to be brought into account in that computation in like manner as if they were dividends or distributions of a company resident outside the United Kingdom.

(4)Without prejudice to any deductions available apart from this sub-paragraph, the deductions referred to in sub-paragraph (1) above include—

(a)a deduction equal to any amount which, by virtue of paragraph 1(6) above, is allowed as a deduction in determining the income of the fund for the account period in question; and

(b)a deduction equal to any amount of tax (paid under the law of a territory outside the United Kingdom) which was taken into account as a deduction in determining the income of the fund for the account period in question but which, because it is referable to capital rather than income, does not fall to be taken into account by virtue of section 811.

(5)For the avoidance of doubt it is hereby declared that, if any sums forming part of the offshore fund’s income for any period have been received by the fund without any deduction of or charge to tax by virtue of section 47 or 48, the effect of the assumption in sub-paragraph (3)(a) above is that those sums are to be brought into account in determining the total profits referred to in sub-paragraph (1) above.

PART IIMODIFICATIONS OF CONDITIONS FOR CERTIFICATION IN CERTAIN CASES

Exclusion of investments in distributing offshore funds

6(1)In any case where—

(a)in an account period of an offshore fund (in this Part of this Schedule referred to as the “primary fund”), the assets of the fund consist of or include interests in another offshore fund; and

(b)those interests (together with other interests which the primary fund may have) are such that, by virtue of subsection (3)(a) or, if the other fund concerned is a company, subsection (3)(b) or (c) of section 760, the primary fund could not, apart from this paragraph, be certified as a distributing fund in respect of that account period; and

(c)without regard to the provisions of this paragraph, that other fund could be certified as a distributing fund in respect of its account period or, as the case may be, each of its account periods which comprises the whole or any part of the account period of the primary fund;

then, in determining whether anything in section 760(3)(a) to (c) prevents the primary fund being certified as mentioned in paragraph (b) above, the interests of the primary fund in that other fund shall be left out of account except for the purposes of determining the total value of the assets of the primary fund.

(2)In this Part of this Schedule an offshore fund falling within sub-paragraph (1)(c) above is referred to as a “qualifying fund”.

(3)In a case falling within sub-paragraph (1) above—

(a)section 760(3)(a) to (c) shall have effect in relation to the primary fund with the modification in paragraph 7 below (in addition to that provided for by sub-paragraph (1) above); and

(b)Part I of this Schedule shall have effect in relation to the primary fund with the modification in paragraph 8 below.

7The modification referred to in paragraph 6(3)(a) above is that, in any case where—

(a)at any time in the account period referred to in paragraph 6(1) above, the assets of the primary fund include an interest in an offshore fund or in any company (whether an offshore fund or not); and

(b)that interest falls to be taken into account in determining whether anything in section 760(3)(a) to (c) prevents the primary fund being certified as a distributing fund in respect of that account period; and

(c)at any time in that account period the assets of the qualifying fund include an interest in the offshore fund or company referred to in paragraph (a) above;

for the purposes of the application in relation to the primary fund of section 760(3)(a) to (c), at any time when the assets of the qualifying fund include the interest referred to in paragraph (c) above, the primary fund’s share of that interest shall be treated as an additional asset of the primary fund.

8(1)The modification referred to in paragraph 6(3)(b) above is that, in determining whether the condition in paragraph 1(1)(b)(ii) above is fulfilled with respect to the account period of the primary fund referred to in paragraph 6(1) above, the United Kingdom equivalent profits of the primary fund for that period shall be treated as increased by the primary fund’s share of the excess income (if any) of the qualifying fund which is attributable to that period.

(2)For the purposes of this paragraph, the excess income of the qualifying fund for any account period of that fund is the amount (if any) by which its United Kingdom equivalent profits for that account period exceed the amount of the distributions made for that period, as determined for the purposes of the application of paragraph 1(1) above to the qualifying fund.

(3)If an account period of the qualifying fund coincides with an account period of the primary fund, then the excess income (if any) of the qualifying fund for that period is the excess income which is attributable to that period of the primary fund.

(4)In a case where sub-paragraph (3) above does not apply, the excess income of the qualifying fund which is attributable to an account period of the primary fund is the appropriate fraction of the excess income (if any) of the qualifying fund for any of its account periods which comprises the whole or any part of the account period of the primary fund and, if there is more than one such account period of the qualifying fund, the aggregate of the excess income (if any) of each of them.

(5)For the purposes of sub-paragraph (4) above, the appropriate fraction is—

9(1)The references in paragraphs 7 and 8(1) above to the primary fund’s share of—

(a)an interest forming part of the assets of the qualifying fund, or

(b)the excess income (as defined in paragraph 8 above) of the qualifying fund,

shall be construed as references to the fraction specified in sub-paragraph (2) below of that interest or excess income.

(2)In relation to any account period of the primary fund, the fraction referred to in sub-paragraph (1) above is—

Offshore funds investing in trading companies