Finance Act 2002

Part 1U.K.Amendments of the Finance Act 1996

IntroductoryU.K.

1Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) (loan relationships) is amended in accordance with the following provisions of this Part of this Schedule.

Meaning of “loan relationship” etc: method of settlementU.K.

F12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-trading deficit on loan relationshipsU.K.

F13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debits and credits brought into accountU.K.

F24. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Authorised accounting methodsU.K.

F25. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Application of accounting methodsU.K.

F26. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounting method where parties have a connectionU.K.

F17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “control” in section 87U.K.

F18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inconsistent application of accounting methodsU.K.

F19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes of accounting methodU.K.

F310. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments subject to deduction of taxU.K.

F111. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Indexed gilt-edged securitiesU.K.

F112. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Manufactured interestU.K.

F113. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interpretation: “shares” not to include building society sharesU.K.

F114. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interpretation: miscellaneousU.K.

F115. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision continuing to be made on accruals basis after company ceases to be partyU.K.

F116. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Claims to treat deficit as eligible for group reliefU.K.

F117. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Claim to carry back deficit to previous accounting periodsU.K.

F118. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deficit carried forward and set against non-trading profits of succeeding accounting periodsU.K.

F119. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DistributionsU.K.

F120. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Life assurance policies and capital redemption policiesU.K.

F421. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Late interest: further cases where paragraph 2 of Schedule 9 appliesU.K.

F122. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bad debts and consortium reliefU.K.

F123. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bad debt etc where parties have a connectionU.K.

F124. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bad debt etc: parties having connection and creditor company in insolvent liquidation etcU.K.

F125. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F526. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bad debt etc: departure not permitted by paragraph 6: subsequent cessation of connectionU.K.

F627. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imported losses etcU.K.

F628. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Continuity of treatment: groups etcU.K.

F629. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loan relationships for unallowable purposesU.K.

F630. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debits and credits treated as relating to capital expenditureU.K.

F631. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Repo transactions and stock lendingU.K.

F732. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Discounted securities where companies have a connectionU.K.

F633. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Discounted securities of close companiesU.K.

F634. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Partnerships involving companiesU.K.

F635. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interpretation of Schedule 9: “major interest”U.K.

F636. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investment trusts and venture capital trusts: treatment of capital reservesU.K.

37(1)Schedule 10 (collective investment schemes) is amended as follows.

(2)For paragraph 1 substitute—

“1A“Investment trusts and venture capital trusts: capital reserves

(1)Where any profits, gains or losses arising to an investment trust from a creditor relationship for an accounting period are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for that accounting period, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.

(2)Where any profits, gains or losses arising to a venture capital trust from a creditor relationship for an accounting period—

(a)are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for the accounting period as if the venture capital trust were an investment trust, or

(b)would be carried to or sustained by a capital reserve if the venture capital trust were an investment trust and were using that Statement of Recommended Practice,

those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.

(3)For the purposes of this paragraph, the “Statement of Recommended Practice” used for an accounting period is—

(a)in relation to an accounting period for which it is permitted to be used, the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in December 1995, as from time to time modified, amended or revised, or

(b)in relation to any accounting period for which it is permitted to be used, any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.”.

Authorised unit trusts and open-ended investment companiesU.K.

38(1)Schedule 10 (collective investment schemes) is amended as follows.

(2)For paragraph 2 (which makes special provision in relation to authorised unit trusts and is applied to open-ended investment companies by regulations under section 152 of the Finance Act 1995 (c. 4)) and the heading immediately preceding it substitute—

“2A“Authorised unit trusts

(1)Where any profits, gains or losses arising to an authorised unit trust from a creditor relationship in an accounting period are capital profits, gains or losses, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.

(2)For the purposes of this paragraph, capital profits, gains or losses arising from a creditor relationship in an accounting period are such profits, gains or losses arising from a creditor relationship as fall to be dealt with under—

(a)the heading “net gains/losses on investments during the period”, or

(b)the heading “other gains/losses”,

in the statement of total return for the accounting period.

(3)For the purposes of sub-paragraph (2) above, the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised unit trust which deals with the accounting period.

(4)For the purposes of sub-paragraph (3) above, “Statement of Recommended Practice” means—

(a)in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Authorised Unit Trust Schemes issued by the Investment Management Regulatory Organisation Limited in January 1997, as from time to time modified, amended or revised; or

(b)in relation to any accounting period for which it is required or permitted to be used, any subsequent Statement of Recommended Practice relating to authorised unit trust schemes, as from time to time modified, amended or revised.

(5)The Treasury may by order amend this paragraph so as to alter the definition of capital profits, gains or losses in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.

(6)The power to make an order under this paragraph includes power—

(a)to make different provision for different cases; and

(b)to make such consequential, supplementary, incidental or transitional provision, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under any enactment).

2BOpen-ended investment companies

(1)Where any profits, gains or losses arising to an open-ended investment company from a creditor relationship in an accounting period are capital profits, gains or losses, those profits, gains or losses must not be brought into account as credits or debits for the purposes of this Chapter, notwithstanding section 84(2)(b) of this Act.

(2)For the purposes of this paragraph, capital profits, gains or losses arising from a creditor relationship in an accounting period are such profits, gains or losses arising from a creditor relationship as fall to be dealt with under—

(a)the heading “net gains/losses on investments during the period”, or

(b)the heading “other gains/losses”,

in the statement of total return for the accounting period.

(3)For the purposes of sub-paragraph (2) above, the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the open-ended investment company which deals with the accounting period.

(4)For the purposes of sub-paragraph (3) above, “Statement of Recommended Practice” means—

(a)in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Open-Ended Investment Companies issued by the Financial Services Authority in November 2000, as from time to time modified, amended or revised; or

(b)in relation to any accounting period for which it is required or permitted to be used, any subsequent Statement of Recommended Practice relating to open-ended investment companies, as from time to time modified, amended or revised.

(5)The Treasury may by order amend this paragraph so as to alter the definition of capital profits, gains or losses in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.

(6)The power to make an order under this paragraph includes power—

(a)to make different provision for different cases; and

(b)to make such consequential, supplementary, incidental or transitional provision, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under any enactment).”.

Distributing offshore fundsU.K.

39For paragraph 3 of that Schedule substitute—

“3(1)For the purposes of paragraph 5(1) of Schedule 27 to the Taxes Act 1988 (computation of UK equivalent profit), the assumptions to be made in determining what, for any period, would be the total profits of an offshore fund are to include the assumptions in sub-paragraphs (2) and (3) below.

(2)The first assumption is that the provisions of this Chapter so far as they relate to the creditor relationships of a company do not apply for the purposes of corporation tax in computing the profits or loss of an offshore fund.

(3)The second assumption is that for the purposes of corporation tax the profits and gains, and losses, that are to be taken to arise from the creditor relationships of an offshore fund are to be computed—

(a)in accordance with the provisions applicable, in the case of unauthorised unit trusts, for the purposes of income tax; and

(b)as if the provisions so applicable had effect in relation to an accounting period of an offshore fund as they have effect, in the case of unauthorised unit trusts, in relation to a year of assessment.

(4)In this paragraph “unauthorised unit trust” means the trustees of any unit trust scheme which is not an authorised unit trust but is a unit trust scheme for the purposes of section 469 of the Taxes Act 1988.”.

Life assurance businessU.K.

F840. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjustments in the case of chargeable assets etcU.K.

41(1)In Schedule 15 (loan relationships: savings and transitional provisions) paragraph 11 is amended as follows.

(2)After sub-paragraph (2) insert—

“(2A)If, in a case where the continuing loan relationship is a creditor relationship,—

(a)the company acquired its rights under the relationship on or before 31st March 1996 by virtue of an arm’s length transaction,

(b)for the accounting period in which it acquired those rights—

(i)there was no connection (as defined in sub-paragraph (2C) below) between the company and the person from whom the company acquired the asset, but

(ii)there was such a connection between the company and a company standing in the position of a debtor as respects the money debt, and

(c)there had been no such connection between the companies mentioned in paragraph (b)(ii) above at any time in the period which—

(i)begins 4 years before the date on which the company acquired those rights, and

(ii)ends twelve months before that date,

this paragraph shall have effect as if the amount mentioned in sub-paragraph (2)(b) above were an amount equal to the greater of the amounts mentioned in sub-paragraph (2B) below.

(2B)Those amounts are—

(a)the fair value of the rights at the time when the company ceases to be a party to the loan relationship; and

(b)the fair value of the rights on 1st April 1996.

(2C)For the purposes of sub-paragraph (2A) above there is a connection between a company and another person at any time if at that time—

(a)the other person is a company and one of the companies has control of the other,

(b)the other person is a company and both companies are under the control of the same person, or

(c)the company is a close company and the other person is a participator in that company or the associate of a person who is such a participator,

and there is a connection between a company and another person for an accounting period if there is a connection (within paragraphs (a) to (c) above) between the company and the person at any time in that accounting period.

(2D)For the purposes of sub-paragraph (2C) above—

(a)subsections (2) to (6) of section 416 of the Taxes Act 1988 (meaning of control) shall apply as they apply for the purposes of Part 11 of that Act;

(b)subject to paragraph (c) below, “participator” and “associate” have the meaning given for the purposes of that Part by section 417 of that Act;

(c)a person shall not be regarded as a participator in relation to a company by reason only that he is a loan creditor of the company.”.

Reduction of paragraph 11 credit where s.251(4) of 1992 Act prevents paragraph 8 lossU.K.

42In Schedule 15, after paragraph 11 (other adjustments in the case of chargeable assets etc) insert—

“Reduction of paragraph 11 credit where s.251(4) of 1992 Act prevents paragraph 8 loss

11A(1)This paragraph applies where, in the case of any asset representing in whole or in part a loan relationship of a company, an amount representing a deemed allowable loss would (apart from this paragraph) fall or have fallen to be brought into account in accordance with paragraph 8(3) above for an accounting period (whenever beginning or ending), but for section 251(4) of the 1992 Act (no allowable loss on disposal of debt acquired from connected person).

(2)Where this paragraph applies, the amount of any credit falling within sub-paragraph (3) below shall be treated for the purposes of this Chapter as reduced (but not below nil) by the amount described in sub-paragraph (1) above.

(3)A credit falls within this sub-paragraph if (apart from this paragraph)—

(a)the credit falls to be given by virtue of paragraph 11(3)(a) above for an accounting period beginning on or after 1st October 2002; and

(b)the loan relationship mentioned in paragraph 11(1)(a) above in the case of the credit is the same loan relationship as the one mentioned in sub-paragraph (1) above.”.