Finance Act 2004

Thin capitalisationU.K.

34Payments of excessive interest etcU.K.

(1)In section 209 of the Taxes Act 1988 (meaning of “distribution”) the following provisions shall cease to have effect—

(a)in subsection (2), paragraph (da) (interest etc in respect of securities where issuing company is 75% subsidiary of holder etc and the interest represents an amount that would not have been paid but for a special relationship etc); and

(b)subsections (8A) to (8F) (application of section 808A(2) to (4) for purposes of paragraph (da) of subsection (2)).

(2)Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) is amended as follows.

(3)After paragraph 1 insert—

“1A“Provision in relation to securities: determination of arm’s length provision

(1)This paragraph applies where—

(a)both of the affected persons are companies, and

(b)the actual provision is provision in relation to a security issued by one of those companies (“the issuing company”).

(2)Paragraph 1(2)(a) above shall be construed as requiring account to be taken of all factors, including—

(a)the question whether the loan would have been made at all in the absence of the special relationship (see sub-paragraph (6) below),

(b)the amount which the loan would have been in the absence of the special relationship, and

(c)the rate of interest and other terms which would have been agreed in the absence of the special relationship,

but this is subject to the following provisions of this paragraph.

(3)In a case where—

(a)a company makes a loan to another company with which it has a special relationship, and

(b)it is not part of the first company’s business to make loans generally,

the fact that it is not part of the first company’s business to make loans generally shall be disregarded in construing sub-paragraph (2) above.

(4)Paragraph 1(2)(a) above shall be construed as requiring no account to be taken, in the determination of any of the matters mentioned in sub-paragraph (5) below, of (or of any inference capable of being drawn from) any guarantee provided by a company with which the issuing company has a participatory relationship (see sub-paragraphs (7) and (8) below).

(5)The matters are—

(a)the appropriate level or extent of the issuing company’s overall indebtedness;

(b)whether it might be expected that the issuing company and a particular person would have become parties to a transaction involving the issue of a security by the issuing company or the making of a loan, or a loan of a particular amount, to the issuing company;

(c)the rate of interest and other terms that might be expected to be applicable in any particular case to such a transaction.

(6)In this paragraph “special relationship” means any relationship by virtue of which the condition in paragraph 1(1)(b) above is satisfied in the case of the affected persons.

(7)In this paragraph any reference to a guarantee includes a reference to a surety and to any other relationship, arrangements, connection or understanding (whether formal or informal) such that the person making the loan to the issuing company has a reasonable expectation that in the event of a default by the issuing company he will be paid by, or out of the assets of, one or more companies.

(8)For the purposes of this paragraph, the cases where one company has a “participatory relationship”with another are those where—

(a)one of them is directly or indirectly participating in the management, control or capital of the other; or

(b)the same person or persons is or are directly or indirectly participating in the management, control or capital of each of them.

(9)In this paragraph “security” includes securities not creating or evidencing a charge on assets.

(10)For the purposes of this paragraph—

(a)interest payable by a company on money advanced without the issue of a security for the advance, or

(b)other consideration given by a company for the use of money so advanced,

shall be treated as if payable or given in respect of a security issued for the advance by the company, and references in this paragraph to a security shall be construed accordingly.

1BGuarantees etc

(1)This paragraph applies where the actual provision is made or imposed by means of a series of transactions which include—

(a)the issuing of a security by a company which is one of the affected persons (“the issuing company”), and

(b)the provision of a guarantee by a company which is the other of those persons.

(2)Paragraph 1(2)(a) above shall be construed as requiring account to be taken of all factors, including—

(a)the question whether the guarantee would have been provided at all in the absence of the special relationship,

(b)the amount that would have been guaranteed in the absence of the special relationship, and

(c)the consideration for the guarantee and other terms which would have been agreed in the absence of the special relationship,

but this is subject to the following provisions of this paragraph.

(3)In a case where—

(a)a company provides a guarantee in respect of another company with which it has a special relationship, and

(b)it is not part of the first company’s business to provide guarantees generally,

the fact that it is not part of the first company’s business to provide guarantees generally shall be disregarded in construing sub-paragraph (2) above.

(4)Paragraph 1(2)(a) above shall be construed as requiring no account to be taken, in the determination of any of the matters mentioned in sub-paragraph (5) below, of (or of any inference capable of being drawn from) any guarantee provided by a company with which the issuing company has a participatory relationship.

(5)The matters are—

(a)the appropriate level or extent of the issuing company’s overall indebtedness;

(b)whether it might be expected that the issuing company and a particular person would have become parties to a transaction involving the issue of a security by the issuing company or the making of a loan, or a loan of a particular amount, to the issuing company;

(c)the rate of interest and other terms that might be expected to be applicable in any particular case to such a transaction.

(6)The following provisions of paragraph 1A above also apply for the purposes of this paragraph—

(a)sub-paragraph (6) (meaning of special relationship);

(b)sub-paragraph (7) (construction of references to a guarantee);

(c)sub-paragraph (8) (meaning of participatory relationship);

(d)sub-paragraph (9) (meaning of security);

(e)sub-paragraph (10) (extended meaning of security).”.

(4)In Schedule 9 to the Finance Act 1996 (c. 8) (loan relationships: special computational provisions) paragraph 11A (exchange gains and losses where loan not on arm’s length terms) is amended as follows—

(a)in sub-paragraph (1)(a) for “section 209(2)(da) or (e)(vii)” substitute “ section 209(2)(e)(vii) ”;

(b)in sub-paragraph (1)(b), before “Schedule 28AA” insert “ paragraph 1 of ”;

(c)omit sub-paragraph (2)(a);

(d)in sub-paragraph (2)(b), before “Schedule 28AA” insert “ paragraph 1 of ”;

(e)omit sub-paragraph (3)(a);

(f)in sub-paragraph (3)(b), omit “in a case falling within paragraph (b) of that sub-paragraph,”;

(g)in sub-paragraph (5)(b), omit “the terms would have been the same, except that”.

35Elimination of double counting etcU.K.

(1)Schedule 28AA to the Taxes Act 1988 is amended as follows.

(2)In paragraph 6 (elimination of double counting) in sub-paragraph (2) (right of disadvantaged person to claim relief, subject to sub-paragraphs (3) to (6) and paragraph 7) before “7” insert “ 6C, 6D, ”.

(3)After paragraph 6B (which is inserted by section 32) insert—

“6C“Claims under paragraph 6 where paragraph 1A applies

(1)Where paragraph 1A above applies in relation to any provision, this paragraph has effect in relation to that provision.

(2)A claim under paragraph 6(2) above may be made in accordance with this paragraph.

For the purposes of this Schedule a “paragraph 6C claim” is a claim under paragraph 6(2) above made in accordance with this paragraph.

(3)A paragraph 6C claim may be made by—

(a)the disadvantaged person, or

(b)the advantaged person,

but any such claim made by the advantaged person shall be taken to be made on behalf of the disadvantaged person.

(4)A paragraph 6C claim may be made before or after a computation falling within paragraph 6(3)(a) above has been made.

(5)A paragraph 6C claim must be made either—

(a)at any time before the end of the period mentioned in paragraph 6(5)(a) above, or

(b)within the period mentioned in paragraph 6(5)(b) above,

but this is subject to section 111(3)(b) of the Finance Act 1998 (extension of period for making a claim).

(6)A paragraph 6C claim is not a claim within paragraph 57 or 58 of Schedule 18 to the Finance Act 1998 (company tax returns, assessments and related matters).

Accordingly, paragraph 59 of that Schedule (application of Schedule 1A to the Management Act) has effect in relation to a paragraph 6C claim.

(7)Where—

(a)a paragraph 6C claim is made before a computation falling within paragraph 6(3)(a) above has been made,

(b)such a computation is subsequently made, and

(c)the claim is not consistent with the computation,

the affected persons shall be treated as if (instead of the claim actually made) a claim had been made that was consistent with the computation.

(8)All such adjustments shall be made (whether by discharge or repayment of tax, the making of assessments or otherwise) as are required to give effect to sub-paragraph (7) above.

(9)Sub-paragraph (8) above has effect notwithstanding any limit on the time within which any adjustment may be made.

(10)Where—

(a)a paragraph 6C claim is made,

(b)a return is subsequently made by the advantaged person on the basis mentioned in paragraph 6(3)(a) above, and

(c)a relevant notice (within the meaning of paragraph 6 above) taking account of such a determination as is mentioned in paragraph 6(4)(b) above is subsequently given to the advantaged person,

sub-paragraph (11) below applies.

(11)Where this sub-paragraph applies, any such amendment of the paragraph 6C claim as may be appropriate in consequence of the determination contained in the relevant notice may be made by—

(a)the disadvantaged person, or

(b)the advantaged person,

but any such amendment made by the advantaged person shall be taken to be made on behalf of the disadvantaged person.

(12)Any such amendment must be made within the period mentioned in paragraph 6(5)(b) above.

But that is subject to section 111(3)(b) of the Finance Act 1998 (extension of period for making amendment).

6DCompensating adjustment for guarantor company etc where paragraph 1B applies

(1)This paragraph applies in any case where—

(a)a company (“the issuing company”) has liabilities under a security issued by the company,

(b)those liabilities are to any extent the subject of a guarantee provided by a company (“the guarantor company”), and

(c)in computing the profits and losses of the issuing company for tax purposes, the amounts to be deducted in respect of interest or other amounts payable under the security fall to be reduced (whether or not to nil) under paragraph 1(2) above by virtue of paragraph 1B above.

(2)On the making of a claim in any such case, the guarantor company shall, to the extent of that reduction, be treated for all purposes of the Taxes Acts as if it (and not the issuing company)—

(a)had issued the security,

(b)owed the liabilities under it, and

(c)had paid any interest or other amounts paid under it by the issuing company,

and in computing the profits and losses of the guarantor company for those purposes amounts shall be brought into account accordingly.

This sub-paragraph is subject to the following provisions of this paragraph.

(3)Where the issuing company’s liabilities under the security are the subject of two or more guarantees (whether or not provided by the same person) TD must not exceed TR, where—

• TD is the total of the amounts brought into account by the guarantor companies by virtue of sub-paragraph (2) above, and

• TR is the total amount of the reductions that fall within sub-paragraph (1)(c) above.

(4)In this paragraph “the loan provision” means the actual provision made or imposed between—

(a)the issuing company, and

(b)another company (“the lending company”),

which is provision in relation to the security.

(5)Where—

(a)the guarantor company makes a claim under sub-paragraph (2) above, and

(b)the lending company makes a claim under paragraph 6 above in respect of the loan provision,

sub-paragraphs (6) and (7) below apply.

(6)In determining, in a case where this sub-paragraph applies, the arm’s length provision for the purposes of paragraph 6(2)(a) above in relation to the lending company’s claim, additional amounts shall be brought into account as credits corresponding to the debits that fall to be brought into account by virtue of sub-paragraph (2) above in relation to the guarantor company.

(7)If, in a case where this sub-paragraph applies,—

(a)the lending company makes its claim under paragraph 6 above before the guarantor company makes its claim under sub-paragraph (2) above, and

(b)the computation on which the lending company’s claim is based does not comply with sub-paragraph (6) above,

the guarantor company’s claim shall be disallowed.

(8)A claim under sub-paragraph (2) above may be made by—

(a)the guarantor company,

(b)where there are two or more guarantor companies, those companies acting together, or

(c)the issuing company,

but any claim made by the issuing company shall be taken to be made on behalf of the guarantor company or companies.

(9)Sub-paragraphs (3) to (6) of paragraph 6 above (claims and time limits) shall apply in relation to a claim under sub-paragraph (2) above made by or on behalf of any person or persons as they apply in relation to a claim under that paragraph made by the disadvantaged person, but taking references in those sub-paragraphs—

(a)to the advantaged person, as references to the issuing company, and

(b)to the disadvantaged person, as references to the guarantor company or companies.

(10)The following provisions of paragraph 1A above also apply for the purposes of this paragraph—

(a)sub-paragraph (7) (construction of references to a guarantee);

(b)sub-paragraph (9) (meaning of security);

(c)sub-paragraph (10) (extended meaning of security).

(11)In this paragraph “the Taxes Acts” has the meaning given in section 118(1) of the Management Act.”.

(4)After paragraph 6D insert—

“6E“Certain interest not to be regarded as chargeable under Case III of Schedule D

“6EWhere—

(a)interest is paid by any person under the actual provision,

(b)paragraph 1(2) above applies in relation to the actual provision,

(c)the amount of interest that would have been payable under the arm’s length provision is less than the amount of interest paid under the actual provision (or there would not have been any interest payable),

(d)the person receiving the interest makes a claim under paragraph 6 above or a paragraph 6C claim,

the interest paid under the actual provision, to the extent that it exceeds the amount of interest that would have been payable under the arm’s length provision, shall not be regarded as chargeable under Case III of Schedule D.”.

(5)In paragraph 14(1) (general interpretation) insert the following definition at the appropriate place—

• ““paragraph 6C claim” has the meaning given by paragraph 6C(2) above;”.

36Balancing payments and elections to pay tax insteadU.K.

(1)Schedule 28AA to the Taxes Act 1988 is amended as follows.

(2)After paragraph 7A (which is inserted by section 30) insert—

“7B“Securities: election to discharge tax liability instead of making balancing payments

(1)This paragraph applies in any case where—

(a)both of the affected persons are companies,

(b)the circumstances are as described in paragraph 6(1) above, and

(c)the actual provision is provision in relation to a security (the “relevant security”).

(2)The disadvantaged person may make an election under this paragraph in respect of the relevant security if the condition in sub-paragraph (3) below is satisfied.

(3)The condition is that—

(a)the actual provision forms part of a capital market arrangement,

(b)the capital market arrangement involves the issue of a capital market investment,

(c)the securities that represent the capital market investment are issued wholly or mainly to independent persons (see sub-paragraph (9) below), and

(d)the total value of the capital market investments made under the capital market arrangement is at least £50 million.

(4)An election under this paragraph in respect of the relevant security is an election for the disadvantaged person—

(a)to make no balancing payment within paragraph 7A above to the advantaged person in respect of the application of paragraph 1(2) above in relation to the relevant security in a chargeable period by virtue of paragraph 1A above, but

(b)instead, to undertake sole responsibility for discharging the advantaged person’s liability to tax for that period so far as resulting from the application of paragraph 1(2) above in relation to the relevant security by virtue of paragraph 1A above.

(5)Where an election under this paragraph has effect in relation to an accounting period of the advantaged person, the tax mentioned in sub-paragraph (4)(b) above—

(a)shall be recoverable from the disadvantaged person as if it were an amount of corporation tax due and owing from that person, and

(b)shall not be recoverable from the advantaged person.

(6)Any election under this paragraph in respect of the relevant security—

(a)must be made by being included (whether by amendment or otherwise) in the disadvantaged person’s company tax return for the chargeable period in which the relevant security is issued,

(b)has effect in relation to each of the affected persons for the chargeable period in which the relevant security is issued and all subsequent chargeable periods, and

(c)is irrevocable.

For the purposes of this sub-paragraph a security issued in a chargeable period beginning before 1st April 2004 shall be treated as if it had been issued in the chargeable period beginning on that date.

(7)An election under this paragraph by a person is of no effect if the Board give that person a notice under this sub-paragraph refusing to accept the election.

(8)A notice under sub-paragraph (7) above may be given only after a notice of enquiry in respect of the company tax return containing the election has been given to the disadvantaged person.

(9)In this paragraph—

• “capital market arrangement” has the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraph 1 of Schedule 2A to that Act);

• “capital market investment” has the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraphs 2 and 3 of Schedule 2A to that Act);

• “company tax return” means the return required to be delivered pursuant to a notice under paragraph 3 of Schedule 18 to the Finance Act 1998, as read with paragraph 4 of that Schedule;

• “independent person” means a person—

  (a)

  who is not the disadvantaged person, and

  (b)

  who does not have a participatory relationship with either of the affected persons.

(10)The following provisions of paragraph 1A above also apply for the purposes of this paragraph—

(a)sub-paragraph (8) (meaning of participatory relationship);

(b)sub-paragraph (9) (meaning of security);

(c)sub-paragraph (10) (extended meaning of security).”.

(3)After paragraph 7B insert—

“7C“Balancing payments by guarantor to issuer: no charge to, or relief from, tax

(1)This paragraph applies in any case where—

(a)the circumstances are as described in paragraph 6D(1) above,

(b)one or more payments (the “balancing payments”) are made by the guarantor company to the issuing company, and

(c)the sole or main reasons for making those payments are that paragraph 1(2) above applies by virtue of paragraph 1B above or that paragraph 6D above applies.

(2)To the extent that the balancing payments made by all the guarantor companies do not in the aggregate exceed the amount TR in paragraph 6D(3) above (total reductions within paragraph 6D(1)(c) above), those payments—

(a)shall not be taken into account in computing for the purposes of corporation tax the profits or losses of the guarantor company or companies or the issuing company, and

(b)shall not for any purpose of the Corporation Tax Acts be regarded as distributions or charges on income.”.

(4)After paragraph 7C insert—

“7D“Guarantees: election to discharge tax liability instead of making balancing payments

(1)This paragraph applies where the following conditions are satisfied—

(a)both of the affected persons are companies,

(b)the circumstances are as described in paragraph 6(1) above,

(c)the actual provision falls within paragraph 1B(1) above.

(2)Sub-paragraphs (2) to (8) of paragraph 7B above apply in a case where this paragraph applies as they apply in a case where that paragraph applies, but with the modifications in sub-paragraphs (3) and (4) below.

(3)The relevant security is the security in paragraph 1B(1)(a) above.

(4)In sub-paragraph (4) (nature of the election)—

(a)for “paragraph 7A above” substitute “ paragraph 7C below ”;

(b)for “paragraph 1A”, in both places, substitute “ paragraph 1B ”.”.