Finance Act 2004

30Provision not at arm’s length: transactions between UK taxpayers etc

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

(2)In paragraph 5 (advantage in relation to United Kingdom taxation)—

(a)in sub-paragraph (1) omit “(but subject to sub-paragraph (2) below)”;

(b)omit sub-paragraphs (2) to (6); and

(c)at the end of the paragraph insert—

“(7)In determining for the purposes of sub-paragraph (1) above the amount that would be taken for tax purposes to be the amount of the profits or losses for a year of assessment in the case of a person who is not resident in the United Kingdom, there shall be left out of account any income of that person which is—

(a)excluded income for the purposes of section 128 of the Finance Act 1995 (limit on income chargeable on non-residents: income tax), or

(b)income to which section 151 of the Finance Act 2003 applies (non-resident companies: extent of charge to income tax).”.

(3)Paragraph 6 (elimination of double counting) is amended as follows.

(4)For sub-paragraph (1) (application of paragraph) substitute—

“(1)This paragraph applies where—

(a)only one of the affected persons (“the advantaged person”) is a person on whom a potential advantage in relation to United Kingdom taxation is conferred by the actual provision; and

(b)the other affected person (“the disadvantaged person”) is within the charge to income tax or corporation tax in respect of profits arising from the relevant activities.”.

(5)In sub-paragraph (2) (application, on a claim, of arm’s length provision to disadvantaged person)—

(a)in the opening words (subjection to paragraph 7 etc)—

(i)for “paragraph”, where first occurring, substitute “paragraphs”, and

(ii)after “7” insert “and 8”;

(b)in paragraph (a) (computation on basis of arm’s length provision), for “the disadvantaged person shall be entitled to have his profits and losses computed” substitute “the profits and losses of the disadvantaged person shall be computed”.

(6)After paragraph 7 insert—

“Balancing payments between affected persons: no charge to, or relief from, tax

7A(1)This paragraph applies where—

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

(b)one or more payments (the “balancing payments”) are made to the advantaged person by the disadvantaged person, and

(c)the sole or main reason for making those payments is that paragraph 1(2) above applies.

(2)To the extent that the balancing payments do not in the aggregate exceed the amount of the available compensating adjustment, those payments—

(a)shall not be taken into account in computing profits or losses of either of the affected persons for the purposes of income tax or corporation tax, and

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

(3)In this paragraph “the available compensating adjustment” means the difference between PL1 and PL2 where—

• PL1 is the profits and losses of the disadvantaged person computed for tax purposes on the basis of the actual provision, and

• PL2 is the profits and losses of the disadvantaged person as they fall (or would fall) to be computed for tax purposes on a claim under paragraph 6 above,

for this purpose taking PL1 or PL2 as a positive amount if it is an amount of profits and as a negative amount if it is an amount of losses.”.

(7)In paragraph 11 (special provision for companies carrying on ring fence trades) in sub-paragraph (3) (Schedule to have effect as if ring fence trade and other activities were carried on by separate persons etc)—

(a)at the end of paragraph (c) insert “and”;

(b)omit paragraph (e) (Schedule to have effect as if paragraphs 5 to 7 were omitted).

(8)In paragraph 12 (appeals) in sub-paragraph (3)(b) for “each of whom is a person in relation to whom the condition set out in paragraph 5(3) above is satisfied” substitute “each of whom is within the charge to income tax or corporation tax in respect of profits arising from the relevant activities”.

(9)Schedule 5 to this Act (which makes amendments to other enactments in relation to transactions not at arm’s length) has effect.