Finance Act 2009

Part 2 – Application of this Schedule

6.This Part of the Schedule sets out gateway conditions to be applied by reference to a comparison of the consolidated gross debt of the worldwide group with the aggregate figure of net debt of the UK group companies. It also sets out rules for excluding groups engaged in particular financial services business. If these conditions for either test are met for any given period of account of the worldwide group then the UK members of the group are not subject to the remaining Parts of the Schedule.

7.Paragraph 2 sets a condition for application of the Schedule based on the amount of the worldwide group’s debt. The term ‘worldwide group’ is defined in Part 10. The Schedule applies if the ‘UK net debt’ of the group exceeds 75 per cent of the ‘worldwide gross debt’ of the group.

8.Sub-paragraph (2) provides that the Schedule will not apply to a period in which the worldwide group is a “qualifying financial services group”, which is defined by paragraph 7.

9.Sub-paragraphs (3)-(5) provide for the 75 per cent figure in sub-paragraph (1) to be increased or decreased prospectively by Treasury order, subject to affirmative resolution.

10.Paragraph 3 defines ‘UK net debt’ for the purpose of paragraph 2 as the average of the opening and closing net debt (the net debt amount) of each relevant group company. The term ‘relevant group company’ is defined in paragraph 86. Sub-paragraph (3) and (4) provide for a ‘net debt’ amount of less than £3 million, and for the net debt amount of a dormant company, to be treated as nil for this purpose respectively. Sub-paragraphs (5)-(7) allow the de minimis limit of £3 million to be increased or decreased prospectively by Treasury order.

11.Sub-paragraph (8) takes the opening and closing dates as the beginning and end of the period of account of the ‘worldwide group’, unless the company is only a ‘relevant group company’ for part of that period in which case the opening and closing dates are set by reference to when the company became or stopped being a ‘relevant group company’.

12.Paragraph 4 explains that the ‘net debt’ of a ‘relevant group company’ at any particular time is the company’s debt liabilities less its liquid assets such as cash and loans receivables, taken from the company’s balance sheet. The class of both relevant liabilities and relevant assets are defined by sub-paragraphs (3) and (4), interpreted by reference to generally accepted accounting practice applicable to UK companies (see sub-paragraph (5)) and can be added to by regulations.

13.Paragraph 5 defines ‘worldwide gross debt’. Sub-paragraph (1) explains that the figure is the average of the amounts taken at the end of the current and preceding periods of account of the worldwide group. Sub-paragraph (2) defines the term by reference to particular amounts of information disclosed in the group’s balance sheet. The paragraph lists the amounts to be taken into account and sub-paragraph (3) provides that expressions used in the list are to be interpreted in accordance with the accounting standards used to draw up the financial statements. The class of liabilities can be added to by regulations. Sub-paragraph (4) provides that rules which apply to a group’s consolidated financial statements within paragraphs 87 to 90 apply to this paragraph.

14.Paragraph 6 explains what is meant by references to amounts disclosed in the balance sheet of a ‘relevant group company’. This includes provision (in sub-paragraphs (2)-(4)) to deal with a foreign company that has a UK permanent establishment and to deal with cases where either a UK company has not drawn up financial statements or there are no separate financial statements for a UK permanent establishment of a foreign company. In all cases references are to amounts that would be disclosed if financial statements were drawn up.

15.Paragraph 7 defines ‘qualifying financial services groups’.

16.Sub-paragraph (1) provides that a worldwide group is a ‘qualifying financial services group’ in a period of account where it either meets the ‘trading income condition’ or would have met it had it not been for losses incurred by the group as a result of trading or investing in financial instruments.

17.Sub-paragraph (2) explains that the ‘trading income condition’ is met for a period of account where either substantially all of the ‘UK trading income’ of the worldwide group for that period, or substantially all of the ‘worldwide trading income’ of the group is derived from ‘qualifying activities’. ‘Qualifying activities’ are defined in paragraph 8.

18.Sub-paragraph (3) defines ‘UK trading income’ and ‘worldwide trading income’ for the purposes of Part 2. ‘UK trading income’ for a period of account of the group is defined as the sum of the trading income of all companies that were “relevant group companies” at any time during that period of account. ‘Relevant group company’ is defined in paragraph 86. ‘Worldwide trading income’ for a period is defined as the trading income for that period of the ‘worldwide group’. ‘Worldwide group’ is defined in paragraph 78.

19.Paragraph 8 provides the list of activities that are to be regarded as ‘qualifying activities’ for the purposes of Part 2. These are lending activities and activities that are ancillary to lending activities, insurance activities and insurance-related activities and relevant dealing in financial instruments.

20.Paragraph 9 defines ‘lending activities and activities ancillary to lending activities’. Sub-paragraph (1) provides the list of activities that are lending activities for the purposes of Part 2. The list includes ‘alternative finance arrangements’ which has the same meaning as in Chapter 6 of Part 6 of the Corporation Tax Act 2009. This broadly applies to arrangements that have the same effect as lending arrangements without involving the payment of interest and relates primarily to Islamic finance products.

21.Sub-paragraph (2) excludes from the definition of a ‘qualifying activity’ activities ancillary to lending activities where the income derived from the ancillary activity is significant when compared to the income derived from lending activities by the worldwide group.

22.Sub-paragraph (3) provides that the income to be taken into account for the purposes of the test in sub-paragraph (2) is the same income that is taken into account for the purposes of the trading income condition in paragraph 7.

23.Sub-paragraph (4) provides a regulation making power to allow the Commissioners to make changes to the list of lending activities in sub-paragraph (1).

24.Sub-paragraph (5) provides that activities carried out in connection with lending activities and activities ancillary to lending activities include the buying, holding, managing and selling of assets.

25.Paragraph 10 defines ‘insurance activities’ and ‘insurance related activities’ for the purposes of Part 2. Sub-paragraph (1) defines ‘insurance activities’ as effecting or carrying out ‘contracts of insurance’ by a ‘regulated insurer’ and investment business arising directly from that activity. Sub-paragraph (6) defines the terms used elsewhere in the paragraph. ‘Contract of insurance’ has the same meaning as in Chapter 1 of Part 12 of ICTA 1988. In that Chapter, ‘contract of insurance’ has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. ‘Insurance business’ has the same meaning as in the Financial Services Authority Handbook. A ‘regulated insurer’ is defined as any member of the worldwide group that is authorised to carry on an insurance business under the laws of any state or territory, or is a member of a body or organisation that is so authorised.

26.Sub-paragraph (2) explains what is meant by ‘insurance-related activities’. Sub-paragraph (2)(a) covers activities that are ancillary to insurance activities defined in sub-paragraph (1). Sub-paragraph (2)(b) covers activities that are the same kind of activities carried out for the purposes of the insurance activity, but which are not actually carried out those purposes and would not be carried out but for insurance activities being carried out. An example would be the management of assets for a third party by an institution that also manages assets as part of its own insurance business.

27.Sub-paragraph (4) explains that activities within sub-paragraphs (2)(a) and (b) are not to be regarded as related to insurance activity if the income from those activities is significant when compared to the income derived by the worldwide group from insurance activities.

28.Sub-paragraph (5) provides that the income to be taken into account for the purposes of the test in sub-paragraph (4) is the same income that is taken into account for the purposes of the trading income condition in paragraph 7.

29.Paragraph 11 gives the meaning of the phrase ‘relevant dealing in financial instruments’ in paragraph 8. It provides that dealing in financial instruments is a qualifying activity where the profits or losses from that dealing, excluding those profits made in the capacity of a broker, are included in the trading profits of the business.

30.Paragraph 12 explains how UK trading income of the worldwide group is calculated for the purposes of paragraph 7. The trading income of a relevant group company will normally be the gross income arising from its activities without taking account of any deductions. However, where the income in respect of an activity is normally reported on a net basis in accordance with generally accepted accounting practice, then the trading income from that activity will be the net income.

31.Sub-paragraph (6) provides that where a proportion of an accounting period in which a relevant group company reports its trading income does not fall within a period of account of the worldwide group, then its income will be reduced on a time-apportioned basis.

32.Sub-paragraph (7) provides that gross or net income received from other UK members of the worldwide group is disregarded in calculating the amount of the UK trading income for the purposes of paragraph 7.

33.Paragraph 13 explains how the worldwide trading income of the worldwide group is calculated for the purposes of paragraph 7. As for the trading income of a relevant group company, the trading income of the worldwide group will normally be the gross income arising from its activities without taking account of any deductions. However, where the income in respect of an activity is normally reported on a net basis in accordance with international accounting standards, then the trading income from that activity will be the net income.

34.Paragraph 14 provides that if an amount disclosed in balance sheets at any given date is expressed in a currency other than sterling, then the amount must be translated into sterling by reference to the spot rate at that date. Sub-paragraphs (2) - (3) provide that where the group’s and relevant group companies’ balance sheets are all expressed in the same foreign currency: