Finance Act 2002

SCHEDULE 25 Loan relationships

Section 82 Part 1 Amendments of the Finance Act 1996 Introductory 1 Chapter 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 settlement 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-trading deficit on loan relationships 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debits and credits brought into account 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Authorised accounting methods 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Application of accounting methods 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounting method where parties have a connection 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meaning of “control” in section 87 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inconsistent application of accounting methods 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes of accounting method 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments subject to deduction of tax 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indexed gilt-edged securities 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufactured interest 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interpretation: “shares” not to include building society shares 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interpretation: miscellaneous 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision continuing to be made on accruals basis after company ceases to be party 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Claims to treat deficit as eligible for group relief 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Claim to carry back deficit to previous accounting periods 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficit carried forward and set against non-trading profits of succeeding accounting periods 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life assurance policies and capital redemption policies 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Late interest: further cases where paragraph 2 of Schedule 9 applies 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debts and consortium relief 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt etc where parties have a connection 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt etc: parties having connection and creditor company in insolvent liquidation etc 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt etc: departure not permitted by paragraph 6: subsequent cessation of connection 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imported losses etc 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Continuity of treatment: groups etc 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan relationships for unallowable purposes 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debits and credits treated as relating to capital expenditure 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repo transactions and stock lending 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounted securities where companies have a connection 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounted securities of close companies 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partnerships involving companies 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interpretation of Schedule 9: “major interest” 36 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment trusts and venture capital trusts: treatment of capital reserves 37 (1) Schedule 10 (collective investment schemes) is amended as follows. (2) For paragraph 1 substitute— Investment trusts and venture capital trusts: capital reserves 1A (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 companies 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— Authorised unit trusts 2A (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). Open-ended investment companies 2B (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 funds 39 For 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 business 40 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments in the case of chargeable assets etc 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 loss 42 In 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. . Part 2 Amendments of other enactments The Taxes Act 1988 Introductory 43 The Taxes Act 1988 is amended as follows. Incidental costs of obtaining loan finance 44 In section 77(2)(a) (meaning of “qualifying loan” etc) omit sub-paragraph (ii) (interest deductible under section 338 against total profits). Group relief 45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building society shares: regulations for deduction of tax 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building society shares: incidental costs of issuing qualifying shares 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European Economic Interest Groupings 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funding bonds issued in respect of interest on certain debts 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers of income arising from securities 51 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treatment of price differential on sale and repurchase of securities 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restriction of relief for payments of interest 53 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Limits on credit: corporation tax 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax on items giving rise to a non-trading credit 55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment trusts 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Venture capital trusts 57 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in ownership of investment company 58 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Finance Act 1988 Commercial woodlands 59 (1) Schedule 6 to the Finance Act 1988 (c. 39) is amended as follows. (2) In consequence of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) in paragraph 3 (abolition of Schedule D election etc) omit— (a) sub-paragraphs (3)(a), (4)(a) and (5)(a) and (b); (b) in sub-paragraph (5), in the words following paragraph (c), the word “group”; and (c) sub-paragraph (6). The Taxation of Chargeable Gains Act 1992 Interest charged to capital 60 (1) Section 40 of the Taxation of Chargeable Gains Act 1992 (c. 12) is amended as follows. (2) After subsection (3) add— (4) In consequence of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) (loan relationships) this section does not have effect in relation to interest referable to an accounting period ending on or after 1st April 1996. . Part 3 Transitional provisions Interpretation 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-trading deficit carried forward from last old accounting period 61A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounted securities where companies have a connection 62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounted securities of close companies 63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Authorised unit trusts and open-ended investment companies 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .