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House of Commons Hansard
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Avoidance in Financial Products
06 March 2007
Volume 457
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In the pre-Budget report (PBR) of 6 December 2006, action was announced to close loopholes used by companies to avoid paying corporation tax. Thanks partly to the disclosure regime, we have now become aware of more schemes similar to those we closed from the date of the PBR.

Legislation will be included in the next Finance Bill to stop companies getting round existing anti-avoidance legislation and exploiting an exemption from corporation tax in circumstances for which it was not intended.

A. Schemes have been disclosed to HM Revenue and Customs (HMRC) under the legislation in part 7 Finance Act (FA) 2004 which seek to avoid the proper application of sections 91A and 91B FA 1996 (certain shares treated as debt).

To prevent the schemes

The limited definition of share in section 103 FA 1996 (which provides that “share” includes only those instruments from which it is possible to obtain a distribution, where distribution does not include a distribution in a winding-up) will no longer apply for the purposes of sections 91A to 91G of that Act.

The fair value of assets acquired in transactions which are effected to prevent the value of shares increasing in an interest-like manner will be disregarded in computing the credits and debits to be brought into account from changes in fair value of the shares.

B. Schemes have been disclosed to HMRC under the legislation in part 7 FA 2004 which seek to avoid the proper application of paragraph 4 schedule 10 FA 1996.

To prevent the schemes the fair value of assets acquired in transactions whose purpose is to reduce the value of the shares, units or other interests in an offshore fund, unit trust or OEIC to which paragraph 4 schedule 10 FA H996 (holdings in funds invested as to 60 per cent. or more in debt and so on treated as loan relationships) applies will be disregarded in computing the credits and debits to be brought into account from changes in fair value of the holdings.

C. Schemes have been disclosed to HMRC under the legislation in part 7 FA 2004 which seek to avoid the proper application of paragraph 26 schedule 26 FA 2002 (derivative contracts: options used to transfer value between connected parties).

To prevent the schemes paragraph 26 (expiry of options to transfer value) will be amended to provide that it applies where an option is partly exercised and partly not.

D. HMRC has obtained information about a scheme which seeks to avoid the proper application of schedule 26 FA 2002 to relevant contracts which are accounted for as financial assets. Schedule 26 will be amended to provide that such contracts must be brought into account for tax purposes on the assumption that fair value accounting is used in cases where it is not.

E. HMRC has also obtained information which indicates that it might be possible to frustrate the workings of sections 774A to 774G of the Income and Corporation Tax Act 1988 (structured finance arrangements or SFAs). To put the issue beyond doubt legislation will be introduced to amend those sections so that arrangements under which existing liabilities ape refinanced using an SFA will be brought clearly within the legislation.

Where the assets which have been used as “collateral” in an SFA are changed the charge to tax will continue to apply to income from the new assets.

In addition, section 263E Taxation of Chargeable Gains Act 1992 (TCGA) which deals with assets transferred in an SFA will be amended so that there is no application of hindsight. This will bring certainty to the position. In future there will a charge to tax under TCGA if it becomes apparent that the asset will not be returned to the seller in a case where section 263E has applied to the original sale.

F. A scheme has been disclosed to HMRC under the legislation in part 7 FA 2004 that seeks to avoid a chargeable gain crystallising by transferring assets when they are subject to an option rather than by a straight sale.

To prevent the scheme, assets transferred between companies in the same TCGA group, will be treated for tax purposes as occurring at market value, instead of a value that leads to neither a gain nor a loss, where that transfer occurs following the exercise of an option granted before the companies were part of that group. The rule governing transactions within a group in section 171 TCGA will be disapplied in these circumstances.

G. Companies could attempt to artificially obtain a tax-free income stream through the manipulation of the settlements legislation in chapter 5 part 5 Income Tax (Trading and Other Income) Act 2005. Such manipulation not intended by the rules should be stopped. To prevent this, subsection (4) of section 660C of the Income and Corporatation Taxes Act 1988 (ICTA) will be repealed.

The legislation described at items A to G above will be effective from today, 6 March 2007. More details about the legislation and the commencement rules can be found on HMRC’s website.

H. On 6 December 2006, regulations were laid before Parliament to prevent the sidestepping of restrictions that exist in ICTA in relation to foreign tax paid on trading profits. The arrangements involve banks and other financial traders using Authorised Investment Funds (AIFs), which in turn invest in overseas securities.

The regulations (SI 2006 No. 3239) apply where a financial trader, together with connected persons, owns more than 50 per cent. of the interests in the AIF. Information disclosed to HMRC has shown that there are arrangements under which financial traders together own a majority of units in an AIF but in such a way that none individually owns more than 50 per cent. To prevent these arrangements being used, amending regulations will be laid today which apply to restrict tax relief where a financial trader individually owns more than 10 per cent. of the interests.

The proposed regulations apply in relation to any distribution from an AIF received by a bank or financial trader made on or after 6 March 2007.