Finance Bill 2002
Amendment 12 Page 153 Line 36
Mr Chancellor of the Exchequer
12
Page 153, line 36 [Schedule 8], leave out paragraph 5 and insert-
'Circumstances in which exemptions do not apply
5 (1) Where in pursuance of arrangements to which this paragraph applies-
(a) an untaxed gain accrues to a company ("company A") on a disposal of shares, or an interest in shares or an asset related to shares, in another company ("company B"), and
(b) before the accrual of that gain-(i) company A acquired control of company B, or the same person or persons acquired control of both companies, or
(ii) there was a significant change of trading activities affecting company B at a time when it was controlled by company A, or when both companies were controlled by the same person or persons,
none of the exemptions in this Schedule applies to the disposal.
(2) This paragraph applies to arrangements from which the sole or main benefit that (but for this paragraph) could be expected to arise is that the gain on the disposal would, by virtue of this Schedule, not be a chargeable gain.
(3) For the purposes of sub-paragraph (1)(a) a gain is "untaxed" if the gain, or all of it but a part that is not substantial, represents profits that have not been brought into account (in the United Kingdom or elsewhere) for the purposes of tax on profits for a period ending on or before the date of the disposal.
(4) The reference in sub-paragraph (3) to profits being brought into account for the purposes of tax on profits includes a reference to the case where-
(a) an amount in respect of those profits is apportioned to a company resident in the United Kingdom by virtue of subsection (3) of section 747 of the Taxes Act 1988 (imputation of chargeable profits etc of controlled foreign companies), and
(b) a sum is chargeable on that company in respect of that amount by virtue of subsection (4) of that section for an accounting period of that company ending on or before the date of the disposal.
(5) For the purposes of sub-paragraph (1)(b)(ii) there is a "significant change of trading activities affecting company B" if-
(a) there is a major change in the nature or conduct of a trade carried on by company B or a 51% subsidiary of company B, or
(b) there is a major change in the scale of the activities of a trade carried on by company B or a 51% subsidiary of company B, or
(c) company B or a 51% subsidiary of company B begins to carry on a trade.
(6) In this paragraph-
"arrangements" includes any scheme, agreement or understanding, whether or not legally enforceable;
"major change in the nature or conduct of a trade" has the same meaning as in section 768 of the Taxes Act (change of ownership of company: disallowance of trading losses);
"profits" means income or gains (including unrealised income or gains).'.
EXPLANATORY NOTE
SUMMARY
1. The amendment is to make clearer the scope of an anti-avoidance provision in the legislation introducing an exemption for gains and losses on substantial shareholdings. The anti-avoidance measure is to prevent the indirect realisation of untaxed investment returns by way of a disposal of shares that would otherwise benefit from an exemption in Part 1 of the Schedule.
DETAILS OF THE AMENDMENT
2. The amendment takes the form of a revised version of paragraph 5 of Schedule 7AC, which sets out the anti-avoidance measure. Much of the revised paragraph contains material that was in the paragraph as presently drafted, albeit that some of it has been reordered.
3. The basic structure of the paragraph continues to be that certain circumstances (set out in sub-paragraph (1)) must be present before it can apply: before an "untaxed gain" arises to a company, either
- that company must have acquired control of another company or the companies must have come under common control; or
- there must have been a significant change of trading activities affecting the company which was controlled by the company realising the untaxed gain.
4. If these circumstances occur in the pursuance of arrangements from which the expected sole or main benefit would be a tax-free gain on a disposal of a substantial shareholding, then sub-paragraph (2) prevents any of the exemptions in Part 1 of the Schedule from applying to the disposal.
5. Sub-paragraphs (3) and (4) set out what is meant by an "untaxed gain" and do not contain any substantive changes compared with the existing provision. Sub-paragraph (5) explains what is meant by a significant change of trading activities.
6. The overall effect of the changes introduced by the amendment is to make it clearer that the provision applies only where, from the outset of the arrangements, the sole or main benefit that could be expected to arise is that a gain on a disposal would not be chargeable by virtue of the Schedule. The amendment achieves this principally by requiring that the circumstances in sub-paragraph (1) must occur in pursuance of the arrangements defined in sub-paragraph (2).
7. The insertion of the alternative to the revised circumstance of acquiring control - the significant change of trading activities affecting the company invested in - is necessary to protect, for example, against the use of dormant companies to acquire the assets on which the untaxed investment return will arise. Dormant companies may already be held within a group and therefore control is not acquired as part of the arrangements, but there is a significant change of trading activity when those assets are acquired.
BACKGROUND
8. The exemption regime for substantial shareholdings is being introduced to enable UK-based companies and groups to restructure rapidly and flexibly in response to emerging global opportunities without facing the prospect of a large tax charge. The regime, including the present amendment, has been the subject of extensive consultation with business.