Introduction Shares accounted for as liabilities
45.Paragraph 4 inserts a new Chapter 6A into the CTA (Shares accounted for as liabilities). It provides a limited replacement for what were sections 91B to 91E of FA 1996 (now Chapter 7 of Part 6 of CTA - shares with guaranteed returns), particularly for that part dealing with "preference share lending" (mostly old section 91D) as, for the reasons given in the consultation document on principles–based drafting issued in November 2008, it is considered better to deal separately with disguised interest in what are clearly not loans in substance or form on the one hand, and what are simply loans dressed up as investment in preference shares on the other.
46.The Chapter as a whole is headed “Shares accounted for as liabilities”. This will cover many shares which are redeemable in accordance with their terms.
47.Section 521A introduces the Chapter and provides for it to treat certain shares held by one company in another company as if they were rights under a creditor loan relationship.
48.Subsection (1) (taken with subsection (3)) provides for the main loan relationships rules in Part 5 (previously Chapter 2 of Part 4 of FA 1996) to apply to the holder of certain shares.
49.Subsections (2) and (6) signpost later sections of CTA and also section 116B of the Taxation of Chargeable Gains Act 1992 (TCGA) dealing with the TCGA implications of changes in the status of certain shares.
50.Subsection (3) states that references in the Chapter to the ”investing company” and “issuing company” are respectively to A and B.
51.Subsection (4) ensures that shares already treated as loan relationships - those in a building society - are not included in the meaning of shares. This replicates section 522(6).
52.Subsection (5) prevents a company from being treated as holding shares that are subject to a repo transaction. This is to prevent the investing company from being able to benefit from any exclusion in section 521C (for instance, the connected party exclusion) that depends on the company holding the share. In any such case Chapter 2A may then apply in relation to the share (since the return does not derive wholly from share ownership).
53.Subsection (6) highlights that section 116B of TCGA (previously section 91G(2) of FA 1996) applies to determine the effect for the purposes of corporation tax on chargeable gains when a share begins or ceases to be one to which section 521C applies. See also the note on paragraph 5 of the draft Schedule below.
54.Section 521B(1) is the operative rule.
55.Subsection (2) applies Part 5 (loan relationships) to the holder of the share in relation to the times in that company’s accounting period when it holds a share in another company and section 521C applies to the share. The fact that the share is treated as a loan relationship (so that it no longer pays distributions) does not however prevent a dividend paid in respect of that share from being taken into account when considering whether the company (if a controlled foreign company) has satisfied an acceptable distribution policy.
56.Subsection (3) ensures that where relevant to the treatment of the holder, the issuing company is treated as a debtor under the loan relationship deemed by subsection (2). Identification of the debtor may be needed in some cases so that other tax rules, such as transfer pricing, can operate correctly. But as noted below the legislation cannot apply where the share issuer and holder are connected, which means that section 349 (connected companies required to use amortised cost accounting) will not be in point in relation to this provision. On the other hand, subsection (4) prevents debits being claimed in respect of such shares.
57.Subsection (4) provides that no debits may be brought into account by the investing company in relation to any share to which Chapter 6A applies. This replicates the exclusion for such debits currently within section 523(3). Unlike that provision, this does not apply in relation to exchange debits. This provision is necessary to prevent attempts to create artificial tax debits.
58.Subsection (5) ensures that any reference to the share in the Chapter is to the share mentioned in subsection (1).
59.Section 521C contains the conditions a share must meet to be a "share" to which section 521B(2) applies. By virtue of subsection (1) a share is to be treated as a creditor relationship of the investing company if:
	the share would be accounted for as a liability by the issuing company in accordance with generally accepted accounting practice - subsection (1)(a). This means generally accepted accounting practice as defined by section 50 of FA 2004, which for this purpose means either International Accounting Standard (IAS) 32 or the UK equivalent Financial Reporting Standard (FRS) 25. This accounting rule replaces the “redeemability” condition in section 529;
	the share produces for the investing company a return which is economically equivalent to interest (whether through dividends, redemption amount or a combination) – subsection (1)(b). This is different from the wording in section 529, but relies instead on the definitions in Chapter 2A;
	the issuing company and the investing company are not connected companies - subsection (1)(c). This does not replicate any provision in section 529, and provides certainty that a share cannot be treated as a creditor relationship where the issuer and holder are connected companies. Distributions on such shares may however be taxable in accordance with section 930M (schemes in the nature of loan relationships);
	The share is within subsection (3) - subsection (1)(d);
	The share is not an excepted share within section 521D; and
	The investing company holds the share for an unallowable purpose as defined by section 521E. The definition of “unallowable purpose” is based on that in Chapter 2A. See the notes on section 521E below.
60.Subsection (2) defines “economically equivalent to interest” for the purposes of subsection (1) in terms identical to section 486B(2).
61.Subsection (3) defines the “relevant time” for the purposes of section subsection (2). It means the later of the time when the share is first held and the return first begins to be produced.
62.Subsection (4) provides that a share meets the condition in section 486(1)(d) (requirement for condition in subsection (3) to be met) if the share is not already treated as a creditor relationship because of section 490 (unit trusts and offshore funds treated as creditor relationships). This replicates what is currently in section 529 (see section 526(1)(b).
63.Subsection (5) gives “connected” the same meaning as in section 466.
64.Section 521D(1) provides that a share is excepted for the purposes of section 521C(1)(e) (and so excluded from application of the legislation) if:
	it is a qualifying publicly issued share; or
	it is a share that mirrors a public issue (as to which see subsection (3) and (4)).
65.Section 521D(2) provides that a share is a qualifying publicly issued share where it was issued by a company as part of an issue to independent persons (defined as a person not connected with the company) and the investing company and persons connected with it hold less than 10 per cent of that issue.
66.Sections 521D(3) and (4) define the two cases where a share mirrors a public issue.
67.Case 1 is where a company (A) issues shares to independent persons (the public issue) and within 24 hours of that issue, other group companies issue shares (the mirroring shares) to company A on the same or substantially the same terms as the public issue and the total nominal value of the mirroring shares does not exceed the nominal value of the public issue – section 521D(3).
68.Case 2 expands the range of mirroring shares to allow for chains of shares to be issued within a group –section 521D(4).
69.Section 521E(1) provides that a share is acquired by the investing company for an unallowable purpose for the purposes of section 521(1)(f) if the main purpose (or one of the main purposes) for which the company holds the share is to secure a “relevant tax advantage”.
70.Section 521E(2) provides that the investing company may elect that Chapter 6A is to apply in relation to shares that produce a return as if section 521(1)(f) were omitted.
71.Section 521E(3) provides that the election must be made no later than the time when the share begins to produced for the company, and is irrevocable. This is subject to paragraph 16 which in all cases allows an election to be made at any time before 1 August 2009, but only in relation to returns arising on or after that date.
72.Section 521E(4) provides that “secure a relevant tax advantage” means secure that the return is taxed more favourably than it would be if it were wholly charged to tax as income or brought into account as income at the time when it would be taxed if the share were a loan relationship.
73.Section 521E(5) provides that the tax avoidance exclusion does not apply where the return is produced for a company that is a CFC. This is because it is unclear whether a company that is not within the charge to corporation tax can have a main purpose of avoiding it.
74.For this purpose, a CFC means a company whose profits are apportioned or would be apportioned but for one of the exemptions in section 748(1) of ICTA.
75.Section 521F deals with the consequences for loan relationships and corporation tax on chargeable gains purposes when a share begins or ceases to meet the conditions in section 521B. This may be because the share begins or ceases to be accounted for as a liability, begins or ceases to be held for an unallowable purpose or the parties become or cease to be connected or for some other reason.
76.Under subsection (2) the investing company is treated for the purposes of the loan relationship rules in Part 5 of CTA as having acquired and disposed of the share immediately before that time for an amount equal to its “notional carrying value”.
77.Subsection (3) defines “notional carrying value” as meaning the amount which would have been the carrying value of the share in the investing company’s accounts if a period of account had ended immediately before section 521B began or ceased to apply
78.Section 521F(4) defines “carrying value” by reference to section 316 of CTA (previously paragraph 19A(4) of Schedule 9 to FA 1996).
79.The overall effect of section 521F is that the acquisition value for the deemed loan relationship should generally be the accounts carrying value of the shares and the deemed disposal should generally be for an amount equal to the accounts carrying value. It will be rare for the accounts carrying value to differ from the tax carrying value because of the exclusion for connected party shares.
80.Paragraph 5 amends section 116B of TCGA. Section 116B is the rewritten version of section 91G(2) of FA 1996 inserted into TCGA by CTA (so far as it applies for the purposes of corporation tax on chargeable gains) and is reproduced below as it will appear following the amendments:
(1)If at any time section 521B of CTA 2009 begins or ceases to apply in the case of a share held by the investing company it is treated for the purposes of this Act [chargeable gains] —
(a)as having disposed of the share immediately before that time for consideration of an amount equal to the notional carrying value of the share at that time, and
(b)as having immediately reacquired it for consideration of the same amount.
(2)In this section—
	“notional carrying value” has the same meaning as in section 521E(2) of CTA 2009 (see subsection (3) of that section),and
	“investing company” has the same meaning as it has for the purposes of Chapter 6A of Part 6 of that Act (shares accounted for as liabilities) (see section 521A(3) of that Act).”
81.The effect of this is that (on a share ceasing to meet the conditions in section 521C) the acquisition value for the shares for the purposes of corporation tax on chargeable gains should generally be the accounts carrying value of the shares and (on a share beginning to meet those conditions) the deemed disposal value should generally be the accounts carrying value. As with paragraph 367 of Schedule 1 to CTA, there is no provision for any hold over of gain or loss.
82.Paragraph 6 makes a consequential amendment to the rules on arbitrage in section 26 of F(No.2)A 2005 so that references in subsection (10) to section 91A and 91B of FA 1996 are replaced by equivalent references to Chapter 2A or 6A of Part 6 of CTA.
83.Paragraph 7 makes a number of amendments to Schedule 4 to CTA to reflect new Chapters 2A and 6A.
84.Paragraph 8 signposts the repeals. The most important repeals here are those of sections 91A to 91G of FA 1996 - the rules that treat shares as loan relationships in certain circumstances. It also repeals sections 91H and 91I of FA 1996 and sections 131 to 133 of FA 2004, which cover partnerships. This points up that the rules here go wider than dealing with shares and deal with any arrangements including partnerships and contributions to partnerships as well as shares. The rules on quasi-stocklending at sections 736C and 736D of ICTA, and quasi-interest arising from repos in section 547, are also repealed.
85.Paragraph 9 contains consequential repeals.
86.Paragraph 10 gives the main commencement rule. The disguised interest rules in Chapter 2A have effect in relation to any arrangement to which the company became party on or after 22 April 2009. This is subject to paragraph 12 in relation to certain existing “caught” arrangements.
87.Paragraph 11 states that the amendments and repeals made by paragraphs 2(3), 4 (shares accounted for as liabilities), 5 (amendments and repeals relating to section 116B of TCGA), 6 (arbitrage), 7 (index of expressions), 8 (repeals) and 9 (consequential repeals) come into force on or after 22 April 2009.
88.Paragraph 12(1) gives the transitional rule in respect of existing arrangements in force as at 22 April and provides that the paragraph applies where Chapter 7 of Part 6 (shares with guaranteed returns), or any of the other provisions being repealed applies in relation to anything done by a company before 22 April 2009 which amounts to an arrangement within the meaning of section 486B(7) to which Chapter 2A might apply if a company became party to the arrangement on or after 22 April.
89.Sub-paragraph (2) then provides that the company is to be treated for the purposes of Chapter 2A as having become party to an arrangement on 22 April. This will not automatically trigger the application of Chapter 2A, but merely make it capable of applying if all the other conditions are met in relation to that arrangement.
90.Sub-paragraph (3) provides that paragraph 12 does not apply if paragraph 13 (former section 91A to 91E shares) applies instead.
91.Paragraph 13(1) gives the rule for determining the treatment for the purposes of corporation tax on chargeable gains in a case where Chapter 7 of Part 6 (shares with guaranteed returns) applies in relation to a share held by a company on 21 April 2009.
92.Sub-paragraph (2) provides that section 116B of TCGA is to be treated as applying as if, on 21 April 2009, the share ceased to be one to which section 91A or 91B applied.
93.This deemed disposal (triggered by the version of section 116B of TCGA in force at 21 April 2009) has the effect that any gain or loss originally deferred under section 91G of FA 1996 when the shares as debt rules began to apply (only applicable if they began to apply on 16 March 2005) is crystallised. Thereafter, any return can be brought into account only under Chapter 2A. It also gives rise to a deemed disposal of the (deemed) creditor loan relationship at fair value and a deemed acquisition cost for the purpose of corporation tax on chargeable gains at that value.
94.Sub-paragraph (3) provides that paragraph 13 does not apply if paragraph 14 (section 91D shares which become Chapter 6A shares) applies instead.
95.Paragraph 14 sets out a separate rule for the cases within paragraph 13(3) to which Chapter 6A applies on 22 April 2009.
96.Sub-paragraph (2) provides in this case that Part 5 of CTA applies as if the company has acquired the share on 22 April 2009 for its notional carrying value on that date. There might be a difference between this amount and the closing value of the creditor relationship as at 21 April 2009. This is a tax nothing.
97.Sub-paragraph (3) defines notional carrying value as having its section 521E(2) meaning.
98.Sub-paragraph (4) ensures that section 521E does not come into force by virtue of the coming into force of section 521B.