Annex 1: Minor Changes in the Law Change 62: Relationships treated as loan relationships etc: Industrial and provident society payments treated as interest under loan relationship: section 499
This change provides that share interest and loan interest of a registered industrial and provident society and share interest of an agricultural co-operative society are treated as trading income where the company is a party to the respective shares or loan for the purposes of a trade.
In the source legislation income from loan relationships is charged under Schedule D Case I if the relationship is used for the purposes of a trade (see section 80(2) of FA 1996) and otherwise under Schedule D Case III (see section 80(3) of that Act).
Section 486(1) of ICTA provides that, notwithstanding anything in the Tax Acts, share or loan interest payable by a registered industrial and provident society is to be treated as interest under a loan relationship of the society. Section 486(4) of ICTA requires any share or loan interest paid by such a society to be chargeable under Schedule D Case III.
“Share interest” is defined in section 486(12) of ICTA to include dividends or other sums payable to a shareholder by reference to shareholding in the society. “Loan interest”, which is also defined in that section, would fall within the loan relationships provisions (Chapter 2 of Part 4 of FA 1996) regardless of section 486 of ICTA. However, section 486(4) of ICTA arguably has the effect of charging such interest under Case III only, but the matter is unclear as the words “Notwithstanding anything in the Tax Acts” only occur in section 486(1) of ICTA and the point arises as to whether section 486(4) is overridden by section 80 of FA 1996, which would give Chapter 2 of Part 4 of FA 1996 precedence.
Section 81(4) of FA 1996 excludes share capital from being treated as a debt and hence from being a loan relationship. It seems that the wording of section 486(1) of ICTA does not require the shareholding itself to be treated as a loan relationship. For that to be the case the definition of “share” in section 103 of FA 1996 would need amendment in the same way that it is amended to exclude building society shares which, as a result, are treated as loan relationships. (Section 477A(3) of ICTA, which is not unlike section 486(1), merely requires building society dividends to be treated as liabilities arising under a loan relationship but does not extend the deeming provision to the shareholding.)
Section 486(9) of ICTA requires section 486(1) (but not subsection (4)) to have effect as if references to an industrial and provident society include a reference to an agricultural co-operative society, which complicates the matter still further.
The resulting situation appears to be as follows.