3(1)In computing the corporation tax chargeable for any accounting period of a company which has issued any deep discount security, the income element in respect of that security for any income period ending in or with that accounting period shall be allowed as a deduction against the total profits of the company for the accounting period as reduced by any relief other than group relief.
(2)The income element for any income period ending in or with an accounting period of a company which has issued a deep discount security shall be treated for the purposes of the Corporation Tax Acts, other than those of section 248(1) of the Taxes Act (which makes provision, in relation to charges, similar to that made by sub-paragraph (1) above) as a charge on income paid by the company in the accounting period.
(3)No income element in respect of any deep discount security shall be so allowed or treated unless—
(a)the cost of paying so much of the amount payable on redemption as represents the discount is ultimately borne by the company;
(b)the income element would not otherwise be deductible in computing the issuing company's profits or any description of those profits for purposes of corporation tax ; and
(c)one or more of the conditions mentioned in sub-paragraph (4) below are satisfied.
(4)The conditions are that—
(a)the company exists wholly or mainly for the purpose of carrying on a trade ;
(b)the deep discount security was issued wholly and exclusively to raise money for purposes of a trade carried on by the company;
(c)the company is an investment company, as defined by section 304(5) of the Taxes Act.
(5)Where, on redemption of any deep discount security any part of the amount payable on redemption is, by virtue of section 233(2)(d) of the Taxes Act, a distribution of the company for the purposes of the Corporation Tax Acts, sub-paragraphs (1) and (2) above shall not apply to any income element in respect of that security.
(6)Without prejudice to its application apart from this paragraph section 38 of the [1980 c. 48.] Finance Act 1980 (incidental costs of obtaining loan finance to be deductible in computing profits or gains to be charged under Case I or Case II of Schedule D and to be treated for certain purposes as expenses of management) shall apply in relation to any qualifying security as it applies in relation to loan stock the interest on which is deductible as mentioned in subsection (2) of that section.
(7)In sub-paragraph (6) above, " qualifying security " means any deep discount security in respect of which the income elements are deductible under sub-paragraph (1) above in computing the total profits of the company by which the incidental costs in question are incurred.
(8)Sub-paragraphs (6) and (7) above shall have effect in relation to expenditure incurred after 13th March 1984.
(9)Relief shall not be given under any provision of the Tax Acts in respect of any income element if (at any time) a scheme has been effected or arrangements have been made such that the sole or main benefit that might be expected to accrue to the company from the issue of the security in question is the obtaining of a reduction in tax liability by means of that relief.
(10)Subsections (2) and (3) of section 38 of the [1976 c. 40.] Finance Act 1976 (restriction of relief for payment of interest) shall apply in relation to sub-paragraph (9) above as they apply in relation to subsection (1) of that section.
4(1)Section 15 of the [1975 c. 22.] Oil Taxation Act 1975 (oil extraction activities etc. ; charges on income) shall apply in relation to income elements in respect of deep discount securities and paragraph 3 above as it applies in relation to interest and section 248 of the Taxes Act (allowance of charges on income).
(2)In the application of section 15 to any deep discount security, subsection (2)(b) shall have effect as if the references to the rate at which interest was payable were references to the aggregate of the rate of interest payable and the amount of any income element in respect of the security for the period in question.