Finance Act 1989

Chapter I General

Income tax rates and allowances

30 Charge and rates of income tax for 1989-90

(1) Income tax shall be charged for the year 1989-90, and the basic rate of tax shall be 25 per cent.

(2) The higher rate at which income tax is charged for the year 1989-90 in respect of so much of an individual’s total income as exceeds the basic rate limit (£20,700) shall be 40 per cent.

31 Age allowance

(1) In section 257 of the Taxes Act 1988—

(a) in subsection (3) (increased allowance for those aged 80 and over) for “80”, wherever occurring, there shall be substituted “75”, and

(b) in subsection (5) (age allowance withdrawn by two-thirds of amount by which income exceeds a specified limit) for “two-thirds” there shall be substituted “one half”.

(2) This section shall have effect for the year 1989-90.

32 Operative date for PAYE

For the year 1989-90, sections 1(5) and 257(10) of the Taxes Act 1988 (which specify the date from which indexed changes in the basic rate limit and in allowances are to be brought into account for the purposes of PAYE) shall have effect as if for the reference to 5th May there were substituted a reference to 18th May.

33 Married couples

(1) Sections 257 to 257F and 265 of the Taxes Act 1988, as inserted for the year 1990-91 and subsequent years by the [1988 c. 39.] Finance Act 1988, shall be amended as follows.

(2) In section 257(1) for “£2,605” there shall be substituted “£2,785”.

(3) In section 257(2) for “£3,180” there shall be substituted “£3,400”.

(4) In section 257(3)—

(a) for “80” there shall be substituted “75”, and

(b) for “£3,310” there shall be substituted “£3,540”.

(5) In section 257(5)—

(a) for “£10,600” there shall be substituted “£11,400”, and

(b) for “two-thirds” there shall be substituted “one half”.

(6) In section 257A(1) for “£1,490” there shall be substituted “£1,590”.

(7) In section 257A(2) for “£1,855” there shall be substituted “£1,985”.

(8) In section 257A(3)—

(a) for “80” there shall be substituted “75”, and

(b) for “£1,895” there shall be substituted “£2,025”.

(9) In section 257A(5)—

(a) for “£10,600” there shall be substituted “£11,400”, and

(b) for “two-thirds” there shall be substituted “one half”.

(10) In sections 257B(2), 257D(8) and 265(3) after paragraph (b) there shall be inserted “or

(c) on account of any payments to which section 593(2) or 639(3) applies,”.

(11) In section 257E(1)(b) for “80” there shall be substituted “75”.

(12) In section 257E(2)(a) for “£3,180” there shall be substituted “£3,400”.

(13) In section 257E(2)(b) for “£3,310” there shall be substituted “£3,540”.

Corporation tax rates etc.

34 Charge and rate of corporation tax for financial year 1989

Corporation tax shall be charged for the financial year 1989 at the rate of 35 per cent.

35 Corporation tax: small companies

(1) For the financial year 1989—

(a) the small companies' rate shall be 25 per cent., and

(b) the fraction mentioned in section 13(2) of the Taxes Act 1988 (marginal relief for small companies) shall be one fortieth.

(2) In section 13(3) of that Act (limits of marginal relief), in paragraphs (a) and (b)—

(a) for “£100,000” there shall be substituted “£150,000”, and

(b) for “£500,000” there shall be substituted “£750,000”.

(3) Subsection (2) above shall have effect for the financial year 1989 and subsequent financial years; and where by virtue of that subsection section 13 of the Taxes Act 1988 has effect with different relevant maximum amounts in relation to different parts of a company’s accounting period, then for the purposes of that section those parts shall be treated as if they were separate accounting periods and the profits and basic profits of the company for that period shall be apportioned between those parts.

Receipts basis etc.

36 Schedule E: revised Cases

(1) The Taxes Act 1988 shall be amended as follows.

(2) In paragraph 1 of section 19(1) the following Cases shall be substituted for Cases I, II and III—

“Case I: any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom, subject however to section 192 if the emoluments are foreign emoluments (within the meaning of that section) and to section 193(1) if in the year of assessment concerned he performs the duties of the office or employment wholly or partly outside the United Kingdom;

Case II: any emoluments, in respect of duties performed in the United Kingdom, for any year of assessment in which the person holding the office or employment is not resident (or, if resident, not ordinarily resident) in the United Kingdom, subject however to section 192 if the emoluments are foreign emoluments (within the meaning of that section);

Case III: any emoluments for any year of assessment in which the person holding the office or employment is resident in the United Kingdom (whether or not ordinarily resident there) so far as the emoluments are received in the United Kingdom;”.

(3) The following paragraph shall be inserted after paragraph 4 of section 19(1)—

“4A. Where (apart from this paragraph) emoluments from an office or employment would be for a year of assessment in which a person does not hold the office or employment, the following rules shall apply for the purposes of the Cases set out in paragraph 1 above—

(a) if in the year concerned the office or employment has never been held, the emoluments shall be treated as emoluments for the first year of assessment in which the office or employment is held;

(b) if in the year concerned the office or employment is no longer held, the emoluments shall be treated as emoluments for the last year of assessment in which the office or employment was held.”

(4) Subsection (2) above shall apply where the year of assessment mentioned in the substituted Case I, II or III is 1989-90 or a subsequent year of assessment.

(5) Subsection (3) above shall apply where each of the years mentioned in the new paragraph 4A(a) or (b) (as the case may be) is 1989-90 or a subsequent year of assessment.

37 Schedule E: assessment on receipts basis

(1) The following sections shall be inserted immediately before section 203 of the Taxes Act 1988—

“202A Assessment on receipts basis

(1) As regards any particular year of assessment—

(a) income tax shall be charged under Cases I and II of Schedule E on the full amount of the emoluments received in the year in respect of the office or employment concerned;

(b) income tax shall be charged under Case III of Schedule E on the full amount of the emoluments received in the United Kingdom in the year in respect of the office or employment concerned.

(2) Subsection (1) above applies—

(a) whether the emoluments are for that year or for some other year of assessment;

(b) whether or not the office or employment concerned is held at the time the emoluments are received or (as the case may be) received in the United Kingdom.

(3) Where subsection (1) above applies in the case of emoluments received, or (as the case may be) received in the United Kingdom, after the death of the person who held the office or employment concerned, the charge shall be a charge on his executors or administrators; and accordingly income tax—

(a) shall be assessed and charged on the executors or administrators, and

(b) shall be a debt due from and payable out of the deceased’s estate.

(4) Section 202B shall have effect for the purposes of subsection (1)(a) above.

202B Receipts basis: meaning of receipt

(1) For the purposes of section 202A(1)(a) emoluments shall be treated as received at the time found in accordance with the following rules (taking the earlier or earliest time in a case where more than one rule applies)—

(a) the time when payment is made of or on account of the emoluments;

(b) the time when a person becomes entitled to payment of or on account of the emoluments;

(c) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and sums on account of the emoluments are credited in the company’s accounts or records, the time when sums on account of the emoluments are so credited;

(d) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the emoluments for a period is determined before the period ends, the time when the period ends;

(e) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the emoluments for a period is not known until the amount is determined after the period has ended, the time when the amount is determined.

(2) Subsection (1)(c), (d) or (e) above applies whether or not the office or employment concerned is that of director.

(3) Paragraph (c), (d) or (e) of subsection (1) above applies if the holder of the office or employment is a director of the company at any time in the year of assessment in which the time mentioned in the paragraph concerned falls.

(4) For the purposes of the rule in subsection (1)(c) above, any fetter on the right to draw the sums is to be disregarded.

(5) In subsection (1) above “director” means—

(a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that board or similar body,

(b) in relation to a company whose affairs are managed by a single director or similar person, that director or person, and

(c) in relation to a company whose affairs are managed by the members themselves, a member of the company.

(6) In subsection (1) above “director”, in relation to a company, also includes any person in accordance with whose directions or instructions the company’s directors (as defined in subsection (5) above) are accustomed to act; and for this purpose a person is not to be deemed to be a person in accordance with whose directions or instructions the company’s directors are accustomed to act by reason only that the directors act on advice given by him in a professional capacity.

(7) Subsections (1) to (6) above shall have effect subject to subsections (8) to (11) below.

(8) In a case where section 141(1)(a), 142(1)(a), 143(1)(a) or 148(4) treats a person as receiving or being paid an emolument or emoluments at a particular time, for the purposes of section 202A(1)(a) the emolument or emoluments shall be treated as received at that time; and in such a case subsections (1) to (6) above shall not apply.

(9) In a case where section 145(1) treats a person as receiving emoluments, for the purposes of section 202A(1)(a) the emoluments shall be treated as received in the period referred to in section 145(1); and in such a case subsections (1) to (6) above shall not apply.

(10) In a case where section 154(1), 157(1), 158(1), 160(1), 160(2), 162(6) or 164(1) treats an amount as emoluments, for the purposes of section 202A(1)(a) the emoluments shall be treated as received in the year referred to in section 154(1) or the other provision concerned; and in such a case subsections (1) to (6) above shall not apply.

(11) In a case where—

(a) emoluments take the form of a benefit not consisting of money, and

(b) subsection (8), (9) or (10) above does not apply,

for the purposes of section 202A(1)(a) the emoluments shall be treated as received at the time when the benefit is provided; and in such a case subsections (1) to (6) above shall not apply.”

(2) This section shall apply where the year of assessment mentioned in the new section 202A(1) is 1989-90 or a subsequent year of assessment even if the emoluments concerned are for a year of assessment before 1989-90.

(3) This section shall not apply in the case of emoluments of an office or employment held by a person who died before 6th April 1989.

38 Schedule E: unpaid emoluments

(1) This section applies to emoluments of an office or employment if—

(a) they are emoluments for a year of assessment (a relevant year) before 1989-90,

(b) they fall within Case I or II of Schedule E as the Case applies for years before 1989-90,

(c) they have not been paid before 6th April 1989, and

(d) they have been received on or after 6th April 1989 and before 6th April 1991;

and section 202B of the Taxes Act 1988 shall apply for the purposes of paragraph (d) above as it applies for the purposes of section 202A(1)(a) of that Act.

(2) The emoluments shall be charged to income tax only by reference to the year of assessment in which they are received.

(3) Any adjustments consequential on this section (such as the amendment of assessments or the repayment or setting-off of tax paid) shall be made.

(4) This section shall not apply to emoluments of an office or employment held by a person who died before 6th April 1989.

(5) This section shall not apply if the only emoluments of the office or employment not paid before 6th April 1989 are emoluments for a period consisting of or falling within the period beginning with 5th March 1989 and ending with 5th April 1989.

(6) This section shall not apply unless—

(a) written notice that it is to apply is given to the inspector before 6th April 1991,

(b) the notice is given by or on behalf of the person who holds or held the office or employment concerned, and

(c) the notice states the amount of the emoluments falling within subsection (1) above.

(7) Subsection (8) below applies where emoluments of an office or employment have been or fall to be computed by reference to the accounts basis as regards the year 1987-88 or years of assessment including that year.

(8) In deciding for the purposes of subsection (1)(a) above whether emoluments are emoluments for a particular year, the emoluments of the office or employment for the year or (as the case may be) years mentioned in subsection (7) above, and for the year 1988-89, shall be computed by reference to that basis.

(9) In deciding whether subsection (8) above applies in a particular case, any request to revoke the application of the accounts basis shall be ignored if—

(a) it is made after 5th April 1989, or

(b) it is made before 6th April 1989 otherwise than in writing.

(10) In the application of this section to emoluments of an office or employment under or with a person carrying on business as an authorised Lloyd’s underwriting agent, the references in subsections (1)(d) and (6)(a) above to 6th April 1991 shall be construed as references to 6th April 1994.

(11) Subsection (10) above shall not apply unless the duties of the office or employment relate wholly or mainly to the underwriting agency business.

(12) The reference in subsection (10) above to an authorised Lloyd’s underwriting agent is to a person permitted by the Council of Lloyd’s to act as an underwriting agent at Lloyd's.

(13) If in a particular case it appears to the Board reasonable to do so they may direct that subsections (1)(d) and (6)(a) above shall have effect in relation to that case as if for the references to 6th April 1991 or (as the case may be) 6th April 1994 there were substituted references to such later date as they may specify in the direction.

(14) In this section “the accounts basis” means the basis commonly so called (under which emoluments for a year of assessment are computed by reference to the emoluments for a period other than the year of assessment).

39 Schedule E: unremitted emoluments

(1) This section applies to emoluments of an office or employment if—

(a) they are emoluments for a year of assessment (a relevant year) before 1989-90,

(b) they are received in the United Kingdom after 5th April 1989, and

(c) had this Act not been passed they would have fallen within Case III of Schedule E.

(2) The emoluments shall be treated as if they were not emoluments for the relevant year.

(3) But they shall be treated as if they were emoluments for the year of assessment in which they are received in the United Kingdom and as if they fell within Case III as substituted by section 36 above; and accordingly income tax shall be charged, in accordance with section 202A of the Taxes Act 1988, by reference to the year of assessment in which the emoluments are received in the United Kingdom.

40 Schedule E: emoluments already paid

(1) Subsection (2) below applies to emoluments of an office or employment if—

(a) they are emoluments for a year of assessment after 1988-89,

(b) they have been paid before 6th April 1989, and

(c) they fall within Case I or II of Schedule E as substituted by section 36 above.

(2) The emoluments shall be treated as if they were received, within the meaning of section 202B of the Taxes Act 1988, on 6th April 1989; and accordingly income tax shall be charged, in accordance with section 202A of that Act, by reference to the year 1989-90.

(3) Subsection (4) below applies to emoluments of an office or employment if—

(a) they are emoluments for a year of assessment after 1988-89,

(b) they have been received in the United Kingdom before 6th April 1989, and

(c) they fall within Case III of Schedule E as substituted by section 36 above.

(4) The emoluments shall be treated as if they were received in the United Kingdom on 6th April 1989; and accordingly income tax shall be charged, in accordance with section 202A of the Taxes Act 1988, by reference to the year 1989-90.

41 Schedule E: pensions etc

(1) This section applies in relation to the following pensions and other benefits—

(a) a pension, stipend or annuity chargeable to income tax under Schedule E by virtue of paragraph 2, 3 or 4 of section 19(1) of the Taxes Act 1988;

(b) a pension or annual payment chargeable to income tax under Schedule E by virtue of section 133 of that Act (voluntary pensions);

(c) income support chargeable to income tax under Schedule E by virtue of section 151 of that Act;

(d) a pension chargeable to income tax under Schedule E by virtue of section 597 of that Act (retirement benefit schemes);

(e) a benefit chargeable to income tax under Schedule E by virtue of section 617(1) of that Act (social security benefits).

(2) As regards any particular year of assessment income tax shall be charged on the amount of the pension or other benefit accruing in respect of the year; and this shall apply irrespective of when any amount is actually paid in respect of the pension or other benefit.

(3) This section shall apply where the year of assessment mentioned in subsection (2) above is 1989-90 or a subsequent year of assessment.

42 Schedule E: supplementary

(1) The Taxes Act 1988 shall be amended as follows.

(2) In section 131(2) (interaction of Cases) the words “for the same or another chargeable period” shall be omitted.

(3) In section 149(1) (sick pay chargeable as emoluments of employment for a certain period) the words “for that period” and the words “for that or any other period” shall be omitted.

(4) Section 170 (profit-related pay charged for year of assessment in which it is paid) shall cease to have effect.

(5) In paragraph 2(2) of Schedule 12 (foreign earnings) for the words from “emoluments from” to “year of assessment” there shall be substituted the words “emoluments for the year of assessment from the relevant employment in respect of which such a deduction is allowed”.

(6) This section shall apply for the year 1989-90 and subsequent years of assessment.

43 Schedule D: computation

(1) Subsection (2) below applies where—

(a) a calculation is made of profits or gains which are to be charged under Schedule D and are for a period of account ending after 5th April 1989,

(b) relevant emoluments would (apart from that subsection) be deducted in making the calculation, and

(c) the emoluments are not paid before the end of the period of nine months beginning with the end of that period of account.

(2) The emoluments—

(a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but

(b) shall be deducted in calculating profits or gains which are to be charged under Schedule D and are for the period of account in which the emoluments are paid.

(3) Subsections (4) and (5) below apply where—

(a) a calculation such as is mentioned in subsection (1)(a) above is made,

(b) the calculation is made before the end of the period of nine months beginning with the end of the period of account concerned,

(c) relevant emoluments would (apart from subsection (2) above) be deducted in making the calculation, and

(d) the emoluments have not been paid when the calculation is made.

(4) It shall be assumed for the purpose of making the calculation that the emoluments will not be paid before the end of that period of nine months.

(5) But the calculation shall be adjusted if—

(a) the emoluments are paid after the calculation is made but before the end of that period of nine months,

(b) a claim to adjust the calculation is made to the inspector, and

(c) the claim is made before the end of the period of two years beginning with the end of the period of account concerned.

(6) In the application of this section to the calculation of a person’s profits or gains as an authorised Lloyd’s underwriting agent—

(a) the references in subsections (1)(c), (3)(b), (4) and (5)(a) above to nine months shall be construed as references to three years and nine months, and

(b) the reference in subsection (5)(c) above to two years shall be construed as a reference to five years.

(7) The reference in subsection (6) above to an authorised Lloyd’s underwriting agent is to a person permitted by the Council of Lloyd’s to act as an underwriting agent at Lloyd's.

(8) In a case where the period of account mentioned in subsection (1)(a) above begins before 6th April 1989 and ends before 6th April 1990, the references in subsections (1)(c), (3)(b), (4) and (5)(a) above to nine months shall be construed as references to eighteen months.

(9) In this section “period of account” means a period for which an account is made up.

(10) For the purposes of this section “relevant emoluments” are emoluments for a period after 5th April 1989 allocated either—

(a) in respect of particular offices or employments (or both), or

(b) generally in respect of offices or employments (or both).

(11) This section applies in relation to potential emoluments as it applies in relation to relevant emoluments, and for this purpose—

(a) potential emoluments are amounts or benefits reserved in the accounts of an employer, or held by an intermediary, with a view to their becoming relevant emoluments;

(b) potential emoluments are paid when they become relevant emoluments which are paid.

(12) In deciding for the purposes of this section whether emoluments are paid at any time after 5th April 1989, section 202B of the Taxes Act 1988 (time when emoluments are treated as received) shall apply as it applies for the purposes of section 202A(1)(a) of that Act, but reading “paid” for “received” throughout.

(13) In section 436(1)(b) of the Taxes Act 1988 (profits to be computed in accordance with provisions of that Act applicable to Case I of Schedule D) the reference to that Act shall be deemed to include a reference to this section.

44 Investment and insurance companies: computation

(1) Subsection (2) below applies where—

(a) a calculation is made for the purposes of corporation tax of the profits of an investment company for an accounting period ending after 5th April 1989,

(b) relevant emoluments would (apart from that subsection) be deducted in making the calculation, and

(c) the emoluments are not paid before the end of the period of nine months beginning with the end of the relevant period of account.

(2) The emoluments—

(a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but

(b) shall be deducted in calculating for the purposes of corporation tax the profits of the company concerned for the accounting period in which the emoluments are paid.

(3) Subsections (4) and (5) below apply where—

(a) a calculation such as is mentioned in subsection (1)(a) above is made,

(b) the calculation is made before the end of the period of nine months beginning with the end of the relevant period of account,

(c) relevant emoluments would (apart from subsection (2) above) be deducted in making the calculation, and

(d) the emoluments have not been paid when the calculation is made.

(4) It shall be assumed for the purpose of making the calculation that the emoluments will not be paid before the end of that period of nine months.

(5) But the calculation shall be adjusted if—

(a) the emoluments are paid after the calculation is made but before the end of that period of nine months,

(b) a claim to adjust the calculation is made to the inspector by or on behalf of the company concerned, and

(c) the claim is made before the end of the period of two years beginning with the end of the period of account concerned.

(6) In a case where the accounting period mentioned in subsection (1)(a) above begins before 6th April 1989 and ends before 6th April 1990, the references in subsections (1)(c), (3)(b), (4) and (5)(a) above to nine months shall be construed as references to eighteen months.

(7) In this section “investment company” has the same meaning as in Part IV of the Taxes Act 1988.

(8) For the purposes of this section “relevant emoluments” are emoluments for a period after 5th April 1989 allocated either—

(a) in respect of particular offices or employments (or both), or

(b) generally in respect of offices or employments (or both).

(9) This section applies in relation to potential emoluments as it applies in relation to relevant emoluments, and for this purpose—

(a) potential emoluments are amounts or benefits reserved in the accounts of an employer, or held by an intermediary, with a view to their becoming relevant emoluments;

(b) potential emoluments are paid when they become relevant emoluments which are paid.

(10) For the purpose of this section the relevant period of account is the period of account which—

(a) includes the accounting period concerned, or

(b) begins when the accounting period concerned begins and ends when the accounting period concerned ends.

(11) In deciding for the purposes of this section whether emoluments are paid at any time after 5th April 1989, section 202B of the Taxes Act 1988 (time when emoluments are treated as received) shall apply as it applies for the purposes of section 202A(1)(a) of that Act, but reading “paid” for “received” throughout.

(12) Where the profits of a company carrying on life assurance business are not charged under Case I of Schedule D, this section shall apply in calculating the profits as it applies in calculating the profits of an investment company; but the effect of section 86 below shall be ignored in construing subsection (1)(b) above.

(13) In a case where, apart from this subsection and by virtue of subsection (2)(b) above as it applies by virtue of subsection (12) above, emoluments fall to be deducted in calculating profits for a particular accounting period—

(a) subsection (2)(b) above shall have effect subject to section 86 below;

(b) in construing section 86 the emoluments shall be treated as expenses for that accounting period.

45 PAYE: meaning of payment

(1) The Taxes Act 1988 shall be amended as follows.

(2) The following section shall be inserted after section 203—

“203A PAYE: meaning of payment

(1) For the purposes of section 203 and regulations under it a payment of, or on account of, any income assessable to income tax under Schedule E shall be treated as made at the time found in accordance with the following rules (taking the earlier or earliest time in a case where more than one rule applies)—

(a) the time when the payment is actually made;

(b) the time when a person becomes entitled to the payment;

(c) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and sums on account of the income are credited in the company’s accounts or records, the time when sums on account of the income are so credited;

(d) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the income for a period is determined before the period ends, the time when the period ends;

(e) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the income for a period is not known until the amount is determined after the period has ended, the time when the amount is determined.

(2) Subsection (1)(c), (d) or (e) above applies whether or not the office or employment concerned is that of director.

(3) Paragraph (c), (d) or (e) of subsection (1) above applies if the holder of the office or employment is a director of the company at any time in the year of assessment in which the time mentioned in the paragraph concerned falls.

(4) For the purposes of the rule in subsection (1)(c) above, any fetter on the right to draw the sums is to be disregarded.

(5) Subsections (5) and (6) of section 202B shall apply for the purposes of subsection (1) above as they apply for the purposes of section 202B(1).”

(3) Section 203(4) (regulations may define payment) shall cease to have effect.

(4) Subsection (2) above shall have effect to determine whether anything occurring on or after the day on which this Act is passed constitutes a payment for the purposes mentioned in the new section 203A.

(5) But if an event occurring before the day on which this Act is passed constituted a payment of or on account of income for the purposes mentioned in the new section 203A, nothing occurring on or after that day shall constitute a payment of or on account of the same income for those purposes.

Interest

46 Relief for interest

For the year 1989-90 the qualifying maximum defined in section 367(5) of the Taxes Act 1988 (limit on relief for interest on certain loans) shall be £30,000.

47 Close company loans: business expansion scheme

In section 360 of the Taxes Act 1988 (loans to buy interest in close company), after subsection (3) there shall be inserted—

“(3A) Interest shall not be eligible for relief under section 353 by virtue of paragraph (a) of subsection (1) above in respect of shares acquired on or after 14th March 1989 if at any time the person by whom they are acquired, or that person’s husband or wife, makes a claim for relief in respect of them under Chapter III of Part VII.”

48 Close company loans: material interest

(1) In section 360 of the Taxes Act 1988 for subsection (4) there shall be substituted—

“(4) Subject to section 360A, in this section expressions to which a meaning is assigned by Part XI have that meaning.”

(2) The following section shall be inserted after that section—

“360A Meaning of “material interest” in section 360

(1) For the purposes of section 360(2)(a) an individual shall be treated as having a material interest in a company—

(a) if he, either on his own or with one or more of his associates, or if any associate of his with or without other such associates, is the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 5 per cent. of the ordinary share capital of the company, or

(b) if, on an amount equal to the whole distributable income of the company falling to be apportioned under Part XI for the purpose of computing total income, more than 5 per cent. of that amount could be apportioned to him together with his associates (if any), or to any associate of his, or any such associates taken together.

(2) Subject to the following provisions of this section, in subsection (1) above “associate”, in relation to an individual, means—

(a) any relative or partner of the individual;

(b) the trustee or trustees of a settlement in relation to which the individual is, or any relative of his (living or dead) is or was, a settlor (“settlement” and “settlor” having the same meaning as in section 681(4)); and

(c) where the individual is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person, the trustee or trustees of the settlement concerned or, as the case may be, the personal representative of the deceased.

(3) In relation to any loan made after 5th April 1987, there shall be disregarded for the purposes of subsection (2)(c) above—

(a) the interest of the trustees of an approved profit sharing scheme (within the meaning of section 187) in any shares which are held by them in accordance with the scheme and have not yet been appropriated to an individual; and

(b) any rights exercisable by those trustees by virtue of that interest.

(4) In relation to any loan made on or after the day on which the Finance Act 1989 was passed, where the individual has an interest in shares or obligations of the company as a beneficiary of an employee benefit trust, the trustees shall not be regarded as associates of his by reason only of that interest unless subsection (6) below applies in relation to him.

(5) In subsection (4) above “employee benefit trust” has the same meaning as in paragraph 7 of Schedule 8, except that in its application for this purpose paragraph 7(5)(b) shall have effect as if it referred to the day on which the Finance Act 1989 was passed instead of to 14th March 1989.

(6) This subsection applies in relation to an individual if at any time on or after the day on which the Finance Act 1989 was passed—

(a) the individual, either on his own or with any one or more of his associates, or

(b) any associate of his, with or without other such associates,

has been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 5 per cent. of the ordinary share capital of the company.

(7) Sub-paragraphs (9) to (12) of paragraph 7 of Schedule 8 shall apply for the purposes of subsection (6) above in relation to an individual as they apply for the purposes of that paragraph in relation to an employee.

(8) In relation to any loan made before 14th November 1986, where the individual is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person, subsection (2)(c) above shall have effect as if for the reference to the trustee or trustees of the settlement concerned or, as the case may be, the personal representative of the deceased there were substituted a reference to any person (other than the individual) interested in the settlement or estate, but subject to subsection (9) below.

(9) Subsection (8) above shall not apply so as to make an individual an associate as being entitled or eligible to benefit under a trust—

(a) if the trust relates exclusively to an exempt approved scheme as defined in section 592; or

(b) if the trust is exclusively for the benefit of the employees, or the employees and directors, of the company or their dependants (and not wholly or mainly for the benefit of directors or their relatives), and the individual in question is not (and could not as a result of the operation of the trust become), either on his own or with his relatives, the beneficial owner of more than 5 per cent. of the ordinary share capital of the company;

and in applying paragraph (b) above any charitable trusts which may arise on the failure or determination of other trusts shall be disregarded.

(10) In this section “relative” means husband or wife, parent or remoter forebear, child or remoter issue or brother or sister.”

Benefits in kind

49 Car benefits

(1) In Schedule 6 to the Taxes Act 1988 (taxation of directors and others in respect of cars) for Part I (tables of flat rate cash equivalents) there shall be substituted—

Part I Tables of Flat Rate Cash Equivalents

Table A

Cars with an original market value up to £19,250 and having a cylinder capacity

Cylinder capacity of car in cubic centimetres	Age of car at end of relevant year of assessment
	Under 4 years	4 years or more
1400 or less	£1,400	£950
More than 1400 but not more than 2000	£1,850	£1,250
More than 2000	£2,950	£1,950

Table B

Cars with an original market value up to £19,250 and not having a cylinder capacity

Original market value of car	Age of car at end of relevant year of assessment
	Under 4 years	4 years or more
Less than £6,000	£1,400	£950
£6,000 or more but less than £8,500	£1,850	£1,250
£8,500 or more but not more than £19,250	£2,950	£1,950

Table C

Cars with an original market value of more than £19,250

Original market value of car	Age of car at end of relevant year of assessment
	Under 4 years	4 years or more
More than £19,250 but not more than £29,000	£3,850	£2,600
More than £29,000	£6,150	£4,100

(2) This section shall have effect for the year 1989-90 and subsequent years of assessment.

50 Security assets and services

(1) For the purposes of this section a security asset is an asset which improves personal security, and a security service is a service which improves personal security.

(2) In a case where—

(a) a security asset or security service is provided for an employee by reason of his employment, or is used by an employee, and

(b) the cost is wholly or partly borne by or on behalf of a person (the provider) other than the employee,

in charging tax under Schedule E on the emoluments from the employment a deduction shall be allowed of an amount equal to so much of the cost so borne as falls to be included in the emoluments of the employment.

(3) In a case where—

(a) a security asset or security service is provided for or used by an employee,

(b) expenses in connection with the provision or use are incurred out of the emoluments of the employment, and

(c) the expenses are reimbursed by or on behalf of a person (the provider) other than the employee,

in charging tax under Schedule E on the emoluments from the employment a deduction shall be allowed of an amount equal to the amount of the expenses.

(4) Subsection (2) or (3) above shall not apply unless the asset or service is provided for or used by the employee to meet a threat which—

(a) is a special threat to his personal physical security, and

(b) arises wholly or mainly by virtue of the particular employment concerned.

(5) Subsection (2) or (3) above shall not apply unless the provider has the meeting of that threat as his sole object in wholly or partly bearing the cost or reimbursing the expenses (as the case may be).

(6) Subsection (2) or (3) above shall not apply in the case of a service unless the benefit resulting to the employee consists wholly or mainly of an improvement of his personal physical security.

(7) Subsection (2) or (3) above shall not apply in the case of an asset unless the provider intends the asset to be used solely to improve personal physical security.

51 Assets used partly for security

(1) In a case where—

(a) apart from section 50(7) above, section 50(2) above would apply in the case of an asset, and

(b) the provider intends the asset to be used partly to improve personal physical security,

section 50(2) shall nevertheless apply, but only so as to allow a deduction of the appropriate proportion of the amount there mentioned.

(2) For the purposes of subsection (1) above the appropriate proportion of the amount mentioned in section 50(2) above is such proportion of that amount as is attributable to the provider’s intention that the asset be used to improve personal physical security.

(3) In a case where—

(a) apart from section 50(7) above, section 50(3) above would apply in the case of an asset, and

(b) the provider intends the asset to be used partly to improve personal physical security,

section 50(3) shall nevertheless apply, but only so as to allow a deduction of the appropriate proportion of the amount there mentioned.

(4) For the purposes of subsection (3) above the appropriate proportion of the amount mentioned in section 50(3) above is such proportion of that amount as is attributable to the provider’s intention that the asset be used to improve personal physical security.

52 Security: supplementary

(1) If the provider intends the asset to be used solely to improve personal physical security, but there is another use for the asset which is incidental to improving personal physical security, that other use shall be ignored in construing section 50(7) above.

(2) The fact that an asset or service improves the personal physical security of any member of the employee’s family or household, as well as that of the employee, shall not prevent section 50(2) or (3) above from applying.

(3) In sections 50 and 51 above and this section—

(a) references to an asset do not include references to a car, a ship or an aircraft,

(b) references to an asset or service do not include references to a dwelling, grounds appurtenant to a dwelling, or living accommodation,

(c) references to an asset include references to equipment and a structure (such as a wall),

(d) references to an employee are to a person who holds an employment, and

(e) references to an employment include references to an office.

(4) For the purposes of sections 50 and 51 above and this section in their application to an asset, it is immaterial whether or not the asset becomes affixed to land (whether constituting a dwelling or otherwise).

(5) For the purposes of sections 50 and 51 above and this section in their application to an asset, it is immaterial whether or not the employee is or becomes entitled to the property in the asset or (in the case of a fixture) an estate or interest in the land concerned.

(6) Sections 50 and 51 above and this section apply where expenditure is incurred on or after 6th April 1989 in or towards bearing a cost or in reimbursing expenses (as the case may be).

53 Employees earning £8,500 or more and directors

(1) For section 167 of the Taxes Act 1988 (which defines “director’s or higher-paid employment” for the purposes of Chapter II of Part V) there shall be substituted—

“167 Employment to which this Chapter applies

(1) This Chapter applies—

(a) to employment as a director of a company (but subject to subsection (5) below), and

(b) to employment with emoluments at the rate of £8,500 a year or more.

(2) For this purpose emoluments are to be calculated—

(a) on the basis that they include all such amounts as come, or would but for section 157(3) come, into charge under this Chapter or section 141, 142, 143 or 145, and

(b) without any deduction under section 198, 201 or 332(3).

(3) Where a person is employed in two or more employments by the same employer and either—

(a) the total of the emoluments of those employments (applying this section) is at the rate of £8,500 a year or more, or

(b) this Chapter applies (apart from this subsection) to one or more of those employments,

this Chapter shall apply to all the employments.

(4) All employees of a partnership or body over which an individual or another partnership or body has control are to be treated for the purposes of this section (but not for any other purpose) as if the employment were an employment by the individual or by that other partnership or body as the case may be.

(5) This Chapter shall not apply to a person’s employment by reason only of its being employment as a director of a company (without prejudice to its application by virtue of subsection (1)(b) or (3) above) if he has no material interest in the company and either—

(a) his employment is as a full-time working director; or

(b) the company is non-profit making (meaning that neither does it carry on a trade nor do its functions consist wholly or mainly in the holding of investments or other property) or is established for charitable purposes only.”

(2) In consequence of subsection (1) above—

(a) for the heading to Chapter II of Part V of the Taxes Act 1988 there shall be substituted “EMPLOYEES EARNING £8,500 OR MORE AND DIRECTORS”;

(b) the words “employment to which this Chapter applies” shall be substituted for the words “director’s or higher-paid employment” in sections 153(1), 154(1), 157(1), 158(1), 160(1) and (2), 162(1), 163(1) and 165(6)(b) of that Act;

(c) for section 160(3) of that Act there shall be substituted—

“(3) Where—

(a) there was outstanding, at any time when a person was in employment to which this Chapter applies, the whole or part of a loan to him (or a relative of his) the benefit of which was obtained by reason of his employment, and

(b) that employment has terminated or ceased to be employment to which this Chapter applies,

subsection (2) above applies as if the employment had not terminated or, as the case may be, had not ceased to be employment to which this Chapter applies.”;

(d) in section 162(5) of that Act, after the words “section 160(2)” there shall be inserted the words “(and where appropriate section 160(3))”;

(e) for section 162(7) of that Act there shall be substituted—

“(7) If at the time of the event giving rise to a charge by virtue of subsection (6) above the employment in question has terminated, that subsection shall apply as if it had not.”

(f) the words “employment to which Chapter II of Part V applies” shall be substituted for the words from “director's” to “section 167)” in sections 332(2)(c) and 418(3)(a) of that Act;

(g) the words “employment to which Chapter II of Part V of the principal Act applies” shall be substituted for the words “director’s or higher paid employment” in section 15(3)(a) of the [1970 c. 9.] Taxes Management Act 1970.

Medical insurance

54 Relief

(1) This section applies where—

(a) on or after 6th April 1990 an individual makes a payment in respect of a premium under a contract of private medical insurance (whenever issued),

(b) the contract meets the requirement in subsection (2) below as to the person or persons insured,

(c) at the time the payment is made the contract is an eligible contract,

(d) the individual making the payment does not make it out of resources provided by another person for the purpose of enabling it to be made, and

(e) the individual making the payment is not entitled to claim any relief or deduction in respect of it under any other provision of the Tax Acts.

(2) The requirement mentioned in subsection (1)(b) above is that the contract insures—

(a) an individual who at the time the payment is made is aged 60 or over and resident in the United Kingdom,

(b) individuals each of whom at that time is aged 60 or over and resident in the United Kingdom, or

(c) two individuals who are married to each other at that time, at least one of whom is aged 60 or over at that time, and each of whom is resident in the United Kingdom at that time.

(3) If the payment is made by an individual who at the time it is made is resident in the United Kingdom (whether or not he is the individual or one of the individuals insured by the contract) it shall be deducted from or set off against his income for the year of assessment in which it is made; but relief under this subsection shall be given only on a claim made for the purpose, except where subsections (4) to (6) below apply.

(4) In such cases and subject to such conditions as the Board may specify in regulations, relief under subsection (3) above shall be given in accordance with subsections (5) and (6) below.

(5) An individual who is entitled to such relief in respect of a payment may deduct and retain out of it an amount equal to income tax on it at the basic rate for the year of assessment in which it is made.

(6) The person to whom the payment is made—

(a) shall accept the amount paid after deduction in discharge of the individual’s liability to the same extent as if the deduction had not been made, and

(b) may, on making a claim, recover from the Board an amount equal to the amount deducted.

(7) The Treasury may make regulations providing that in circumstances prescribed in the regulations—

(a) an individual who has made a payment in respect of a premium under a contract of private medical insurance shall cease to be and be treated as not having been entitled to relief under subsection (3) above; and

(b) he or the person to whom the payment was made (depending on the terms of the regulations) shall account to the Board for tax from which relief has been given on the basis that the individual was so entitled.

(8) Regulations under subsection (7) above may include provision adapting or modifying the effect of any enactment relating to income tax in order to secure the performance of any obligation imposed under paragraph (b) of that subsection.

(9) In this section—

(a) references to a premium, in relation to a contract of insurance, are to any amount payable under the contract to the insurer, and

(b) references to an individual who is resident in the United Kingdom at any time include references to an individual who is at that time performing duties which are treated by virtue of section 132(4)(a) of the Taxes Act 1988 as performed in the United Kingdom.

55 Eligible contracts

(1) This section has effect to determine whether a contract is at a particular time (the relevant time) an eligible contract for the purposes of section 54 above.

(2) A contract is an eligible contract at the relevant time if—

(a) it was entered into by an insurer who at the time it was entered into was a qualifying insurer and was approved by the Board for the purposes of this section,

(b) the period of insurance under the contract does not exceed one year (commencing with the date it was entered into),

(c) the contract is not connected with any other contract at the relevant time and has not been connected with any other contract at any time since it was entered into,

(d) no benefit has been provided by virtue of the contract other than an approved benefit, and

(e) the contract meets one or more of the three conditions set out below.

(3) The first condition is that the contract is certified by the Board under section 56 below at the relevant time.

(4) The second condition is that, at the time the contract was entered into, it conformed with a standard form certified by the Board as a standard form of eligible contract.

(5) The third condition is that, at the time the contract was entered into, it conformed with a form varying from a standard form so certified in no other respect than by making additions—

(a) which were (at the time the contract was entered into) certified by the Board as compatible with an eligible contract when made to that standard form, and

(b) which (at that time) satisfied any conditions subject to which the additions were so certified.

(6) Where a contract is varied, and the relevant time falls after the time the variation takes effect, subsections (1) to (5) above shall have effect as if “entered into” read “varied” in each place where it occurs in subsections (4) and (5) above.

(7) For the purposes of this section a contract is connected with another contract at any time if—

(a) they are simultaneously in force at that time,

(b) either of them was entered into with reference to the other, or with a view to enabling the other to be entered into on particular terms, or with a view to facilitating the other being entered into on particular terms, and

(c) the terms on which either of them was entered into would have been significantly less favourable to the insured if the other had not been entered into.

(8) For the purposes of this section each of the following is a qualifying insurer—

(a) an insurer lawfully carrying on in the United Kingdom business of any of the classes specified in Part I of Schedule 2 to the [1982 c. 50.] Insurance Companies Act 1982;

(b) an insurer not carrying on business in the United Kingdom but carrying on business in another member State and being either a national of a member State or a company or partnership formed under the law of any part of the United Kingdom or another member State and having its registered office, central administration or principal place of business in a member State.

(9) For the purposes of this section a benefit is an approved benefit if it is provided in pursuance of a right of a description mentioned in section 56(3)(a) below.

56 Certification of contracts

(1) The Board shall certify a contract under this section if it satisfies the conditions set out in subsection (3) below; and the certification shall be expressed to take effect from the time the conditions are satisfied, and shall take effect accordingly.

(2) The Board shall revoke a certification of a contract under this section if it comes to their notice that the contract has ceased to satisfy the conditions set out in subsection (3) below; and the revocation shall be expressed to take effect from the time the conditions ceased to be satisfied, and shall take effect accordingly.

(3) The conditions referred to above are that—

(a) the contract either provides indemnity in respect of all or any of the costs of all or any of the treatments, medical services and other matters for the time being specified in regulations made by the Treasury, or in addition to providing indemnity of that description provides cash benefits falling within rules for the time being so specified,

(b) the contract does not confer any right other than such a right as is mentioned in paragraph (a) above or is for the time being specified in regulations made by the Treasury,

(c) the premium under the contract is in the Board’s opinion reasonable, and

(d) the contract satisfies such other requirements as are for the time being specified in regulations made by the Treasury.

(4) The certification of a contract by the Board under this section shall cease to have effect if the contract is varied; but this is without prejudice to the application of the preceding provisions of this section to the contract as varied.

(5) Where the Board refuse to certify a contract under this section, or they revoke a certification, an appeal may be made to the Special Commissioners by—

(a) the insurer, or

(b) any person who (if the policy were certified) would be entitled to relief under section 54 above.

(6) Where a contract is certified under this section, or a certification is revoked or otherwise ceases to have effect, any adjustments resulting from the certification or from its revocation or ceasing to have effect shall be made.

(7) Subsection (6) above applies where a certification or revocation takes place on appeal as it applies in the case of any other certification or revocation.

(8) In this section the reference to a premium, in relation to a contract of insurance, is to any amount payable under the contract to the insurer.

57 Medical insurance: supplementary

(1) The Board may by regulations—

(a) provide that a claim under section 54(3) or (6)(b) above shall be made in such form and manner, shall be made at such time, and shall be accompanied by such documents, as may be prescribed;

(b) make provision, in relation to payments in respect of which a person is entitled to relief under section 54 above, for the giving by insurers in such circumstances as may be prescribed of certificates of payment in such form as may be prescribed to such persons as may be prescribed;

(c) provide that a person who provides (or has at any time provided) insurance under contracts of private medical insurance shall comply with any notice which is served on him by the Board and which requires him within a prescribed period to make available for the Board’s inspection documents (of a prescribed kind) relating to such contracts;

(d) provide that persons of such a description as may be prescribed shall, within a prescribed period of being required to do so by the Board, furnish to the Board information (of a prescribed kind) about contracts of private medical insurance;

(e) make provision with respect to the approval of insurers for the purposes of section 55 above and the withdrawal of approval for the purposes of that section;

(f) make provision for and with respect to appeals against decisions of the Board with respect to the giving or withdrawal of approval of insurers for the purposes of section 55 above;

(g) make provision with respect to the certification by the Board of standard forms of eligible contract and variations from standard forms of eligible contract certified by them;

(h) make provision for and with respect to appeals against decisions of the Board with respect to the certification of standard forms of eligible contract or variations from standard forms of eligible contract certified by them;

(i) provide that certification, or the revocation of a certification, under section 56 above shall be carried out in such form and manner as may be prescribed;

(j) make provision with respect to appeals against decisions of the Board with respect to certification or the revocation of certification under section 56 above;

(k) make provision generally as to administration in connection with sections 54 to 56 above.

(2) The words “Regulations under section 57 of the Finance Act 1989” shall be added at the end of each column in the Table in section 98 of the [1970 c. 9.] Taxes Management Act 1970 (penalties for failure to furnish information etc.).

(3) The following provisions of the Taxes Management Act 1970, namely—

(a) section 29(3)(c) (excessive relief),

(b) section 30 (tax repaid in error etc.),

(c) section 88 (interest), and

(d) section 95 (incorrect return or accounts),

shall apply in relation to the payment of an amount claimed under section 54(6)(b) above to which the claimant was not entitled as if it had been income tax repaid as a relief which was not due.

(4) In sections 257B(2), 257D(8) and 265(3) of the Taxes Act 1988 after paragraph (c) there shall be inserted “or

(d) on account of any payments to which section 54(5) of the Finance Act 1989 applies”.

(5) In subsection (1) above—

• “eligible contract” has the meaning given by section 55 above, and

• “prescribed” means prescribed by or, in relation to form, under the regulations.

Charities

58 Payroll deduction scheme

(1) In section 202(7) of the Taxes Act 1988 (which limits to £240 the deductions attracting relief) for “£240” there shall be substituted “£480”.

(2) This section shall have effect for the year 1989-90 and subsequent years of assessment.

59 Covenanted subscriptions

(1) In determining whether a payment made to a charity within subsection (2) below is —

(a) an annual payment for the purposes of the Tax Acts, or

(b) a payment to which section 125(1) of the Taxes Act 1988 applies, or

(c) a covenanted payment to charity within the meaning given by section 660(3) of that Act,

there shall be disregarded any consideration for the payment which is of a kind described in subsection (3) below.

(2) A charity is within this subsection if its sole or main purpose is—

(a) the preservation of property for the public benefit, or

(b) the conservation of wildlife for the public benefit.

(3) The consideration referred to in subsection (1) above is the right of admission—

(a) to view property the preservation of which is the sole or main purpose of the charity, or

(b) to observe wildlife the conservation of which is the sole or main purpose of the charity.

(4) In subsection (3) above “right of admission” refers to admission of the person making the payment (or of any member of his family who may be admitted because of the payment) either free of the charges normally payable for admission by members of the public, or on payment of a reduced charge.

(5) Subsection (1) above shall not apply unless the opportunity to make payments of the kind in question is available to members of the public.

(6) For the purposes of this section—

(a) “charity” means a body of persons or trust established for charitable purposes only, and

(b) the bodies mentioned in section 507 shall each be treated as having been so established.

(7) This section shall apply to payments due on or after 14th March 1989.

60 British Museum and Natural History Museum

(1) In subsection (1) of section 507 of the Taxes Act 1988 (which gives tax exemption to the National Heritage Memorial Fund and the Historic Buildings and Monuments Commission) after paragraph (b) there shall be inserted—

“(c) the Trustees of the British Museum;

(d) the Trustees of the British Museum (Natural History);”

and subsection (2) of that section (which gives partial tax exemption to those Trustees) shall cease to have effect.

(2) In section 339(9) of that Act, for the words from “the Trustees” (where those words first occur) to “History) and” there shall be substituted the words “each of the bodies mentioned in section 507, and in subsections (1) to (5) above includes”.

(3) In section 660(4) of that Act, for the words from “the Trustees” to “England” there shall be substituted the words “the bodies mentioned in section 507”.

(4) Subsection (1) above shall apply in relation to accounting periods ending on or after 14th March 1989, and subsections (2) and (3) above shall apply to payments due on or after that day.

Profit-related pay, share schemes etc.

61 Profit-related pay

Schedule 4 to this Act (which amends the provisions of the Taxes Act 1988 relating to profit-related pay) shall have effect.

62 Savings-related share option schemes

(1) Part III of Schedule 9 to the Taxes Act 1988 (requirements applicable to savings-related share option schemes) shall be amended as follows.

(2) In paragraph 24(2)(a) (scheme not to permit monthly amount of contributions linked to schemes to exceed £100), for “£100” there shall be substituted “£150”.

(3) In paragraph 25(b) (requirement that price at which share may be acquired under scheme be not less than 90 per cent. of market value), for the words “90 per cent.” there shall be substituted the words “80 per cent.”.

(4) Subsection (2) above shall come into force on such day as the Treasury may by order made by statutory instrument appoint.

63 Profit sharing schemes

(1) In section 187(2) of the Taxes Act 1988, in the definition of “relevant amount” (limit on the value of shares that may be appropriated to a participant in a year of assessment), for the words “not less than £l,250 and not more than £5,000” there shall be substituted the words “not less than £2,000 and not more than £6,000”.

(2) This section shall apply for the year 1989-90 and subsequent years of assessment.

64 Share option and profit sharing schemes: shares of consortium member

In paragraph 10 of Schedule 9 to the Taxes Act 1988, paragraph (c)(ii) (which requires a consortium member to hold not less than three-twentieths of share capital of grantor company etc. if member’s shares are to qualify as scheme shares) shall cease to have effect.

65 Employee share schemes: material interest

In Schedule 9 to the Taxes Act 1988 the following paragraph shall be inserted after paragraph 39—

“Shares subject to an employee benefit trust

40 (1) Where an individual has an interest in shares or obligations of the company as a beneficiary of an employee benefit trust, the trustees shall not be regarded as associates of his by reason only of that interest unless sub-paragraph (3) below applies in relation to him.

(2) In this paragraph “employee benefit trust” has the same meaning as in paragraph 7 of Schedule 8.

(3) This sub-paragraph applies in relation to an individual if at any time on or after 14th March 1989—

(a) the individual, either on his own or with any one or more of his associates, or

(b) any associate of his, with or without other such associates,

has been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 25 per cent., or in the case of a share option scheme which is not a savings-related share option scheme more than 10 per cent., of the ordinary share capital of the company.

(4) Sub-paragraphs (9) to (12) of paragraph 7 of Schedule 8 shall apply for the purposes of this paragraph in relation to an individual as they apply for the purposes of that paragraph in relation to an employee.”

66 Priority share allocations for employees etc

(1) In relation to offers made on or after 11th October 1988, section 68 of the [1988 c. 39.] Finance Act 1988 (which provides for the benefits derived from priority rights in share offers to be disregarded in certain circumstances) shall have effect with the following amendments.

(2) In subsection (1), the words from “at the fixed price” to “tendered” shall be omitted.

(3) After that subsection there shall be inserted—

“(1A) Where the price payable by the director or employee is less than the fixed price or the lowest price successfully tendered, subsection (1) above shall not apply to the benefit represented by the difference in price.”

(4) In subsection (2), for paragraph (a) (priority shares not to exceed 10 per cent. of shares subject to the offer) there shall be substituted—

“(a) that the aggregate number of shares subject to the offer that may be allocated as mentioned in subsection (1)(b) above does not exceed the limit specified in subsection (2A) below or, as the case may be, either of the limits specified in subsection (2B) below”.

(5) After subsection (2) there shall be inserted—

“(2A) Except where subsection (2B) below applies, the limit relevant for the purposes of subsection (2)(a) above is 10 per cent. of the shares subject to the offer (including the shares that may be allocated as mentioned in subsection (1)(b) above).

(2B) Where the offer is part of arrangements which include one or more other offers to the public of shares of the same class, the limits relevant for the purposes of subsection (2)(a) above are—

(a) 40 per cent. of the shares subject to the offer (including the shares that may be allocated as mentioned in subsection (1)(b) above), and

(b) 10 per cent. of all the shares of the class in question (including the shares that may be so allocated) that are subject to any of the offers forming part of the arrangements.”

Employee share ownership trusts

67 Tax relief

(1) This section applies where—

(a) a company expends a sum in making a payment by way of contribution to the trustees of a trust which is a qualifying employee share ownership trust at the time the sum is expended,

(b) at that time, the company or a company which it then controls has employees who are eligible to benefit under the terms of the trust deed,

(c) at that time the company is resident in the United Kingdom,

(d) before the expiry of the expenditure period the sum is expended by the trustees for one or more of the qualifying purposes, and

(e) before the end of the claim period a claim for relief under this section is made.

(2) In such a case the sum—

(a) shall be deducted in computing for the purposes of Schedule D the profits or gains of a trade carried on by the company, or

(b) if the company is an investment company or a company in the case of which section 75 of the Taxes Act 1988 applies by virtue of section 76 of that Act, shall be treated as expenses of management.

(3) For the purposes of subsection (1)(b) above, the question whether one company is controlled by another shall be construed in accordance with section 840 of the Taxes Act 1988.

(4) For the purposes of subsection (1)(d) above each of the following is a qualifying purpose—

(a) the acquisition of shares in the company which established the trust;

(b) the repayment of sums borrowed;

(c) the payment of interest on sums borrowed;

(d) the payment of any sum to a person who is a beneficiary under the terms of the trust deed;

(e) the meeting of expenses.

(5) For the purposes of subsection (1)(d) above the expenditure period is the period of nine months beginning with the day following the end of the period of account in which the sum is charged as an expense of the company, or such longer period as the Board may allow by notice given to the company.

(6) For the purposes of subsection (1)(e) above the claim period is the period of two years beginning with the day following the end of the period of account in which the sum is charged as an expense of the company.

(7) For the purposes of this section the trustees of an employee share ownership trust shall be taken to expend sums paid to them in the order in which the sums are received by them (irrespective of the number of companies making payments).

68 Principal charges to tax

(1) This section applies where a chargeable event (within the meaning of section 69 below) occurs in relation to the trustees of an employee share ownership trust.

(2) In such a case—

(a) the trustees shall be treated as receiving, when the event occurs, annual profits or gains whose amount is equal to the chargeable amount (within the meaning of section 70 below),

(b) the profits or gains shall be chargeable to tax under Case VI of Schedule D for the year of assessment in which the event occurs, and

(c) the rate at which the tax is chargeable shall be a rate equal to the sum of the basic rate and the additional rate for the year of assessment in which the event occurs.

(3) If the whole or any part of the tax assessed on the trustees is not paid before the expiry of the period of six months beginning with the day on which the assessment becomes final and conclusive, a notice of liability to tax under this subsection may be served on a qualifying company and the tax or the part unpaid (as the case may be) shall be payable by the company on service of the notice.

(4) Where a notice of liability is served under subsection (3) above—

(a) any interest which is due on the tax or the part (as the case may be) and has not been paid by the trustees, and

(b) any interest accruing due on the tax or the part (as the case may be) after the date of service,

shall be payable by the company.

(5) Where a notice of liability is served under subsection (3) above and any amount payable by the company (whether on account of tax or interest) is not paid by the company before the expiry of the period of three months beginning with the date of service, the amount unpaid may be recovered from the trustees (without prejudice to the right to recover it instead from the company).

(6) For the purposes of this section each of the following is a qualifying company—

(a) the company which established the employee share ownership trust;

(b) any company falling within subsection (7) below.

(7) A company falls within this subsection if, before it is sought to serve a notice of liability on it under subsection (3) above—

(a) it has paid a sum to the trustees, and

(b) the sum has been deducted as mentioned in section 67(2)(a) above or treated as mentioned in section 67(2)(b) above.

69 Chargeable events

(1) For the purposes of section 68 above each of the following is a chargeable event in relation to the trustees of an employee share ownership trust—

(a) the transfer of securities by the trustees, if the transfer is not a qualifying transfer;

(b) the transfer of securities by the trustees to persons who are at the time of the transfer beneficiaries under the terms of the trust deed, if the terms on which the transfer is made are not qualifying terms;

(c) the retention of securities by the trustees at the expiry of the period of seven years beginning with the date on which they acquired them;

(d) the expenditure of a sum by the trustees for a purpose other than a qualifying purpose.

(2) For the purposes of subsection (1)(a) above a transfer is a qualifying transfer if it is made to a person who at the time of the transfer is a beneficiary under the terms of the trust deed.

(3) For the purposes of subsection (1)(a) above a transfer is also a qualifying transfer if—

(a) it is made to the trustees of a scheme which at the time of the transfer is a profit sharing scheme approved under Schedule 9 to the Taxes Act 1988, and

(b) it is made for a consideration which is not less than the price the securities might reasonably be expected to fetch on a sale in the open market.

(4) For the purposes of subsection (1)(b) above a transfer of securities is made on qualifying terms if—

(a) all the securities transferred at the same time are transferred on similar terms,

(b) securities have been offered to all the persons who are beneficiaries under the terms of the trust deed when the transfer is made, and

(c) securities are transferred to all such beneficiaries who have accepted.

(5) For the purposes of subsection (1)(d) above each of the following is a qualifying purpose—

(a) the acquisition of shares in the company which established the trust;

(b) the repayment of sums borrowed;

(c) the payment of interest on sums borrowed;

(d) the payment of any sum to a person who is a beneficiary under the terms of the trust deed;

(e) the meeting of expenses.

(6) For the purposes of subsection (4) above, the fact that terms vary according to the levels of remuneration of beneficiaries, the length of their service, or similar factors, shall not be regarded as meaning that the terms are not similar.

(7) In ascertaining for the purposes of this section whether particular securities are retained, securities acquired earlier by the trustees shall be treated as transferred by them before securities acquired by them later.

(8) For the purposes of this section trustees—

(a) acquire securities when they become entitled to them (subject to the exceptions in subsection (9) below);

(b) transfer securities to another person when that other becomes entitled to them;

(c) retain securities if they remain entitled to them.

(9) The exceptions are these—

(a) if securities are issued to trustees in exchange in circumstances mentioned in section 85(1) of the [1979 c. 14.] Capital Gains Tax Act 1979, they shall be treated as having acquired them when they became entitled to the securities for which they are exchanged;

(b) if trustees become entitled to securities as a result of a reorganisation, they shall be treated as having acquired them when they became entitled to the original shares which those securities represent (construing “reorganisation” and “original shares” in accordance with section 77 of that Act).

(10) If trustees agree to take a transfer of securities, for the purposes of this section they shall be treated as becoming entitled to them when the agreement is made and not on a later transfer made pursuant to the agreement.

(11) If trustees agree to transfer securities to another person, for the purposes of this section the other person shall be treated as becoming entitled to them when the agreement is made and not on a later transfer made pursuant to the agreement.

(12) For the purposes of this section the following are securities—

(a) shares;

(b) debentures.

70 Chargeable amounts

(1) This section has effect to determine the chargeable amount for the purposes of section 68 above.

(2) If the chargeable event falls within section 69(1)(a), (b) or (c) above the following rules shall apply—

(a) if the event constitutes a disposal of the securities by the trustees for the purposes of the Capital Gains Tax Act 1979, the chargeable amount is an amount equal to the sums allowable under section 32(1)(a) and (b) of that Act;

(b) if the event does not constitute such a disposal, the chargeable amount is an amount equal to the sums which would be so allowable had the trustees made a disposal of the securities for the purposes of that Act at the time the chargeable event occurs.

(3) If the chargeable event falls within section 69(1)(d) above the chargeable amount is an amount equal to the sum concerned.

71 Further charges to tax: borrowing

(1) This section applies where—

(a) a chargeable event (within the meaning of section 69 above) occurs in relation to the trustees of an employee share ownership trust,

(b) at the time the event occurs anything is outstanding in respect of the principal of an amount or amounts borrowed at any time by the trustees, and

(c) the chargeable event is one as regards which section 72(2)(b) below applies.

(2) In the following provisions of this section—

(a) “the initial chargeable event” means the event referred to in subsection (1)(a) above, and

(b) “the total outstanding amount” means the total amount outstanding, at the time the initial chargeable event occurs, in respect of the principal of an amount or amounts borrowed at any time by the trustees.

(3) If any of the total outstanding amount is repaid after the initial chargeable event occurs, a further chargeable event shall occur in relation to the trustees at the end of the year of assessment in which the repayment is made.

(4) In such a case—

(a) the trustees shall be treated as receiving, when the further event occurs, annual profits or gains whose amount is equal to the chargeable amount,

(b) the profits or gains shall be chargeable to tax under Case VI of Schedule D for the year of assessment at the end of which the further event occurs, and

(c) the rate at which the tax is chargeable shall be a rate equal to the sum of the basic rate and the additional rate for the year of assessment at the end of which the further event occurs.

(5) Subject to subsection (6) below, for the purposes of subsection (4) above the chargeable amount is an amount equal to the aggregate of the total outstanding amount repaid in the year of assessment.

(6) In a case where section 72(2)(b) below had effect in the case of the initial chargeable event, for the purposes of subsection (4) above the chargeable amount is an amount equal to the smaller of—

(a) the aggregate of the total outstanding amount repaid in the year of assessment, and

(b) an amount found by applying the formula A-B-C.

(7) For the purposes of subsection (6) above—

(a) A is the amount which would be the chargeable amount for the initial chargeable event apart from section 72(2) below,

(b) B is the chargeable amount for the initial chargeable event, and

(c) C is the amount (if any) found under subsection (8) below.

(8) If, before the further chargeable event occurs, one or more prior chargeable events have occurred in relation to the trustees by virtue of the prior repayment of any of the total outstanding amount found for the time the initial chargeable event occurs, the amount found under this subsection is an amount equal to the chargeable amount for the prior chargeable event or to the aggregate of the chargeable amounts for the prior chargeable events (as the case may be).

(9) In a case where—

(a) a chargeable event (within the meaning of section 69 above) occurs in relation to the trustees in circumstances mentioned in subsection (1) above,

(b) a sum falls to be included in the total outstanding amount found for the time the event occurs,

(c) another chargeable event (within the meaning of that section) occurs in relation to the trustees in circumstances mentioned in subsection (1) above, and

(d) the same sum or a part of it would (apart from this subsection) fall to be included in the total outstanding amount found for the time the event occurs,

the sum or part (as the case may be) shall not be included in the total outstanding amount found for the time the other chargeable event occurs.

(10) In ascertaining for the purposes of this section whether a repayment is in respect of a particular amount, amounts borrowed earlier shall be taken to be repaid before amounts borrowed later.

(11) Subsections (3) to (7) of section 68 above shall apply where tax is assessed by virtue of this section as they apply where tax is assessed by virtue of that section.

72 Limit on chargeable amount

(1) For the purposes of this section each of the following is a chargeable event in relation to the trustees of an employee share ownership trust—

(a) an event which is a chargeable event by virtue of section 69 above;

(b) an event which is a chargeable event by virtue of section 71 above.

(2) If a chargeable event (the event in question) occurs in relation to the trustees of an employee share ownership trust, the following rules shall apply—

(a) the amount which would (apart from this subsection) be the chargeable amount for the event in question shall be aggregated, for the purposes of paragraph (b) below, with the chargeable amounts for other chargeable events (if any) occurring in relation to the trustees before the event in question,

(b) if the amount which would (apart from this subsection) be the chargeable amount for the event in question (or the aggregate found under paragraph (a) above, if there is one) exceeds the deductible amount, the chargeable amount for the event in question shall be the amount it would be apart from this subsection less an amount equal to the excess, and

(c) section 70(2) and (3) and section 71(5) above shall have effect subject to paragraph (b) above.

(3) For the purposes of subsection (2) above the deductible amount (as regards the event in question) is an amount equal to the total of the sums falling within subsection (4) below.

(4) A sum falls within this subsection if it has been received by the trustees before the occurrence of the event in question and—

(a) it has been deducted as mentioned in section 67(2)(a) above, or treated as mentioned in section 67(2)(b) above, before the occurrence of that event, or

(b) it would fall to be so deducted or treated if a claim for relief under section 67 above had been made immediately before the occurrence of that event.

73 Information

(1) An inspector may by notice in writing require a return to be made by the trustees of an employee share ownership trust if they have at any time received a sum which has been deducted as mentioned in section 67(2)(a) above or treated as mentioned in section 67(2)(b) above.

(2) Where he requires such a return to be made the inspector shall specify the information to be contained in it.

(3) The information which may be specified is information the inspector needs for the purposes of sections 68 to 72 above, and may include information about—

(a) sums received (including sums borrowed) by the trustees;

(b) expenditure incurred by them;

(c) assets acquired by them;

(d) transfers of assets made by them.

(4) The information which may be required under subsection (3)(a) above may include the persons from whom the sums were received.

(5) The information which may be required under subsection (3)(b) above may include the purpose of the expenditure and the persons receiving any sums.

(6) The information which may be specified under subsection (3)(c) above may include the persons from whom the assets were acquired and the consideration furnished by the trustees.

(7) The information which may be included under subsection (3)(d) above may include the persons to whom assets were transferred and the consideration furnished by them.

(8) In a case where a sum has been deducted as mentioned in section 67(2)(a) above, or treated as mentioned in section 67(2)(b) above, the inspector shall send to the trustees to whom the payment was made a certificate stating—

(a) that a sum has been so deducted or so treated, and

(b) what sum has been so deducted or so treated.

(9) In the Table in section 98 of the [1970 c. 9.] Taxes Management Act 1970 (penalties for failure to comply with notices etc.) at the end of the first column there shall be inserted—

• “Section 73 of the Finance Act 1989”.

74 Interpretation

Schedule 5 to this Act shall have effect to determine whether, for the purposes of sections 67 to 73 above, a trust is at a particular time—

(a) an employee share ownership trust;

(b) a qualifying employee share ownership trust.

Pensions etc.

75 Retirement benefits schemes

Schedule 6 to this Act (which relates to retirement benefits schemes) shall have effect.

76 Non-approved retirement benefits schemes

(1) In computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of any expenses falling within subsection (2) or (3) below; and no expenses falling within either of those subsections shall be treated for the purposes of section 75 of the Taxes Act 1988 (investment companies) as expenses of management.

(2) Expenses fall within this subsection if—

(a) they are expenses of providing benefits pursuant to a relevant retirement benefits scheme, and

(b) the benefits are not ones in respect of which a person is on receipt chargeable to income tax.

(3) Expenses fall within this subsection if—

(a) they are expenses of paying any sum pursuant to a relevant retirement benefits scheme with a view to the provision of any benefits, and

(b) the sum is not one which when paid is treated as the income of a person by virtue of section 595(1) of the Taxes Act 1988 (sum paid with a view to the provision of any relevant benefits for an employee).

(4) No sum shall be deducted in respect of any expenses falling within subsection (5) or (6) below—

(a) in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, or

(b) by virtue of section 75 of the Taxes Act 1988,

unless the sum has actually been expended.

(5) Expenses fall within this subsection if—

(a) they are expenses of providing benefits pursuant to a relevant retirement benefits scheme, and

(b) the benefits are ones in respect of which a person is on receipt chargeable to income tax.

(6) Expenses fall within this subsection if—

(a) they are expenses of paying any sum pursuant to a relevant retirement benefits scheme with a view to the provision of any benefits, and

(b) the sum is one which when paid is treated as the income of a person by virtue of section 595(1) of the Taxes Act 1988.

(7) In this section—

• “retirement benefits scheme” has the same meaning as in Chapter I of Part XIV of the Taxes Act 1988, and

• references to a relevant retirement benefits scheme are references to a retirement benefits scheme which is not of a description mentioned in section 596(1)(a), (b) or (c) of the Taxes Act 1988.

(8) This section has effect in relation to expenses incurred on or after the day on which this Act is passed.

77 Personal pension schemes

Schedule 7 to this Act (which relates to personal pension schemes) shall have effect.

Unit trusts etc.

78 Certified unit trusts

The following sections shall be inserted after section 468 of the Taxes Act 1988—

“468A Certified unit trusts

(1) For the purposes of sections 468B and 468C “certified unit trust” means, as respects an accounting period, a unit trust scheme in the case of which—

(a) an order under section 78 of the [1986 c. 60.] Financial Services Act 1986 is in force during the whole or part of that accounting period, and

(b) a certificate under section 78(8) of that Act, certifying that the scheme complies with the conditions necessary for it to enjoy the rights conferred by the UCITS directive, has been issued before or at any time during that accounting period.

(2) In this section—

• “the UCITS directive” means the directive of the Council of the European Communities, dated 20th December 1985, on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (no. 85/611/EEC), and

• “unit trust scheme” has the same meaning as in section 469.

468B Certified unit trusts: corporation tax

(1) This section has effect as regards an accounting period of the trustees of a certified unit trust ending after 31st December 1989.

(2) Subject to subsection (3) below, the rate of corporation tax for a financial year shall be deemed to be the rate at which income tax at the basic rate is charged for the year of assessment which begins on 6th April in the financial year concerned.

(3) Where the period begins before 1st January 1990, subsection (2) above shall only apply for the purpose of computing corporation tax chargeable for so much of the period as falls in the financial year 1990 and subsection (4) below shall apply for the purpose of computing corporation tax chargeable for so much of the period as falls in the financial year 1989.

(4) So much of the period as falls after 31st December 1989 and before 1st April 1990 shall be deemed to fall in a financial year for which the rate of corporation tax is the rate at which income tax at the basic rate is charged for the year 1989-90.

(5) Where the period begins after 31st December 1989, section 338 shall have effect as if any reference to interest of any description were a reference to interest of that description on borrowing of a relevant description.

(6) For the purposes of subsection (5) above borrowing is of a relevant description if it is borrowing in respect of which there has been no breach during the accounting period of the duties imposed on the manager of the scheme by regulations under section 81 of the [1986 c. 60.] Financial Services Act 1986 with respect to borrowing by the trustees of the scheme.

(7) The Treasury may by regulations provide that for subsection (6) above (as it has effect for the time being) there shall be substituted a subsection containing a different definition of what constitutes borrowing of a relevant description for the purposes of subsection (5) above.

(8) Regulations under subsection (7) above may contain such supplementary, incidental, consequential or transitional provision as the Treasury think fit.

(9) In this section “certified unit trust” has the meaning given by section 468A.

468C Certified unit trusts: distributions

(1) Subsection (2) below applies where—

(a) as regards a distribution period ending after 31st December 1989 a dividend is treated by virtue of section 468(2) as paid to a unit holder (whether or not income is in fact paid to the unit holder),

(b) the dividend is treated as paid by the trustees of a unit trust scheme which is a certified unit trust as respects the accounting period in which the distribution period falls, and

(c) on the date of payment the unit holder is within the charge to corporation tax and not a dual resident.

(2) For the purpose of computing corporation tax chargeable in the case of the unit holder the payment shall be deemed—

(a) to be an annual payment, and not a dividend or other distribution, and

(b) to have been received by the unit holder after deduction of income tax at the basic rate, for the year of assessment in which the date of payment falls, from a corresponding gross amount.

(3) Subsection (2) above shall not apply where the rights in respect of which the dividend is treated as paid are held by the trustees of a unit trust scheme which on the date of payment is a fund of funds.

(4) Where the unit holder is on the date of payment the manager of the scheme, subsection (2) above shall not apply in so far as the rights in respect of which the dividend is treated as paid are rights held by him in the ordinary course of his business as manager of the scheme.

(5) Subsection (2) above shall not apply to so much of the payment as is attributable to income of the trustees arising before 1st January 1990.

(6) In this section—

• “certified unit trust” has the meaning given by section 468A,

• “distribution period” has the same meaning as in section 468,

• “dual resident” means a person who is resident in the United Kingdom and falls to be regarded for the purposes of any arrangements having effect by virtue of section 788 as resident in a territory outside the United Kingdom,

• “fund of funds” means a unit trust scheme the sole object of which is to enable the unit holders to participate in or receive profits or income arising from the acquisition, holding, management or disposal of units in unit trust schemes, and

• “unit trust scheme” has the same meaning as in section 469.”

79. Funds of funds.

The following section shall be inserted after section 468C of the Taxes Act 1988—

“468D Funds of funds: distributions

(1) Subsection (2) below applies where—

(a) as regards a distribution period ending after 31st December 1989 a dividend is treated by virtue of section 468(2) as paid to a unit holder (whether or not income is in fact paid to the unit holder),

(b) the dividend is treated as paid by the trustees of a unit trust scheme which on the date of payment is a fund of funds, and

(c) on the date of payment the unit holder is within the charge to corporation tax and not a dual resident.

(2) For the purpose of computing corporation tax chargeable in the case of the unit holder the payment shall be deemed—

(a) to be an annual payment, and not a dividend or other distribution, and

(b) to have been received by the unit holder after deduction of income tax at the basic rate, for the year of assessment in which the date of payment falls, from a corresponding gross amount.

(3) Where the unit holder is on the date of payment the manager of the scheme, subsection (2) above shall not apply in so far as the rights in respect of which the dividend is treated as paid are rights held by him in the ordinary course of his business as manager of the scheme.

(4) Subsection (2) above shall not apply to so much of the payment as is attributable to income of the trustees arising before 1st January 1990.

(5) In this section—

• “distribution period” has the same meaning as in section 468,

• “dual resident” and “fund of funds” have the same meanings as in section 468C,

• “unit trust scheme” has the same meaning as in section 469.”

80 Gilt unit trusts

(1) Where, in the case of a certified unit trust and apart from this subsection, section 468(5) of the Taxes Act 1988 would apply as regards a distribution period beginning after 31st December 1989, section 468(5) shall not apply in the case of the trust as regards that period.

(2) Where by virtue of subsection (1) above the last distribution period as regards which section 468(5) applies in the case of a certified unit trust is one beginning on or before, and ending after, 31st December 1989, the trustees' liability to income tax in respect of any source of income chargeable under Case III of Schedule D shall be assessed as if they had ceased to possess the source of income on the last day of that distribution period.

(3) But where section 67 of the Taxes Act 1988 applies by virtue of subsection (2) above, it shall apply with the omission from subsection (1)(b) of the words from “and shall” to “this provision”.

(4) For the purposes of this section “certified unit trust” means, as respects a distribution period, a unit trust scheme in the case of which—

(a) an order under section 78 of the [1986 c. 60.] Financial Services Act 1986 is in force during the whole or part of the accounting period in which the distribution period falls, and

(b) a certificate under section 78(8) of that Act, certifying that the scheme complies with the conditions necessary for it to enjoy the rights conferred by the UCITS directive, has been issued before or at any time during that accounting period.

(5) In this section—

• “distribution period” has the same meaning as in section 468 of the Taxes Act 1988,

• “the UCITS directive” means the directive of the Council of the European Communities, dated 20th December 1985, on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (No. 85/611/EEC), and

• “unit trust scheme” has the same meaning as in section 469 of the Taxes Act 1988.

81 Offshore funds operating equalisation arrangements

(1) In section 758 of the Taxes Act 1988 (offshore funds operating equalisation arrangements) in subsection (6) (reference to section 78 of the [1979 c. 14.] Capital Gains Tax Act 1979 not to include reference to it as applied by section 82) for the words “but not” there shall be substituted the words “and a reference to section 78”.

(2) This section shall apply where a conversion of securities occurs on or after 14th March 1989; and “conversion of securities” here has the same meaning as in section 82 of the Capital Gains Tax Act 1979.

Life assurance

82 Calculation of profits

(1) Where the profits of an insurance company in respect of its life assurance business are, for the purposes of the Taxes Act 1988, computed in accordance with the provisions of that Act applicable to Case I of Schedule D, then, in calculating the profits for any period of account,—

(a) there shall be taken into account as an expense (so far as not so taken into account apart from this section) any amounts which, in respect of the period, are allocated to or expended on behalf of policy holders or annuitants; and

(b) if, at the end of the period, the company has an unappropriated surplus on valuation, as shown in its return for the purposes of the [1982 c. 50.] Insurance Companies Act 1982, then, subject to subsection (3) below, the closing liabilities of the period may include such amount, forming part of that surplus, as is required to meet the reasonable expectations of policy holders or annuitants with regard to bonuses or other additions to benefit of a discretionary nature.

(2) For the purposes of this section an amount is allocated to policy holders or annuitants if, and only if,—

(a) bonus payments are made to them; or

(b) reversionary bonuses are declared in their favour or a reduction is made in the premiums payable by them;

and the amount of the allocation is, in a case within paragraph (a) above, the amount of the payments and, in a case within paragraph (b) above, the amount of the liabilities assumed by the company in consequence of the declaration or reduction.

(3) The amount which, apart from this subsection, would be included in the closing liabilities of a period of account by virtue of subsection (1)(b) above shall be reduced or, as the case may be, extinguished by deducting therefrom the total of the amounts which—

(a) for periods of account ending before 14th March 1989 have been excluded, by virtue of section 433 of the Taxes Act 1988, as being reserved for policy holders or annuitants, and

(b) have not before that date either been allocated to or expended on behalf of policy holders or annuitants or been treated as profits of an accounting period on ceasing to be so reserved.

(4) Where the closing liabilities of a period of account include an amount by virtue of subsection (1)(b) above, the like amount shall be included in the opening liabilities of the next following period of account.

(5) This section has effect with respect to periods of account ending on or after 14th March 1989; and the following provisions of this section shall apply for the purposes of the application of this section to any such period which begins before that date (in this section referred to as a “straddling period”).

(6) For the purposes referred to in subsection (5) above, it shall be assumed that the straddling period consists of two separate periods of account,—

(a) the first beginning at the beginning of the straddling period and ending on 13th March 1989 (in this section referred to as “the first notional period”); and

(b) the second beginning on 14th March 1989 and ending at the end of the straddling period (in this section referred to as “the second notional period”);

and any reference in subsection (7) or subsection (8) below to a time apportionment is a reference to an apportionment made by reference to the respective lengths of the two notional periods.

(7) To determine the profits of the first notional period and the amount excluded from the profits of that period by virtue of section 433 of the Taxes Act 1988 as being reserved for policy holders or annuitants,—

(a) in the first instance the profits of the straddling period and the amount so excluded from those profits shall be computed as if subsections (1) to (4) above did not apply with respect to any part of the straddling period; and

(b) there shall then be determined that part of the profits and the amount computed under paragraph (a) above which, on a time apportionment, is properly attributable to the first notional period.

(8) To determine the profits of the second notional period,—

(a) in the first instance the profits of the straddling period shall be computed as if subsections (1) to (4) above applied to the whole of the straddling period; and

(b) there shall then be determined that part of the profits computed under paragraph (a) above which, on a time apportionment, is properly attributable to the second notional period.

83 Receipts to be brought into account

(1) Where the profits of an insurance company in respect of its life assurance business are, for the purposes of the Taxes Act 1988, computed in accordance with the provisions of that Act applicable to Case I of Schedule D, then, so far as referable to that business, the following items, as brought into account for a period of account (and not otherwise), namely,—

(a) the company’s investment income from the assets of its long-term business fund, and

(b) any increase in the value (whether realised or not) of those assets,

shall be taken into account as receipts of the period; and if for any period of account there is a reduction in the value referred to in paragraph (b) above (as brought into account for the period), that reduction shall be taken into account as an expense of that period.

(2) Except in so far as regulations made by the Treasury otherwise provide, in subsection (1) above “brought into account” means brought into account in the revenue account prepared for the purposes of the [1982 c. 50.] Insurance Companies Act 1982.

(3) Subject to subsection (5) below, this section has effect with respect to periods of account ending on or after 1st January 1990; and the following provisions of this section shall apply for the purposes of the application of this section to any such period which begins before that date (in this section referred to as a “straddling period”).

(4) Subject to subsection (5) below, for the purposes referred to in subsection (3) above, it shall be assumed that the straddling period consists of two separate periods of account,—

(a) the first beginning at the beginning of the straddling period and ending on 31st December 1989 (in this section referred to as “the first notional period”); and

(b) the second beginning on 1st January 1990 and ending at the end of the straddling period (in this section referred to as “the second notional period”);

and any reference in subsection (6) or subsection (7) below to a time apportionment is a reference to an apportionment made by reference to the respective lengths of the two notional periods.

(5) In the case of any company which, by notice in writing given to the inspector on or before 31st December 1992, so elects,—

(a) subsections (3) and (4)(b) above shall have effect as if for “1st January 1990” there were substituted “14th March 1989”; and

(b) subsection (4)(a) above shall have effect as if for “31st December” there were substituted “13th March”.

(6) To determine the profits of the first notional period,—

(a) in the first instance the profits of the straddling period shall be computed as if subsections (1) and (2) above did not apply with respect to any part of that period; and

(b) there shall then be determined that part of the profits computed under paragraph (a) above which, on a time apportionment, is properly attributable to the first notional period.

(7) To determine the profits of the second notional period,—

(a) in the first instance the profits of the straddling period shall be computed as if subsections (1) and (2) above applied with respect to the whole of that period; and

(b) there shall then be determined that part of the profits computed under paragraph (a) above which, on a time apportionment, is properly attributable to the second notional period.

84 Interpretation of sections 85 to 89 and further provisions about insurance companies

(1) In sections 85 to 89 below “basic life assurance business” means life assurance business other than general annuity business and pension business.

(2) Any reference in the sections referred to in subsection (1) above or the following provisions of this section to a straddling period is a reference to an accounting period which begins before 1st January 1990 and ends on or after that date.

(3) For the purposes of the sections referred to in subsection (1) above and for the purposes of subsection (5)(b) below it shall be assumed that a straddling period consists of two separate accounting periods—

(a) the first beginning at the beginning of the straddling period and ending on 31st December 1989; and

(b) the second beginning on 1st January 1990 and ending at the end of the straddling period;

and in those sections and subsection (5)(b) below the first of those two notional accounting periods is referred to as “the 1989 component period” and the second is referred to as “the 1990 component period”.

(4) Chapter I of Part XII of the Taxes Act 1988 (insurance companies) shall have effect subject to the amendments in Schedule 8 to this Act, being—

(a) amendments relating to franked investment income, loss relief and group relief; and

(b) amendments consequential on or supplemental to sections 82 and 83 above and sections 85 to 89 below.

(5) Subject to subsection (6) below, in Schedule 8 to this Act,—

(a) paragraphs 2 and 6 shall be deemed to have come into force on 14th March 1989; and

(b) the remainder shall have effect with respect to accounting periods beginning on or after 1st January 1990 (including the 1990 component period).

(6) Nothing in subsection (5) above affects the operation, by virtue of any provision of sections 82 and 83 above and sections 85 to 89 below, of any enactment repealed or amended by Schedule 8 to this Act and, so long as the provisions of that Schedule do not have effect in relation to sections 434 and 435 of the Taxes Act 1988, nothing in subsection (5)(a) above affects the continuing operation of section 433 of that Act for the purpose only of determining the fraction of the profits referred to in subsectio(6) of section 434 and subsection (1)(b) of section 435.

85 Charge of certain receipts of basic life assurance business

(1) Subject to subsection (2) below, where the profits of an insurance company in respect of its life assurance business are not charged under Case I of Schedule D, there shall be chargeable under Case VI of that Schedule any receipts referable to the company’s basic life assurance business—

(a) which, if those profits were charged under Case I of Schedule D, would be taken into account in computing those profits; and

(b) which would not be within the charge to tax (except under Case I of Schedule D) apart from this section;

and for the purposes of paragraph (a) above, the provisions of section 83 above as to the manner in which any item is to be taken into account shall be disregarded.

(2) The receipts referred to in subsection (1) above do not include—

(a) any premium; or

(b) any sum received by virtue of a claim under an insurance contract (including a re-insurance contract); or

(c) any repayment or refund (in whole or in part) of a sum disbursed by the company as acquisition expenses falling within paragraphs (a) to (c) of subsection (1) of section 86 below; or

(d) any sum which is taken into account under section 76(1)(a) of the Taxes Act 1988 as a deduction from the amount treated as expenses of management of the company; or

(e) any sum which is not within the charge to tax (except under Case I of Schedule D) because of an exemption from tax.

(3) This section has effect with respect to the receipts of accounting periods beginning on or after 1st January 1990 (including the 1990 component period).

86 Spreading of relief for acquisition expenses

(1) For the purposes of this section, the acquisition expenses for any period of an insurance company carrying on life assurance business are such of the following expenses of management as are for that period attributable to the company’s basic life assurance business,—

(a) commissions (however described), other than commissions in respect of industrial life assurance business carried on by the company,

(b) any other expenses of management which are disbursed solely for the purpose of the acquisition of business, and

(c) so much of any other expenses of management which are disbursed partly for the purpose of the acquisition of business and partly for other purposes as are properly attributable to the acquisition of business,

less any such repayments or refunds falling within section 76(1)(c) of the Taxes Act 1988 as are received in the period.

(2) The exclusion from paragraph (a) of subsection (1) above of commissions in respect of industrial life assurance business shall not prevent such commissions constituting expenses of management for the purposes of paragraph (b) or paragraph (c) of that subsection.

(3) Nothing in subsections (1) and (2) above applies to commissions (however described) in respect of insurances made before 14th March 1989, but without prejudice to the application of those subsections to any commission attributable to a variation on or after that date in a policy issued in respect of an insurance made before that date; and, for this purpose, the exercise of any rights conferred by a policy shall be regarded as a variation of it.

(4) In subsection (1) above “the acquisition of business” includes the securing on or after 14th March 1989 of the payment of increased or additional premiums in respect of a policy of insurance issued in respect of an insurance already made (whether before, on or after that date).

(5) In relation to any period, the expenses of management attributable to a company’s basic life assurance business are expenses—

(a) which are disbursed for that period (disregarding any treated as so disbursed by section 75(3) of the Taxes Act 1988); and

(b) which, disregarding subsection (6) below, are deductible as expenses of management in accordance with sections 75 and 76 of the Taxes Act 1988.

(6) Notwithstanding anything in sections 75 and 76 of the Taxes Act 1988 but subject to subsection (7) below, only one-seventh of the acquisition expenses for any accounting period (in this section referred to as “the base period”) shall be treated as deductible under those sections for the base period, and in subsections (8) and (9) below any reference to the full amount of the acquisition expenses for the base period is a reference to the amount of those expenses which would be deductible for that period apart from this subsectio

(7) In the case of the acquisition expenses for an accounting period or part of an accounting period falling wholly within 1990, subsection (6) above shall have effect as if for “one-seventh” there were substituted “five-sevenths”; and, in the case of the acquisition expenses for an accounting period or part of an accounting period falling wholly within 1991, 1992 or 1993, the corresponding substitution shall be “four-sevenths”, “three-sevenths” or “two-sevenths” respectively.

(8) Where, by virtue of subsection (6) (and, where appropriate, subsection (7)) above, only a fraction of the full amount of the acquisition expenses for the base period is deductible under sections 75 and 76 of the Taxes Act 1988 for that period, then, subject to subsection (9) below, a further one-seventh of the full amount shall be so deductible for each succeeding accounting period after the base period until the whole of the full amount has become so deductible, except that, for any accounting period of less thaa year, the fraction of one-seventh shall be proportionately reduced.

(9) For any accounting period for which the fraction of the full amount of the acquisition expenses for the base period which would otherwise be deductible in accordance with subsection (8) above exceeds the balance of those expenses which has not become deductible for earlier accounting periods, only that balance shall be deductible.

(10) This section has effect for accounting periods beginning on or after 1st January 1990 (including the 1990 component period).

87 Management expenses

(1) Section 76 of the Taxes Act 1988 shall be amended in accordance with subsections (2) and (3) below.

(2) In subsection (1), after paragraph (b) there shall be inserted “and

(c) there shall be deducted from the amount treated as the expenses of management for any accounting period any repayment or refund (in whole or in part) of a sum disbursed by the company (for that or any earlier period) as acquisition expenses; and

(d) the amount treated as expenses of management shall not include any amount in respect of expenses referable to general annuity business or pension business; and

(e) the amount of profits from which expenses of management may be deducted for any accounting period shall not exceed the net income and gains of that accounting period referable to basic life assurance business;

and for this purpose “net income and gains” means income and gains after deducting any reliefs or exemptions which fall to be applied before taking account of this section.”

(3) For subsection (8) there shall be substituted—

“(8) In this section—

• “acquisition expenses” means expenses falling within paragraphs (a) to (c) of subsection (1) of section 86 of the Finance Act 1989;

• “basic life assurance business” has the meaning assigned by section 84(1) of that Act;

and other expressions have the same meaning as in Chapter I of Part XII.”

(4) In consequence of the amendment made by subsection (2) above, section 436(3)(b) of the Taxes Act 1988 (no deduction of expenses of management in certain cases) shall cease to have effect.

(5) This section has effect with respect to accounting periods beginning on or after 1st January 1990; and, in relation to a straddling period, sections 75, 76 and 436 of the Taxes Act 1988—

(a) shall have effect in relation to the 1989 component period without regard to the amendments made by subsections (2) to (4) above; and

(b) shall have effect in relation to the 1990 component period as amended by those subsections.

(6) If, for the 1989 component period, there is an amount of expenses of management available to be carried forward to the 1990 component period under section 75(3)(a) of the Taxes Act 1988 (as applied by section 76 thereof),—

(a) that amount shall form a pool to which the following provisions of this section shall apply and to which section 75(3)(b) of that Act (in this subsection referred to as “the carry-forward provision”) shall apply only to the extent specified in paragraph (c) below;

(b) if, for the 1990 component period or any subsequent accounting period, the amount which (disregarding the pool) may be deducted in respect of expenses of management is less than the amount of the profits from which, disregarding section 76(1)(e) of that Act (as set out in subsection (2) above), the expenses of management are deductible, paragraph (c) below shall apply for that period; and in that paragraph the difference between the amount which may be so deducted and that amount of profits is referred to as “the potetial deficiency” for the period;

(c) where this paragraph applies for an accounting period (including the 1990 component period) the carry-forward provision shall be taken to have had effect to carry forward to the accounting period (as if disbursed as expenses for that period) so much of the pool as does not exceed the potential deficiency for the period and is permitted under section 76(2) of the Taxes Act 1988; and the amount of the pool shall be reduced accordingly.

(7) In the case of a company which has an accounting period beginning on 1st January 1990, subsection (6) above shall apply as if—

(a) any reference therein to the 1989 component period were a reference to the accounting period ending on 31st December 1989; and

(b) any reference therein to the 1990 component period were a reference to the accounting period beginning on 1st January 1990.

88 Corporation tax: policy holders' fraction of profits

(1) Subject to subsection (2) below, in the case of a company carrying on life assurance business, the rate of corporation tax chargeable for any financial year on the policy holders' fraction of its relevant profits for any accounting period shall be deemed to be the rate at which income tax at the basic rate is charged for the year of assessment which begins on 6th April in the financial year concerned.

(2) Subsection (1) above does not apply in relation to profits charged under Case I of Schedule D.

(3) For the purposes of subsection (1) above, the relevant profits of a company for an accounting period are the total profits of its life assurance business, less any deduction due under section 76 of the Taxes Act 1988, but before allowing any relief under Chapter II or Chapter IV of Part X of that Act.

(4) In determining for the purposes of section 13 of the Taxes Act 1988 (small companies' relief) the profits and basic profits (within the meaning of that section) of an accounting period of a company carrying on life assurance business, the policy holders' fraction of the company’s relevant profits for that period shall be left out of account.

(5) This section has effect with respect to the profits of a company for accounting periods beginning on or after 1st January 1990 (including the 1990 component period); and, for this purpose, the profits of the 1990 component period shall be taken to be that portion of the profits of the straddling period which the length of the 1990 component period bears to the length of the straddling period.

89 Shareholders' and policy holders' fractions

(1) In relation to an accounting period of an insurance company carrying on life assurance business, any reference to the shareholders' fraction or the policy holders' fraction is a reference to the appropriate fraction determined, subject to subsections (7) and (8) below, by the formulae in subsection (2) below.

(2) The formulae referred to in subsection (1) above are—

(a) for the shareholders' fraction,

and

(b) for the policy holders' fraction,

where “A” and “B” are determined in accordance with the following provisions of this section.

(3) In the formulae in subsection (2) above “A” is the profits of the company for the accounting period in respect of its life assurance business, computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D, and, if there are no such profits (or there is a loss), “A” is zero.

(4) Subject to subsection (6) below, in those formulae “B” is such a sum as, after deduction of corporation tax at the rate provided for by subsection (1) of section 88 above in relation to the policy holders' fraction of the company’s relevant profits for the accounting period (within the meaning of that subsection), is equal to the excess (if any) for the corresponding period of account of—

(a) the aggregate of—

(i) the closing liabilities to policy holders referable to the company’s basic life assurance business,

(ii) the sums paid to policy holders in the period in respect of claims referable to that business, and

(iii) any amounts allocated to policy holders in respect of that period which do not fall within sub-paragraph (i) or sub-paragraph (ii) above and which are referable to that business,

• over

(b) the aggregate of the premiums receivable by the company for the period in respect of its basic life assurance business and the opening liabilities to policy holders referable to that business,

and, if there is no such excess, “B” is zero.

(5) The references in subsection (4) above to the opening and closing liabilities to policy holders are references to those liabilities including any such amount as is referred to in section 82(1)(b) above.

(6) In relation to an accounting period, references in subsection (4) above to the corresponding period of account are references,—

(a) if the accounting period coincides with a period of account, to that period; and

(b) in any other case, to the period of account in which the accounting period is comprised;

and, for the purpose of determining “B” in a case where paragraph (b) above applies, the aggregates referred to in paragraphs (a) and (b) of subsection (4) above shall each be proportionately reduced to reflect the length of the accounting period as compared with the length of the corresponding period of account.

(7) Subject to subsection (8) below, if in the case of any accounting period of a company both “A” and “B” in the formulae in subsection (2) above are zero,—

(a) the shareholders' fraction shall be taken to be the whole; and

(b) the policy holders' fraction shall be taken to be nil.

(8) In relation to an accounting period of an insurance company carrying on mutual life assurance business,—

(a) any reference to the shareholders' fraction is a reference to nil; and

(b) any reference to the policy holders' fraction is a reference to the whole.

90 Life policies etc. held by companies

Schedule 9 to this Act (which imposes tax on certain benefits relating to life policies, life annuities and capital redemption policies held by companies, and makes related provision) shall have effect.

Underwriters

91 Premiums trust funds: stock lending

(1) In section 725 of the Taxes Act 1988 (Lloyd’s underwriters) the following subsections shall be inserted after subsection (9)—

“(10) Subsection (11) below applies where the following state of affairs exists at the beginning of 1st January of any year or the end of 31st December of any year—

(a) securities have been transferred by the trustees of a premiums trust fund in pursuance of an arrangement mentioned in section 129(1) or (2),

(b) the transfer was made to enable another person to fulfil a contract or to make a transfer,

(c) securities have not been transferred in return, and

(d) section 129(3) applies to the transfer made by the trustees.

(11) The securities transferred by the trustees shall be treated for the purposes of subsections (1) to (6) above as if they formed part of the premiums trust fund at the beginning of 1st January concerned or the end of 31st December concerned (as the case may be).”

(2) In section 142A of the [1979 c. 14.] Capital Gains Tax Act 1979 (assets in premiums trust fund) the following subsections shall be inserted after subsection (4)—

“(4A) Subsection (4B) below applies where the following state of affairs exists at the beginning of an accounting period or the end of an accounting period—

(a) securities have been transferred by the trustees of a premiums trust fund in pursuance of an arrangement mentioned in section 129(1) or (2) of the Taxes Act 1988 (stock lending),

(b) the transfer was made to enable another person to fulfil a contract or to make a transfer,

(c) securities have not been transferred in return, and

(d) the transfer made by the trustees constitutes a disposal which by virtue of section 149B(9) below is to be disregarded as there mentioned.

(4B) The securities transferred by the trustees shall be treated for the purposes of subsection (3) above as if they formed part of the premiums trust fund at the beginning concerned or the end concerned (as the case may be).”

(3) This section applies where the transfer by the trustees of a premiums trust fund is made after the date specified as mentioned in section 129(6) of the Taxes Act 1988.

92 Regulations about underwriters etc

(1) In section 451(1A) of the Taxes Act 1988 (regulations about underwriters) for the words from “with respect to” to the end there shall be substituted the words “with respect to any year or years of assessment; and the year (or any of the years) may be the one in which the regulations are made or any year falling before or after that year.”

(2) The following subsection shall be inserted after section 451(1A) of that Act—

“(1B) But the regulations may not make provision with respect to any year of assessment which precedes the next but one preceding the year of assessment in which the regulations are made.”

(3) In section 142A of the [1979 c. 14.] Capital Gains Tax Act 1979 (regulations about premiums trust funds) subsection (5)(c) shall be omitted and the following subsections shall be inserted after subsection (5)—

“(6) Regulations under subsection (5) above may make provision with respect to any year or years of assessment; and the year (or any of the years) may be the one in which the regulations are made or any year falling before or after that year.

(7) But the regulations may not make provision with respect to any year of assessment which precedes the next but one preceding the year of assessment in which the regulations are made.”

(4) Subsection (5) below applies in the case of any provision of the Tax Acts, the [1970 c. 9.] Taxes Management Act 1970, the Capital Gains Tax Act 1979, or any other enactment relating to capital gains tax, which imposes a time limit for making a claim or an election or an application.

(5) The Board may by regulations provide that where the claim or election or application falls to be made by an underwriting member of Lloyd’s or his spouse (or both) the provision shall have effect as if it imposed such longer time limit as is specified in the regulations.

(6) Regulations under subsection (5) above—

(a) shall be made by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons;

(b) may make different provision for different provisions or different purposes.

(7) Regulations under subsection (5) above may make provision with respect to any year or years of assessment; and the year (or any of the years) may be the one in which the regulations are made or any year falling before or after that year.

Securities

93 Deep discount securities: amendments

Schedule 10 to this Act (which amends Schedule 4 to the Taxes Act 1988) shall have effect.

94 Deep gain securities

Schedule 11 to this Act (which contains provisions about securities capable of yielding a deep gain) shall have effect.

95 Treasury securities issued at a discount

(1) Section 126 of the Taxes Act 1988 (tax not to be charged on certain securities in respect of discount under Case III of Schedule D) shall be amended as mentioned in subsections (2) and (3) below.

(2) In subsection (2) (the securities affected) for the words “except Treasury bills” there shall be substituted the words “except—

(a) Treasury bills,

(b) relevant deep discount securities, and

(c) deep gain securities.”

(3) The following subsection shall be inserted after subsection (2)—

“(3) For the purposes of subsection (2) above—

(a) a relevant deep discount security is a security falling within paragraph 1(1)(dd) of Schedule 4 to this Act, and

(b) a deep gain security is a security which is a deep gain security for the purposes of Schedule 11 to the Finance Act 1989.”

(4) The preceding provisions of this section shall apply—

(a) in the case of a deep discount security, where there is a disposal (within the meaning of Schedule 4 to the Taxes Act 1988) on or after 14th March 1989;

(b) in the case of a deep gain security, where there is a transfer within the meaning of Schedule 11 to this Act, or a redemption, on or after 14th March 1989.

(5) Subsection (7) below applies where—

(a) by virtue of paragraph 19(2) of Schedule 4 to the Taxes Act 1988, a security falls to be treated as a deep discount security as there mentioned, and

(b) after the time mentioned in paragraph 19(1)(d) of that Schedule there is a disposal (within the meaning of that Schedule) of the security.

(6) Subsection (7) below also applies where—

(a) by virtue of paragraph 20(2) of Schedule 11 to this Act, a security falls to be treated as a deep gain security as there mentioned, and

(b) after the time mentioned in paragraph 20(1)(d) of that Schedule there is a transfer (within the meaning of that Schedule) or a redemption of the security.

(7) In a case where this subsection applies, section 126 of the Taxes Act 1988 shall not apply in the case of the disposal, transfer or redemption (as the case may be).

96 Securities: miscellaneous

(1) In section 452(8) of the Taxes Act 1988 (special reserve funds) for the words from “In paragraph (a) above” to the end there shall be substituted—

• “In paragraph (a) above “income” includes—

  (a)

  annual profits or gains chargeable to tax by virtue of section 714(2) or 716(3),

  (b)

  amounts treated as income chargeable to tax by virtue of paragraph 4 of Schedule 4, and

  (c)

  amounts treated as income chargeable to tax by virtue of paragraph 5 of Schedule 11 to the Finance Act 1989.”

(2) In section 687 of the Taxes Act 1988 (payments under discretionary trusts) the following shall be inserted after subsection (3)(g)—

“(h) the amount of any tax on an amount which is treated as income of the trustees by virtue of paragraph 4 of Schedule 4 and is charged to tax at a rate equal to the sum of the basic rate and the additional rate by virtue of paragraph 17 of that Schedule;

(i) the amount of any tax on an amount which is treated as income of the trustees by virtue of paragraph 5 of Schedule 11 to the Finance Act 1989 and is charged to tax at a rate equal to the sum of the basic rate and the additional rate by virtue of paragraph 11 of that Schedule;”.

(3) The following subsections shall be inserted at the end of section 132A of the [1979 c. 14.] Capital Gains Tax Act 1979 (deep discount securities)—

“(5) Where by virtue of paragraph 18(3) of Schedule 4 to the Taxes Act 1988 trustees are deemed for the purposes of that Schedule to dispose of a security at a particular time—

(a) they shall be deemed to dispose of the security at that time for the purposes of this Act, and

(b) the disposal deemed by paragraph (a) above shall be deemed to be at the market value of the security.

(6) Where by virtue of paragraph 18(4) of Schedule 4 to the Taxes Act 1988 trustees are deemed for the purposes of that Schedule to acquire a security at a particular time—

(a) they shall be deemed to acquire the security at that time for the purposes of this Act, and

(b) the acquisition deemed by paragraph (a) above shall be deemed to be at the market value of the security.”

(4) The new paragraphs (b) and (c) inserted by subsection (1) above, and subsection (2) above, shall apply—

(a) in the case of a deep discount security, where there is a disposal (within the meaning of Schedule 4 to the Taxes Act 1988) on or after 14th March 1989;

(b) in the case of a deep gain security, where there is a transfer within the meaning of Schedule 11 to this Act, or a redemption, on or after 14th March 1989.

Groups of companies

97 Set-off of ACT where companies remain in same group

(1) In section 240 of the Taxes Act 1988 (set-off of company’s ACT against subsidiary’s liability to corporation tax) at the end of subsection (5) (set-off not to be made against subsidiary’s liability to corporation tax for any accounting period in which, or in any part of which, it was not a subsidiary of the surrendering company) there shall be added the words “unless throughout that period or part both companies were subsidiaries of a third company”.

(2) This section shall have effect in relation to accounting periods ending on or after 14th March 1989.

98 Restriction on set-off of ACT

(1) After section 245 of the Taxes Act 1988 there shall be inserted—

“245A Restriction on application of section 240 in certain circumstances

(1) This section applies if—

(a) there is a change in the ownership of a company (“the relevant company”);

(b) by virtue of section 240 the relevant company is treated as having paid an amount of advance corporation tax in respect of a distribution made by it at any time before the change; and

(c) within the period of six years beginning three years before the change, there is a major change in the nature or conduct of a trade or business of the company which is for the purposes of section 240 the surrendering company in relation to that amount.

(2) No advance corporation tax which the relevant company is treated by virtue of section 240 as having paid in respect of a distribution made by it in an accounting period beginning before the change of ownership shall be treated under section 239(4) as paid by it in respect of distributions made in an accounting period ending after the change of ownership; and this subsection shall apply to an accounting period in which the change of ownership occurs as if the part ending with the change of ownership, ad the part after, were two separate accounting periods.

(3) Subsections (4) and (5) of section 245 shall apply also for the purposes of this section and as if the reference in subsection (4) of section 245 to the period of three years mentioned in subsection (1)(a) of that section were a reference to the period mentioned in subsection (1)(c) above.

(4) Sections 768(8) and (9) and 769 shall apply also for the purposes of this section and as if in subsection (3) of section 769 the reference to the benefit of losses were a reference to the benefit of advance corporation tax.

245B Restriction on set-off where asset transferred after change in ownership of company

(1) Subsection (4) below applies if—

(a) there is a change in the ownership of a company (“the relevant company”);

(b) any advance corporation tax paid by the relevant company in respect of distributions made by it in an accounting period beginning before the change is treated under section 239(4) as paid by it in respect of distributions made by it in an accounting period ending after the change;

(c) after the change the relevant company acquires an asset from another company in such circumstances that section 273(1) of the Taxes Act 1970 applies to the acquisition; and

(d) a chargeable gain accrues to the relevant company on the disposal of the asset within the period of three years beginning with the change of ownership.

(2) Subsection (1)(b) above shall apply to an accounting period in which the change of ownership occurs as if the part ending with the change of ownership, and the part after, were two separate accounting periods.

(3) For the purposes of subsection (1)(d) above an asset acquired by the relevant company as mentioned in subsection (1)(c) above shall be treated as the same as an asset owned at a later time by that company if the value of the second asset is derived in whole or in part from the first asset, and in particular where the second asset is a freehold, and the first asset was a leasehold and the lessee has acquired the reversion.

(4) In relation to the accounting period in which the chargeable gain accrues to the relevant company (“the relevant period”), section 239 shall have effect as if the limit imposed by subsection (2) of that section on the amount of advance corporation tax to be set against the relevant company’s liability to corporation tax were reduced by whichever is the lesser of—

(a) the amount of advance corporation tax that would have been payable (apart from section 241) in respect of a distribution made at the end of the relevant period of an amount which, together with the advance corporation tax so payable in respect of it, is equal to the chargeable gain, and

(b) the amount of surplus advance corporation tax in relation to the accounting period which by virtue of subsection (2) above is treated for the purposes of subsection (1)(b) above as ending with the change of ownership.

(5) Sections 768(8) and (9) and 769 shall apply also for the purposes of this section and as if in subsection (3) of section 769 the reference to the benefit of losses were a reference to the benefit of advance corporation tax.”

(2) This section shall have effect where the change in the ownership of the relevant company occurs on or after 14th March 1989.

99 Dividends etc. paid by one member of a group to another

(1) Section 247 of the Taxes Act 1988 (dividends etc. paid by one member of a group to another) shall be amended in accordance with this section.

(2) In subsection (1) for paragraph (b) there shall be substituted—

“(b) a trading or holding company which does not fall within subsection (1A) below and which is owned by a consortium the members of which include the receiving company,”.

(3) After subsection (1) there shall be inserted—

“(1A) A company falls within this subsection if—

(a) it is a 75 per cent. subsidiary of any other company, or

(b) arrangements of any kind (whether in writing or not) are in existence by virtue of which it could become such a subsidiary.”

(4) After subsection (8) there shall be inserted—

“(8A) Notwithstanding that at any time a company (“the subsidiary company”) is a 51 per cent. subsidiary of another company (“the parent company”) it shall not be treated at that time as such a subsidiary for the purposes of this section unless, additionally, at that time—

(a) the parent company would be beneficially entitled to more than 50 per cent. of any profits available for distribution to equity holders of the subsidiary company; and

(b) the parent company would be beneficially entitled to more than 50 per cent. of any assets of the subsidiary company available for distribution to its equity holders on a winding-up.”

(5) For subsection (9)(c) there shall be substituted—

“(c) a company is owned by a consortium if 75 per cent. or more of the ordinary share capital of the company is beneficially owned between them by companies resident in the United Kingdom of which none—

(i) beneficially owns less than 5 per cent. of that capital,

(ii) would be beneficially entitled to less than 5 per cent. of any profits available for distribution to equity holders of the company, or

(iii) would be beneficially entitled to less than 5 per cent. of any assets of the company available for distribution to its equity holders on a winding-up,

and those companies are called the members of the consortium.”

(6) After subsection (9) there shall be inserted—

“(9A) Schedule 18 shall apply for the purposes of subsections (8A) and (9)(c) above as it applies for the purposes of section 413(7).”

(7) This section shall have effect in relation to dividends and other sums paid on or after the day on which this Act is passed.

100 Change in ownership of company

(1) Section 769 of the Taxes Act 1988 (which contains rules for determining whether for the purposes of sections 245 and 768 of that Act there is a change in the ownership of a company) shall be amended in accordance with this section.

(2) For subsection (6) there shall be substituted—

“(6) If there is a change in the ownership of a company, including a change occurring by virtue of the application of this subsection but not a change which is to be disregarded under subsection (5) above, then—

(a) in a case falling within subsection (1)(a) above, the person mentioned in subsection (1)(a) shall be taken for the purposes of this section to acquire at the time of the change any relevant assets owned by the company;

(b) in a case falling within subsection (1)(b) above but not within subsection (1)(a) above, each of the persons mentioned in subsection (1)(b) shall be taken for the purposes of this section to acquire at the time of the change the appropriate proportion of any relevant assets owned by the company; and

(c) in any other case, each of the persons mentioned in paragraph (c) of subsection (1) above (other than any whose holding is disregarded under that paragraph) shall be taken for the purposes of this section to acquire at the time of the change the appropriate proportion of any relevant assets owned by the company.

(6A) In subsection (6) above—

• “the appropriate proportion”, in relation to one of two or more persons mentioned in subsection (1)(b) or (c) above, means a proportion corresponding to the proportion which the percentage of the ordinary share capital acquired by him bears to the percentage of that capital acquired by all those persons taken together; and

• “relevant assets”, in relation to a company, means—

  (a)

  any ordinary share capital of another company, and

  (b)

  any property or rights which under subsection (3) above may be taken into account instead of ordinary share capital of another company.

(6B) Notwithstanding that at any time a company (“the subsidiary company”) is a 75 per cent. subsidiary of another company (“the parent company”) it shall not be treated at that time as such a subsidiary for the purposes of this section unless, additionally, at that time—

(a) the parent company would be beneficially entitled to not less than 75 per cent. of any profits available for distribution to equity holders of the subsidiary company; and

(b) the parent company would be beneficially entitled to not less than 75 per cent. of any assets of the subsidiary company available for distribution to its equity holders on a winding-up.

(6C) Schedule 18 shall apply for the purposes of subsection (6B) above as it applies for the purposes of section 413(7).”

(3) Subsection (7)(b) and (c) shall cease to have effect.

(4) This section shall have effect where the change of ownership of a company would be treated as occurring on or after 14th March 1989.

101 Treatment of convertible shares or securities for purposes relating to group relief etc

(1) Paragraph 1 of Schedule 18 to the Taxes Act 1988 (which contains definitions relating to group relief) shall be amended in accordance with this section.

(2) For sub-paragraph (3)(b) there shall be substituted—

“(b) do not carry any right either to conversion into shares or securities of any other description except—

(i) shares to which sub-paragraph (5A) below applies,

(ii) securities to which sub-paragraph (5B) below applies, or

(iii) shares or securities in the company’s quoted parent company,

or to the acquisition of any additional shares or securities;”.

(3) For sub-paragraph (5)(a) there shall be substituted—

“(a) which does not carry any right either to conversion into shares or securities of any other description except—

(i) shares to which sub-paragraph (5A) below applies,

(ii) securities to which sub-paragraph (5B) below applies, or

(iii) shares or securities in the company’s quoted parent company,

or to the acquisition of any additional shares or securities;”.

(4) After sub-paragraph (5) there shall be inserted—

“(5A) This sub-paragraph applies to any shares which—

(a) satisfy the requirements of sub-paragraph (3)(a), (c) and (d) above, and

(b) do not carry any rights either to conversion into shares or securities of any other description, except shares or securities in the company’s quoted parent company, or to the acquisition of any additional shares or securities.

(5B) This sub-paragraph applies to any securities representing a loan of or including new consideration and—

(a) which satisfies the requirements of sub-paragraph (5)(b) and (c) above, and

(b) which does not carry any such rights as are mentioned in sub-paragraph (5A)(b) above.

(5C) For the purposes of sub-paragraphs (3) and (5) to (5B) above a company (“the parent company”) is another company’s “quoted parent company” if and only if—

(a) the other company is a 75 per cent. subsidiary of the parent company,

(b) the parent company is not a 75 per cent. subsidiary of any company, and

(c) the parent company’s ordinary shares (or, if its ordinary share capital is divided into two or more classes, its ordinary shares of each class) are quoted on a recognised stock exchange or dealt in on the Unlisted Securities Market;

and in this sub-paragraph “ordinary shares” means shares forming part of ordinary share capital.

(5D) In the application of sub-paragraphs (3) and (5) to (5B) above in determining for the purposes of sub-paragraph (5C)(a) above who are the equity holders of the other company (and, accordingly, whether section 413(7) prevents the other company from being treated as a 75 per cent. subsidiary of the parent company for the purposes of sub-paragraph (5C)(a)), it shall be assumed that the parent company is for the purposes of sub-paragraphs (3) and (5) to (5B) above the other company’s quoted parent company.”

(5) In sub-paragraph (6) for the words “to (5)” there shall be substituted the words “to (5D)”.

(6) This section, so far as relating to Schedule 18 of the Taxes Act 1988 in its application (by virtue of section 138 below) for the purposes of subsections (1D) and (1E) of section 272 of the Taxes Act 1970, shall be deemed to have come into force on 14th March 1989.

102 Surrender of company tax refund etc. within group

(1) Subsection (2) below applies where—

(a) there falls to be made to a company (“the surrendering company”) which is a member of a group throughout the appropriate period a tax refund relating to an accounting period of the company (“the relevant accounting period”), and

(b) another company (“the recipient company”) which is a member of the same group throughout the appropriate period also has the relevant accounting period as an accounting period.

(2) Where this subsection applies the two companies may, at any time before the refund is made to the surrendering company, jointly give notice to the inspector in such form as the Board may require that subsection (4) below is to have effect in relation to the refund or to any part of the refund specified in the notice.

(3) In subsection (1) above—

• “appropriate period” means the period beginning with the relevant accounting period and ending on the day on which the notice under subsection (2) above is given, and

• “tax refund relating to an accounting period” means, in relation to a company—

  (a)

  a repayment of corporation tax paid by the company for the period,

  (b)

  a repayment of income tax in respect of a payment received by the company in the period, or

  (c)

  a payment of the whole or part of the tax credit comprised in any franked investment income received by the company in the period.

(4) Subject to subsection (6) below, where this subsection has effect in relation to any refund or part of a refund—

(a) the recipient company shall be treated for all purposes of the Tax Acts as having paid on the relevant date an amount of corporation tax for the relevant accounting period equal to the amount of the refund or part, and

(b) there shall be treated for all those purposes as having been made to the surrendering company on the relevant date a repayment of corporation tax or income tax or a payment of tax credit (as the case may be) equal to the amount of the refund or part;

and where the refund is a repayment of corporation tax, any interest relating to it which has been paid by the surrendering company shall be treated as having been paid by the recipient company.

(5) In subsection (4) above “relevant date”, in relation to a refund, means—

(a) in so far as it consists of a repayment of corporation tax paid by the surrendering company after the date on which it became due and payable under section 10 of the Taxes Act 1988, the day on which it was paid by that company, and

(b) otherwise, the date on which corporation tax for the relevant accounting period became due and payable.

(6) For the purpose of ascertaining the amount of any penalty to which the recipient company is liable under section 94(6) of the [1970 c. 9.] Taxes Management Act 1970, the corporation tax which the company is treated as having paid by subsection (4)(a) above shall be treated as paid on the day on which the notice under subsection (2) above is given (and not on the relevant date).

(7) A payment for a transferred tax refund—

(a) shall not be taken into account in computing profits or losses of either company for corporation tax purposes, and

(b) shall not for any of the purposes of the Corporation Tax Acts be regarded as a distribution or a charge on income;

and in this subsection “a payment for a transferred tax refund” means a payment made by the receiving company to the surrendering company in pursuance of an agreement between them as respects the giving of a notice under this section, being a payment not exceeding the amount of the refund in question.

(8) For the purposes of this section two companies are members of the same group if and only if they would be for the purposes of Chapter IV of Part X of the Taxes Act 1988.

(9) This section shall not apply unless the relevant accounting period ends after such day, not being earlier than 31st March 1992, as the Treasury may by order made by statutory instrument appoint.

Close companies

103 Repeal of apportionment provisions

(1) Except as provided by subsection (2) below, Chapter III of Part XI of the Taxes Act 1988 (apportionment of undistributed income etc. of close companies) shall not have effect in relation to accounting periods beginning after 31st March 1989.

(2) Section 427(4) of the Taxes Act 1988 (which gives relief to an individual where income apportioned to him in an earlier accounting period of a close company is included in a distribution received by him in a later accounting period), and section 427(5) of, and Part I of Schedule 19 to, that Act so far as they relate to section 427(4), shall continue to have effect in any case where the subsequent distribution referred to in section 427(4) is made before 1st April 1992.

104 Meaning of “close company”

(1) In section 414 of the Taxes Act 1988 for subsection (2) (further case in which a company is a close company for the purposes of the Tax Acts) there shall be substituted—

“(2) Subject to section 415 and subsection (5) below, a company resident in the United Kingdom (but not falling within subsection (1)(b) above) is also a close company if five or fewer participators, or participators who are directors, together possess or are entitled to acquire—

(a) such rights as would, in the event of the winding-up of the company (“the relevant company”) on the basis set out in subsection (2A) below, entitle them to receive the greater part of the assets of the relevant company which would then be available for distribution among the participators, or

(b) such rights as would in that event so entitle them if any rights which any of them or any other person has as a loan creditor (in relation to the relevant company or any other company) were disregarded.

(2A) In the notional winding-up of the relevant company, the part of the assets available for distribution among the participators which any person is entitled to receive is the aggregate of—

(a) any part of those assets which he would be entitled to receive in the event of the winding-up of the company, and

(b) any part of those assets which he would be entitled to receive if—

(i) any other company which is a participator in the relevant company and is entitled to receive any assets in the notional winding-up were also wound up on the basis set out in this subsection, and

(ii) the part of the assets of the relevant company to which the other company is entitled were distributed among the participators in the other company in proportion to their respective entitlement to the assets of the other company available for distribution among the participators.

(2B) In the application of subsection (2A) above to the notional winding-up of the other company and to any further notional winding-up required by paragraph (b) of that subsection (or by any further application of that paragraph), references to “the relevant company” shall have effect as references to the company concerned.

(2C) In ascertaining under subsection (2) above whether five or fewer participators, or participators who are directors, together possess or are entitled to acquire rights such as are mentioned in paragraph (a) or (b) of that subsection—

(a) a person shall be treated as a participator in or director of the relevant company if he is a participator in or director of any other company which would be entitled to receive assets in the notional winding-up of the relevant company on the basis set out in subsection (2A) above, and

(b) except in the application of subsection (2A) above, no account shall be taken of a participator which is a company unless the company possesses or is entitled to acquire the rights in a fiduciary or representative capacity.

(2D) Subsections (4) to (6) of section 416 apply for the purposes of subsections (2) and (2A) above as they apply for the purposes of subsection (2) of that section.”

(2) Subsection (3) of that section shall cease to have effect.

(3) In subsection (5)(b) of that section for the words from “paragraph (c)” to “that paragraph” there shall be substituted the words “paragraph (a) of subsection (2) above or paragraph (c) of section 416(2) and it would not be a close company if the references in those paragraphs”.

(4) This section shall be deemed to have come into force on 1st April 1989.

105 Small companies' rate not available to certain close companies

(1) In section 13 of the Taxes Act 1988 (small companies' relief) in subsection (1) for the words “a company resident in the United Kingdom” there shall be substituted the words “a company which—

(a) is resident in the United Kingdom, and

(b) is not a close investment-holding company (as defined in section 13A) at the end of that period,”.

(2) After that section there shall be inserted the following section—

“13A Close investment-holding companies

(1) A close company is for the purposes of section 13(1) a “close investment-holding company” unless it complies with subsection (2) below.

(2) A company (“the relevant company”) complies with this subsection in any accounting period if throughout that period it exists wholly or mainly for any one or more of the following purposes—

(a) the purpose of carrying on a trade or trades on a commercial basis,

(b) the purpose of making investments in land or estates or interests in land in cases where the land is, or is intended to be, let to persons other than—

(i) any person connected with the relevant company, or

(ii) any person who is the wife or husband of an individual connected with the relevant company, or is a relative, or the wife or husband of a relative, of such an individual or of the husband or wife of such an individual,

(c) the purpose of holding shares in and securities of, or making loans to, one or more companies each of which is a qualifying company or a company which—

(i) is under the control of the relevant company or of a company which has control of the relevant company, and

(ii) itself exists wholly or mainly for the purpose of holding shares in or securities of, or making loans to, one or more qualifying companies,

(d) the purpose of co-ordinating the administration of two or more qualifying companies,

(e) the purpose of a trade or trades carried on on a commercial basis by one or more qualifying companies or by a company which has control of the relevant company, and

(f) the purpose of the making, by one or more qualifying companies or by a company which has control of the relevant company, of investments as mentioned in paragraph (b) above.

(3) For the purposes of subsection (2) above, a company is a “qualifying company”, in relation to the relevant company, if it—

(a) is under the control of the relevant company or of a company which has control of the relevant company, and

(b) exists wholly or mainly for either or both of the purposes mentioned in subsection (2)(a) or (b) above.

(4) Where a company is wound up, it shall not be treated as failing to comply with subsection (2) above in the accounting period that (by virtue of subsection (7) of section 12) begins with the time which is for the purposes of that subsection the commencement of the winding up, if it complied with subsection (2) above in the accounting period that ends with that time.

(5) In this section—

• “control” shall be construed in accordance with section 416, and

• “relative” has the meaning given by section 839(8).

(6) Section 839 shall apply for the purposes of this section.”

(3) This section shall have effect in relation to accounting periods beginning after 31st March 1989.

106 Restriction on payment of tax credits.

(1) In section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions) in subsection (3) after the words “made and” there shall be inserted the words “subject to subsections (3A) to (3D) below” and after that subsection there shall be inserted—

“(3A) Subject to subsection (3B) below, where it appears to the inspector that, in any accounting period of a company at the end of which it is a close investment-holding company—

(a) arrangements relating to the distribution of the profits of the company exist or have existed the main purpose of which or one of the main purposes of which is to enable payments, or payments of a greater amount, to be made to any one or more individuals under subsection (3) above in respect of such an excess as is mentioned in that subsection, and

(b) by virtue of those arrangements, any eligible person—

(i) receives a qualifying distribution consisting of a payment made by the company on the redemption, repayment or purchase of its own shares, or

(ii) receives any other qualifying distribution in respect of shares in or securities of the company, where the amount or value of the distribution is greater than might in all the circumstances have been expected but for the arrangements,

the entitlement of the eligible person to have paid to him under subsection (3) above all or part of a tax credit in respect of any distribution made by the company in the period shall be restricted to such extent as appears to the inspector to be just and reasonable.

(3B) Subsection (3A) above does not apply in relation to a tax credit in respect of a dividend paid by a company in any accounting period in respect of its ordinary share capital if—

(a) throughout the period, the company’s ordinary share capital consisted of only one class of shares, and

(b) no person waived his entitlement to any dividend which would have become payable by the company in the period or failed to receive any dividend which had become due and payable to him by the company in the period.

(3C) In subsection (3A) above—

• “arrangements” means arrangements of any kind whether in writing or not,

• “close investment-holding company” has the meaning given by section 13A, and

• “eligible person”, in relation to a qualifying distribution, means an individual resident in the United Kingdom who would (apart from subsection (3A) above) be entitled to have paid to him under subsection (3) above all or part of a tax credit in respect of the distribution.

(3D) In determining under subsection (3) above whether a person is entitled to have any excess of tax credit paid to him in a case where subsection (3A) above applies, tax credits shall be set against income tax in the order that results in the greatest payment in respect of the excess.”

(2) This section shall have effect in relation to distributions made by companies in accounting periods beginning after 31st March 1989.

107 Close companies: consequential amendments

Schedule 12 to this Act (in which Part I contains administrative provisions relating to close companies and Part II makes amendments connected with section 103 above) shall have effect.

Settlements etc.

108 Outright gifts etc. between husband and wife

(1) Section 685 of the Taxes Act 1988 (provisions supplementary to sections charging settlor to tax in excess of basic rate on certain settlement income) shall be amended as follows.

(2) In subsection (3), after the word “above” there shall be inserted the words “and subsection (4B) below”.

(3) At the end of subsection (4) there shall be added the words “, but subject to subsections (4A) and (4C) below”.

(4) After subsection (4) there shall be inserted—

“(4A) References in section 683 to a settlement do not include references to an outright gift by one spouse to the other of property from which income arises unless—

(a) the gift does not carry a right to the whole of that income, or

(b) the property given is wholly or substantially a right to income.

(4B) For the purposes of subsection (4A) above a gift is not an outright gift if it is subject to conditions, or if the property given or any derived property is or will or may become, in any circumstances whatsoever, payable to or applicable for the benefit of the donor.

(4C) References in section 683 to a settlement do not include references to the irrevocable allocation of pension rights by one spouse to the other in accordance with the terms of a relevant statutory scheme (within the meaning of Chapter I of Part XIV).”

(5) This section shall have effect for the year 1990-91 and subsequent years of assessment.

109 Settlements where settlor retains interest in settled property

(1) After section 674 of the Taxes Act 1988 there shall be inserted—

“674A Other settlements where settlor retains interest in settled property

(1) Where, during the life of the settlor, income arising under a settlement is, under the settlement and in the events that occur, payable to or applicable for the benefit of any person other than the settlor, then, unless, under the settlement and in those events, the income—(a) consists of annual payments made under a partnership agreement to or for the benefit of a former member, or the widow or dependants of a deceased former member, of the partnership, being payments made under a liability incurred for full consideration; or

(b) is of a kind excluded from subsection (1) of section 683 by subsection (6) or (9) of that section; or

(c) is income arising under a settlement made by one party to a marriage by way of provision for the other after the dissolution or annulment of the marriage, or while they are separated under an order of a court or under a separation agreement or in such circumstances that the separation is likely to be permanent, being income payable to or applicable for the benefit of that other party; or

(d) is income from property of which the settlor has divested himself absolutely by the settlement; or

(e) consists of covenanted payments to charity (as defined by section 660(3)); or

(f) is income which, by virtue of any provision of the Income Tax Acts other than this section, is to be treated for all the purposes of those Acts as income of the settlor;

the income shall be treated for all the purposes of the Income Tax Acts as the income of the settlor and not as the income of any other person.

(2) Subsections (6) to (10) of section 683 shall apply in relation to subsection (1) above as they apply in relation to subsection (1) of that section.

(3) Subsections (1), (2), (3) and (for the year 1990-91 and subsequent years of assessment) (4A) to (4C) of section 685 shall have effect for the purposes of this section as they have effect for the purposes of section 683, but with the omission from subsections (1) and (2) of the words “in the case of a settlement made after 6th April 1965”.

(4) For the year 1990-91 and subsequent years of assessment subsection (1)(a) above shall have effect with the insertion after the word “widow” of the word “widower”.

(5) This section applies in relation to income—

(a) which arises on or after 14th March 1989 under a settlement made on or after that day, or

(b) which arises on or after 6th April 1990 under a settlement made before 14th March 1989, so far as it is payable to or applicable for the benefit of the settlor’s husband or wife,

except income consisting of annual payments made under an obligation which is an existing obligation for the purposes of section 36(3) of the [1988 c. 39.] Finance Act 1988.”

(2) In section 125(3) of the Taxes Act 1988, in paragraph (a), for the words “section 683(1)(a) or (c) or (6)” there shall be substituted the words “subsection (1)(a) or (c) of section 674A or 683 or subsection (6) of section 683 (including that subsection as it applies in relation to section 674A(1))”.

(3) In sections 675(1), (4) and (5) and 676(1)(a) of that Act, for the words “or 674” there shall be substituted the words “674 or 674A”.

(4) In section 677(2)(c) of that Act, after “674” there shall be inserted “674A”.

110 Residence of trustees.

(1) Where the trustees of a settlement include at least one who is not resident in the United Kingdom as well as at least one who is, then for all the purposes of the Income Tax Acts—

(a) if the condition in subsection (2) below is satisfied, the trustee or trustees not resident in the United Kingdom shall be treated as resident there, and

(b) otherwise, the trustee or trustees resident in the United Kingdom shall be treated as not resident there (but as resident outside the United Kingdom).

(2) The condition referred to in subsection (1) above is that the settlor or, where there is more than one, any of them is at any relevant time—

(a) resident in the United Kingdom,

(b) ordinarily resident there, or

(c) domiciled there.

(3) For the purposes of subsection (2) above the following are relevant times in relation to a settlor—

(a) in the case of a settlement arising under a testamentary disposition of the settlor or on his intestacy, the time of his death, and

(b) in the case of any other settlement, the time or, where there is more than one, each of the times when he has provided funds directly or indirectly for the purposes of the settlement.

(4) For the purposes of this section “settlor”, in relation to a settlement, includes any person who has provided or undertaken to provide funds directly or indirectly for the purposes of the settlement.

(5) In section 824(9) of the Taxes Act 1988 (repayment supplements), for the words “or a United Kingdom trust (as defined in section 231),” there shall be substituted the words “the trustees of a settlement”.

(6) Subject to subsections (7) to (9) below, this section shall apply for the year 1989-90 and subsequent years of assessment.

(7) For the purpose of determining the residence of trustees at any time during the year 1989-90, the condition in subsection (2) above shall be regarded as not having been satisfied if none of the trustees of the settlement is resident in the United Kingdom at any time during the period beginning with 1st October 1989 and ending with 5th April 1990.

(8) This section shall not apply for any of the purposes of section 739 of the Taxes Act 1988 in relation to income payable before 15th June 1989, or for the purposes of subsection (3) of that section in relation to income payable on or after that date if—

(a) the capital sum there referred to is received, or the right to receive it is acquired, before that date, and

(b) that sum is wholly repaid, or the right to it waived, before 1st October 1989.

(9) This section shall not apply for any of the purposes of section 740 of the Taxes Act 1988 in relation to benefits received before 15th June 1989; and, in relation to benefits received on or after that date, “relevant income” for those purposes shall include income arising to trustees before 6th April 1989 notwithstanding that one or more of them was not resident outside the United Kingdom, unless they have been charged to tax in respect of it.

111 Residence of personal representatives.

(1) Where the personal representatives of a deceased person include at least one who is not resident in the United Kingdom as well as at least one who is, then for all the purposes of the Income Tax Acts—

(a) if the condition in subsection (2) below is satisfied, the personal representative or representatives not resident in the United Kingdom shall be treated as resident there, and

(b) otherwise, the personal representative or representatives resident in the United Kingdom shall be treated as not resident there (but as resident outside the United Kingdom).

(2) The condition referred to in subsection (1) above is that the deceased person is at his death—

(a) resident in the United Kingdom,

(b) ordinarily resident there, or

(c) domiciled there.

(3) In this section “personal representatives” means—

(a) in relation to England and Wales, the deceased person’s personal representatives as defined by section 55 of the [1925 c. 23.] Administration of Estates Act 1925;

(b) in relation to Scotland, his executor or the judicial factor on his estate;

(c) in relation to Northern Ireland, his personal representatives as defined by section 45(1) of the [1955 c. 24 (N.I.).] Administration of Estates Act (Northern Ireland) 1955; and

(d) in relation to another country or territory, the persons having in relation to him under its law any functions corresponding to the functions for administration purposes of personal representatives under the law of England and Wales.

(4) In section 824(9) of the Taxes Act 1988 (repayment supplements), for the words from “or, in” to “section 701)” there shall be substituted the words “or personal representatives (within the meaning of section 111 of the Finance Act 1989)”.

(5) Subject to subsections (6) to (8) below, this section shall apply for the year 1989-90 and subsequent years of assessment.

(6) For the purpose of determining the residence of personal representatives at any time during the year 1989-90, the condition in subsection (2) above shall be regarded as not having been satisfied if none of the personal representatives is resident in the United Kingdom at any time during the period beginning with 1st October 1989 and ending with 5th April 1990.

(7) This section shall not apply for any of the purposes of section 739 of the Taxes Act 1988 in relation to income payable before 15th June 1989, or for the purposes of subsection (3) of that section in relation to income payable on or after that date if—

(a) the capital sum there referred to is received, or the right to receive it is acquired, before that date, and

(b) that sum is wholly repaid, or the right to it waived, before 1st October 1989.

(8) This section shall not apply for any of the purposes of section 740 of the Taxes Act 1988 in relation to benefits received before 15th June 1989 and, in relation to benefits received on or after that date, “relevant income” for those purposes shall include income arising to personal representatives before 6th April 1989 notwithstanding that one or more of them was not resident outside the United Kingdom, unless they have been charged to tax in respect of it.

Miscellaneous

112 Security: trades etc

(1) This section applies in computing, for the purposes of Case I or Case II of Schedule D, the profits or gains of a trade, profession or vocation carried on by an individual or by a partnership of individuals.

(2) In a case where this section applies, nothing in section 74(a) or (b) of the Taxes Act 1988 (deductions limited by reference to purposes of trade etc.) shall prevent the deduction of a sum in respect of expenditure incurred in connection with the provision for or use by the individual, or any of the individuals, of a security asset or security service.

(3) Subsection (2) above shall not apply unless the asset or service is provided or used to meet a threat which—

(a) is a special threat to the individual’s personal physical security, and

(b) arises wholly or mainly by virtue of the particular trade, profession or vocation concerned.

(4) Subsection (2) above shall not apply unless the person incurring the expenditure has as his sole object in doing so the meeting of that threat.

(5) Subsection (2) above shall not apply in the case of a service unless the benefit resulting to the individual consists wholly or mainly of an improvement of his personal physical security.

(6) Subsection (2) above shall not apply in the case of an asset unless the person incurring the expenditure intends the asset to be used solely to improve personal physical security.

(7) But in a case where—

(a) apart from subsection (6) above, subsection (2) above would apply in the case of an asset, and

(b) the person incurring the expenditure intends the asset to be used partly to improve personal physical security,

subsection (2) shall nevertheless apply, but only as regards the appropriate proportion of the expenditure there mentioned.

(8) For the purposes of subsection (7) above the appropriate proportion of the expenditure mentioned in subsection (2) above is such proportion of that expenditure as is attributable to the intention of the person incurring it that the asset be used to improve personal physical security.

113 Security: trades etc. (supplementary)

(1) For the purposes of section 112 above—

(a) a security asset is an asset which improves personal security,

(b) a security service is a service which improves personal security,

(c) references to an asset do not include references to a car, a ship or an aircraft,

(d) references to an asset or service do not include references to a dwelling or grounds appurtenant to a dwelling, and

(e) references to an asset include references to equipment and a structure (such as a wall).

(2) If the person incurring the expenditure intends the asset to be used solely to improve personal physical security, but there is another use for the asset which is incidental to improving personal physical security, that other use shall be ignored in construing section 112(6) above.

(3) The fact that an asset or service improves the personal physical security of any member of the family or household of the individual concerned, as well as that of the individual, shall not prevent section 112(2) above from applying.

(4) For the purposes of section 112 above in its application to an asset, it is immaterial whether or not the asset becomes affixed to land (whether constituting a dwelling or otherwise).

(5) For the purposes of section 112 above in its application to an asset, it is immaterial whether or not the individual concerned is or becomes entitled to the property in the asset or (in the case of a fixture) an estate or interest in the land concerned.

(6) Section 112 above applies where expenditure is incurred on or after 6th April 1989.

114 Relief for pre-trading expenditure

(1) In section 401(1) of the Taxes Act 1988 (which gives relief for expenditure incurred by a person within three years before he begins to carry on a trade, profession or vocation), for the word “three” there shall be substituted the word “five”.

(2) This section shall have effect where the time when the person begins to carry on the trade, profession or vocation falls after the end of March 1989.

115 Double taxation: tax credits

(1) Where any arrangements having effect by virtue of section 788 of the Taxes Act 1988 provide —

(a) for persons who are resident outside the United Kingdom and who receive distributions from companies resident in the United Kingdom to be entitled to tax credits, and

(b) for the amount paid to such a person by way of tax credit to be determined by reference to the amount to which an individual resident in the United Kingdom would have been entitled, subject to a deduction calculated by reference to the aggregate of the amount or value of the distribution and the amount of the tax credit paid,

the arrangements shall be construed as providing for that deduction to be calculated by reference to the gross amount or value of the distribution and tax credit, without any allowance for the deduction itself.

(2) This section shall have effect in relation to payments made before the passing of this Act as well as those made after that time, except that it shall not affect—

(a) the judgment of any court given before 25th October 1988, or

(b) the law to be applied in proceedings on appeal to the Court of Appeal or the House of Lords where the judgment of the High Court or the Court of Session which is in issue was given before that date.

116 Interest payments to Netherlands Antilles subsidiaries

(1) A payment to which this section applies shall be treated for the purposes of—

(a) section 338 of the Taxes Act 1988 (payment of interest within section 124 of that Act to be a charge on income), and

(b) section 349 of that Act (such a payment to be made gross),

as if it were a payment of interest within section 124 of that Act (quoted Eurobonds).

(2) This section applies to a payment of interest if—

(a) it is made on or after 1st April 1989 by a relevant United Kingdom company to a relevant Netherlands Antilles subsidiary, and

(b) not later than 90 days after the payment is received by the subsidiary, it is applied by the subsidiary in paying interest on quoted Eurobonds issued by it before 26th July 1984 or in meeting expenses incurred in connection with the issue of quoted Eurobonds so issued.

(3) In subsection (2) above—

(a) “relevant Netherlands Antilles subsidiary” means a company which—

(i) at the time when the quoted Eurobonds were issued was resident in the Netherlands Antilles (including Aruba) and was a 90 per cent. subsidiary of a company resident in the United Kingdom, and

(ii) at the time when the payment is made is resident in the Netherlands Antilles (but not Aruba) and is a 90 per cent. subsidiary of the relevant United Kingdom company; and

(b) “relevant United Kingdom company” means a company which is resident in the United Kingdom and which is not a 51 per cent. subsidiary of a company not resident in the United Kingdom.

(4) For the purpose of determining whether a company is a relevant Netherlands Antilles subsidiary, its residence (whether before 1st April 1989 or at any later time) shall be ascertained in accordance with the terms of the arrangements made with the Government of the Kingdom of the Netherlands on behalf of the Government of the Netherlands Antilles which had effect by virtue of section 788 of the Taxes Act 1988 immediately before 1st April 1989.

(5) In this section “quoted Eurobond” has the same meaning as in section 124 of the Taxes Act 1988.