Finance Act 1985

• (b) the terms of issue of the deep discount securities are determined by the company by reference to (though not necessarily in such a way that they reflect) the terms of issue of relevant securities which are held by the company when the deep discount securities are issued or which it intends to acquire later.

• (2) This sub-paragraph applies to deep discount securities issued by a company where—

• (a) sub-paragraph (1) above would apply if the references to relevant securities included references to United Kingdom corporate bonds, and

• (b) the company acquired those bonds on or after their issue (by another company) in circumstances where sub-paragraph (1) above would have applied if they had been deep discount securities.

• (3) This sub-paragraph applies to deep discount securities of a particular kind issued by a company and in the case of which—

• (a) neither of the preceding sub-paragraphs applies, and

• (b) at any time in the first income period of the securities of that kind the assets held by the company include relevant securities with a value equal to at least 75 per cent, of the value of all the assets held by it.

• (4) This sub-paragraph applies to deep discount securities issued by a company where either—

• (a) they are issued on a conversion to which section 82 of the Capital Gains Tax Act 1979 applies of old securities, or

• (b) they are issued by a company in exchange for old securities in circumstances in which section 85(3) of that Act applies or are treated as so issued by virtue of section 86(1) of that Act,

and in this sub-paragraph "old securities" means deep discount securities to which sub-paragraph (1), (2) or (3) above or this subparagraph applies, except that securities to which sub-paragraph (3) above applies are not old securities unless sub-paragraph (3)(b) has been fulfilled in their case by the time the conversion or exchange concerned takes place.

• (5) In the following provisions of this Schedule " chargeable security " means a deep discount security to which any of the preceding sub-paragraphs applies.

• (6) In this paragraph—

• " deep discount securities " has the same meaning as in section 36 of the Finance Act 1984,

• " income period " has the meaning given by paragraph 1(7) of Schedule 9 to that Act,

• " issued " shall be construed in accordance with section 36(4) of that Act,

• "relevant securities" means securities within the meaning of Chapter IV of this Part of this Act, but excluding United Kingdom corporate bonds,

• "terms of issue" includes terms relating to amounts payable on redemption or by way of interest, or to times of payment of such amounts, and

• "value" in relation to assets means the price they might reasonably be expected to fetch on a sale in the open market.

• (7) For the purposes of this paragraph a company holds assets if it has a beneficial interest in them and acquires them if it acquires inch an interest in them.

• (8) For the purposes of this paragraph securities are of the same kind if they are treated as being of the same kind by the practice of a stock exchange, or would be so treated if dealt with on a stock exchange.

• (9) In this paragraph " United Kingdom corporate bonds " means securities—

• (a) issued by a company resident in the United Kingdom at the time of issue,

• (b) the debt on which represents and has at all times represented a normal commercial loan, as denned in paragraph 1(5) of Schedule 12 to the Finance Act 1973, and

• (c) which are expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling.

• (10) For the purposes of sub-paragraph (9)(c) above—

• (a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and

• (b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.

The charge

2

• (1) Where a person acquires a chargeable security, the chargeable amount shall be treated as income chargeable to tax under Case III or (as the case may be) Case IV of Schedule D on each of the following occasions—

• (a) the end of each income period to fall within the period of ownership;

• (b) the end of any income period which ends but does not begin in the period of ownership.

• (2) In sub-paragraph (1) above " the chargeable amount" means—

• (a) where paragraph (a) applies, an amount equal to the income element for the income period;

• (b) where paragraph (6) applies, an amount equal to the income element for the part of the income period falling within the period of ownership.

• (3) The income chargeable shall (notwithstanding anything in sections 119 to 121 or, as the case may be, 122 to 124 of the Taxes Act) be taken into account in computing tax charged for the year of assessment in which the occasion concerned occurs.

• (4) Where the person disposes of the security, or paragraph 8(2)(a) of Schedule 9 to the Finance Act 1984 treats him as disposing of it, any amount (or the aggregate of any amounts) treated as income by virtue of this paragraph shall be deducted from the income chargeable by virtue of paragraph 1(1)(a) of that Schedule.

• (5) Paragraph 8(3) of that Schedule shall not apply in the case of a chargeable security which is converted or exchanged.

• (6) Sub-paragraph (4) above shall not affect the references in paragraphs 1(1)(c) and 9 of that Schedule to the amount mentioned in paragraph 1(1)(a) of that Schedule; and the references in paragraph 8(2)(b) and (c) of that Schedule to the amount on which he is chargeable shall be construed as references to the amount on which he would be chargeable apart from sub-paragraph (4) above.

• (7) Where an amount is (or amounts are) treated as income by virtue of this paragraph, then, in arriving at the accrued income attributable to the period between the person's acquisition and redemption for the purposes of paragraph 7(2) of that Schedule, that amount (or the aggregate of those amounts) shall be deducted from such income found under paragraph 7(2) apart from this sub-paragraph.

• (8) Section 360(2) of the Taxes Act (exemption for charities from tax on chargeable gains) shall apply in relation to tax chargeable by virtue of this paragraph as it applies in relation to tax on chargeable gains.

• (9) In this paragraph, expressions which are also used in paragraph 1 of Schedule 9 to the Finance Act 1984 have the same meanings as in that paragraph.

Information

3

Every company which issues a chargeable security to which paragraph 1(1), (2) or (4) above applies shall cause to be shown on fee certificate of each such security the fact that tax is chargeable under this Schedule.

Minor amendment

4

In paragraph 1(7) of Schedule 9 to the Finance Act 1984, in paragraph (b) of the definition of " income period ", after " begins on " there shall be inserted " the issue or on".

SCHEDULE 12

Introduction

1

In section 48 of this Act and this Schedule "limited partner" means—

• (a) a person who is carrying on a trade as a limited partner in a limited partnership registered under the Limited Partnerships Act 1907,

• (b) a person who is carrying on a trade as a general partner in a partnership, who is not entitled to take part in the management of the trade and who is entitled to have his liabilities, or his liabilities beyond a certain limit, for debts or obligations incurred for the purposes of the trade discharged or reimbursed by some other person, or

• (c) a person who carries on a trade jointly with others and who, under the law of any territory outside the United Kingdom, is not entitled to take part in the management of the trade and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the trade.

Individuals as limited partners

2

• (1) This paragraph applies to an amount which may be given or allowed to an individual under any of the enactments specified in sub-paragraph (3) below—

• (a) in respect of a loss sustained by him in a trade, or of interest paid by him in connection with the carrying on of a trade, in a relevant year of assessment, or

• (b) as an allowance falling to be made to him for a relevant year of assessment either in taxing a trade or by way of discharge or repayment of tax to which he is entitled by reason of his participation in a trade.

• (2) Such an amount may be given or allowed otherwise than against income consisting of profits or gains arising from the trade only to the extent that the amount given or allowed or (as the case may be) the aggregate amount does not exceed the relevant sum.

• (3) The enactments are—

• (a) section 168 of the Taxes Act;

• (b) section 30 of the Finance Act 1978 ;

• (c) section 71 of the Capital Allowances Act 1968 ; and

• (d) section 75 of the Finance Act 1972.

• (4) In this paragraph—

• " relevant year of assessment" means a year of assessment at any time during which the individual carried on the trade as a limited partner;

• "the aggregate amount" means the aggregate of any amounts given or allowed to him at any time under any of the enactments specified in sub-paragraph (3) above— in respect of a loss sustained by him in the trade, or of interest paid by him in connection with carrying it on, in any relevant year of assessment, or as an allowance falling to be made to him for any relevant year of assessment either in taxing the trade or by way of discharge or repayment of tax to which he is entitled by reason of his participation in the trade ;

• " the relevant sum " means the amount of his contribution to the trade as at the appropriate time ; and

• " the appropriate time " is the end of the relevant year of assessment in which the loss is sustained or the interest paid, or for which the allowance falls to be made (except that where he ceased to carry on the trade during that year of assessment it is the time when he so ceased).

• (5) To the extent that an allowance is taken into account in computing profits or gains or losses in the year of loss by virtue of section 169(1) of the Taxes Act it shall, for the purposes of section 48 of this Act and this paragraph, be treated as falling to be made in the year of loss (and not the year of assessment for which the year of loss is the basis year).

Companies as limited partners

3

• (1) This paragraph applies to an amount which may be given or allowed under any of the enactments specified in sub-paragraph (3) below—

• (a) in respect of a loss incurred by a company in a trade, or of charges paid by a company in connection with the carrying on of a trade, in a relevant accounting period, or

• (b) as an allowance falling to be made to a company for a relevant accounting period either in taxing a trade or by way of discharge or repayment of tax to which it is entitled by reason of its participation in a trade ;

and in this paragraph such a company is referred to as "the partner company ".

• (2) Such an amount may be given or allowed to the partner company otherwise than against profits or gains arising from the trade, or to another company, only to the extent that the amount given or allowed or (as the case may be) the aggregate amount does not exceed the relevant sum.

• (3) The enactments are-

• (a) section 177(2) of the Taxes Act;

• (b) section 74 of the Capital Allowances Act 1968 ;

• (c) section 248 of the Taxes Act; and

• (d) subsections (1), (2) and (6) of section 259 of the Taxes Act.

• (4) In this paragraph—

• "relevant accounting period" means an accounting period of the partner company at any time during which it carried on the trade as a limited partner ;

• " the aggregate amount" means the aggregate of any amounts given or allowed to the partner company or another company at any time under any of the enactments specified in sub-paragraph (3) above— in respect of a loss incurred by the partner company in the trade, or of charges paid by it in connection with carrying it on, in any relevant accounting period, or as an allowance falling to be made to the partner company for any relevant accounting period either in taxing tie trade or by way of discharge or repayment of tax to which it is entitled by reason of its participation in the trade;

• "the relevant sum" means the amount of the partner company's contribution to the trade as at the appropriate time ; and

• " the appropriate time " is the end of the relevant accounting period in which the loss is incurred or the charges paid, or for which the allowance falls to be made (except that where the partner company ceased to carry on the trade during that accounting period it is the time when it so ceased).

Contribution

4

A person's contribution to a trade at any time is the aggregate Of—

• (a) the amount which he has contributed to it as capital and has not, directly or indirectly, drawn out or received back (other than anything which he is or may be entitled so to draw out or receive back at any time when he carries on the trade as a limited partner or which he is or may be entitled to require another person to reimburse to him), and

• (6) the amount of any profits or gains of the trade to which he is entitled but which he has not received in money or money's worth.

SCHEDULE 13

Recovery of tax credits incorrectly paid

1

• (1) Where the provisions of section 54 of this Act apply so as to withdraw the entitlement of a company to claim to have a tax credit in respect of a qualifying distribution set against the income tax chargeable on its income and to have the excess of the credit over that income tax paid to it and the company (in this paragraph referred to as " the recipient company ") has either had that excess paid to it, or has received an additional amount in accordance with arrangements made under Regulation 2(1) of the Double Taxation Relief (Taxes on Income) (General) (Dividend) Regulations 1973, it shall be liable to a fine for the violation of the provisions of section 54 of this Act equal to twice the amount of the excess or additional amount as the case may be and such fine (in this section referred to as " the recoverable amount") shall be payable to the Board and be treated as having become payable at the date when the excess or additional amount was paid to the recipient company and may be recovered in accordance with sub-paragraphs (2) to (5) below.

• (2) The recoverable amount may be assessed and recovered as if it were unpaid tax and section 30 of the Taxes Management Act 1970 (recovery of overpayment of tax, etc.) shall apply accordingly.

• (3) Any amount which may be assessed and recovered as if it were unpaid tax by virtue of this paragraph shall carry interest at the rate of 9 per cent, per annum from the date when it was payable in accordance with this paragraph until the date it is paid and it is hereby declared that this paragraph applies to a recoverable amount which is paid without the making of an assessment (but is paid after it is due) and that, where the recoverable amount is charged by any assessment (whether or not any part of it has been paid when the assessment is made), this paragraph applies in relation to interest running before, as well as after, the making of the assessment.

• (4) Where the recoverable amount is not paid by the recipient company within six months from the date on which it became payable—

• (a) the recoverable amount may at any time within six years from the date on which it became payable be assessed and recovered as if it were unpaid tax due from any person who is or was at any time prior to the expiration of the said six year period connected with the recipient company, or would have been connected on the assumption that all the facts and circumstances relating to the recipient company at the time the excess or additional amount as the case may be was paid continued to apply for six years thereafter, and section 30 of the Taxes Management Act 1970 shall apply accordingly, and

• (b) as respects its accounting periods beginning with that in which the excess or additional amount referred to in subparagraph (1) above was paid and ending with that following that in which the recoverable amount is paid in accordance with the provisions of this paragraph, the company which made the qualifying distribution in respect of which the recipient company received the excess or additional amount Shall not be entitled to set any advance corporation tax paid by it against its liability to corporation tax for such periods in accordance with section 85 of the Finance Act 1972 (payments of advance corporation tax to be set against company's liability to corporation tax on its income) nor to surrender the benefit of the whole or any part of any amount of advance corporation tax to a subsidiary in accordance with section 92 of that Act (setting of company's surplus advance corporation tax against subsidiary's liability) in such periods.

• (5) Where a recoverable amount is assessed and recovered from a person connected with the recipient company in accordance with sub-paragraph (4)(a) above, that person shall be liable for the interest payable in accordance with sub-paragraph (3) above and, until the interest is so paid, sub-paragraph (4)(b) above shall apply as if the words " the interest due in accordance with sub-paragraph (3) above is paid " were substituted for the words " the recoverable amount is paid in accordance with the provisions of this paragraph

• (6) Interest payable under this paragraph shall be paid without any deduction of income tax and shall not be allowed as a deduction in computing any income, profits or losses for any tax purposes.

• (7) Where under the law in force in a territory outside the United Kingdom interest is payable subject to a deduction in respect of taxation and such deduction applies to an amount of interest paid in accordance with sub-paragraph (3) above, the reference to the rate of 9 per cent, per annum in that sub-paragraph shall be deemed to be a reference to such rate of interest as after such deduction shall be equal to the rate of 9 per cent, per annum.

Claims to payment of tax credits following remedial legislation in unitary states

2

• (1) This paragraph has effect where a company to which section 54 applies has a qualifying presence in a province, state or other part of a territory outside the United Kingdom which has been prescribed as a unitary state for the purposes of that section and, at the time when a qualifying distribution is made to that company by a company which is resident in the United Kingdom, that state has enacted legislation the effect of which is that, as from a future date which shall not be later than 31st December 1986, it will cease to be a unitary state within the meaning of the definition in paragraph 5(1) below, notwithstanding that it remains prescribed as such for the purposes of that section.

• (2) In the circumstances described in sub-paragraph (1) above the company in receipt of the qualifying distribution shall be entitled on or after the effective date to claim to have the tax credit to which it is entitled in respect of the distribution set against its hability to income tax and to have the excess (if any) of the credit over that liability paid to it; but, if payment of the excess or of the additional amount referred to in Regulation 2(1) of the Double Taxation Relief (Taxes on Income) (General) (Dividend) Regulations 1973 is made before the effective date, the provisions of paragraph 1 above shall apply in relation to that payment regardless of lie enactment of the legislation referred to in sub-paragraph (1) above.

• (3) For the purposes of this paragraph the effective date shall be ¢deemed to be the date (not to be later than 31st December 1986) on which the legislation referred to in sub-paragraph (1) above actually becomes effective in the province, state or other part of the territory outside the United Kingdom which has been prescribed as a unitary state for the purposes of section 54, irrespective of the date, if any, specified in that legislation.

Avoidance of provision withdrawing tax credits

3

• (1) In any case where arrangements are made, whether before or after section 54 comes into force, as a result of which interest is paid or a discount is allowed by or through a person who is resident in the United Kingdom, or carries on business in the United Kingdom through a branch or agency, and it is reasonable to suppose that, if such payment or allowance had not been made, a qualifying distribution would have been made by the person by or through whom the payment or allowance is made, or by another company resident in the United Kingdom, to a company which has, or is an associated company of a company which has, a qualifying presence in a unitary state at the time when the payment or allowance is made, then—

• (a) no person who receives that payment or allowance shall been titled to relief from income tax or corporation tax thereon by virtue of arrangements having effect under section 497(1) of the Taxes Act, and

• (b) the payment or allowance shall not be allowed as a deduction in computing any income, profits or losses for any tax purposes.

• (2) Without prejudice to the generality of sub-paragraph (1) above, where a payment or allowance is not of itself a payment or allowance to which sub-paragraph (1) above applies, but is made in conjunction with other payments of whatever nature and taken together with those payments has substantially similar effect to a distribution, then, for the purposes of sub-paragraph (1) above, it shall be treated as a payment or allowance within that sub-paragraph.

• (3) Any company which has received such a payment of interest as is referred to in sub-paragraph (1) above, from which income tax has not been deducted by the person making the payment, and has a qualifying presence in a unitary state at the time of the payment, shall be treated for the purposes of paragraph 1 above as a company from which the entitlement to claim payment of the excess of a tax credit over the income tax chargeable on its income has been withdrawn by section 54(1) and which has had paid to it such an excess in an amount equal to the income tax which should have been deducted from the payment of interest.

Power to inspect documents of non-resident companies

4

• (1) Where it appears to the Board that the provisions of section 54 and this Schedule may apply to a company resident outside the United Kingdom (in this paragraph referred to as a "foreign parent"), the Board may, by notice in writing given to the foreign parent or any associated company of that foreign parent, require that company within such time (not being less than thirty days) as may be specified in the notice to make available for inspection any books, accounts, or other documents or records whatsoever of that company where in the opinion of the Board it is proper that they should inspect such documents for the purposes of ascertaining whether the said provisions apply to the foreign parent or such associated company notwithstanding that in the opinion of the person to whom the notice is given those provisions do not apply to that company or any associated company of that company.

• (2) In the Table to section 98 of the Taxes Management Act 1970 (penalties) at the end of the first column there shall be added—

Paragraph 4 of Schedule 13 to the Finance Act 1985

.

Meaning of " unitary state ", etc.

5

• (1) In this Schedule and section 54 of this Act—

• " group" and " member of a group" shall be construed in accordance with section 272 (1) of the Taxes Act (definition of groups of companies) with the omission of the restriction in paragraph (a) of that subsection and the substitution of the words " 51 per cent. " for the words "75 per cent." wherever they occur,

• "qualifying distribution " has the same meaning as in Part V of the Finance Act 1972 (taxation of companies and company distributions),

• " unitary state" means a province, state or other part of a territory outside the United Kingdom with the government of which the arrangements referred to in subsection (1) of section 54 have been made which, in taxing the income or profits of companies from sources within that province, state or other part, takes into account, or is entitled to take into account, income, receipts, deductions, outgoings or assets of such companies, or of associated companies of such companies, arising, expended or situated as the case may be outside that territory and which has been prescribed under subsection (7) of that section as a unitary state for the purposes of that section ; but no such province, state or other part shall be so prescribed which only takes into account such income, receipts, deductions, outgoings or assets— if the associated company was incorporated under the law of the territory, or for the purpose of granting relief in taxing dividends received by companies.

• (2) For the purposes of this Schedule and section 54 of this Act—

• (a) section 533 of the Taxes Act (connected persons) applies; and

• (b) section 302 of the Taxes Act (meaning of " associated company " and " control") applies with the substitution of the words " six years " for " one year " in subsection (1) of that section.

SCHEDULE 14

PART I — Amendments with Respect to Expenditure Incurred on or after 1st April 1985

1

In section 46 of the Finance Act 1971 (machinery and plant on lease) after subsection (1) there shall be inserted the following subsection—

(1A) Where subsection (1) above applies, the question whether the provision of the machinery or plant is to be treated as being wholly and exclusively or only partly for the purposes of the trade referred to in paragraph (a) of that subsection shall be determined according to whether the machinery or plant was in fact provided wholly and exclusively for the purpose of letting otherwise than in the course of a trade or only partly for that purpose.

2

In paragraph 5 of Schedule 8 to that Act (use partly for trade purposes and partly for other purposes) in sub-paragraph (1) (first-year allowances)—

• (a) for the words from " that, during" to " used for other purposes " there shall be substituted " that the provision of the machinery or plant is partly for purposes other than those of a trade carried on by him";

• (b) for the words " machinery or plant were to be used only " there shall be substituted " provision of the machinery or plant were wholly and exclusively"; and

• (c) the words " during that period " shall be omitted.

PART II — Amendments with Respect to Chargeable Periods etc. ending on or after 1st April 1985

The Finance Act 1971

3

• (1) At the end of subsection (2A) of section 44 of the Finance Act 1971 (which was inserted by section 59 of the Finance Act 1984) there shall be added the words " and all such assessments and adjustments of assessments shall be made as may be necessary to give effect to this subsection".

• (2) In subsection (4) of that section (definition of "qualifying expenditure ") in paragraph (a), for the words from " which is in use " to " those purposes ", where those words secondly occur, there shall be substituted " being expenditure incurred in the chargeable period in question or its basis period or at any previous time, and "

• (3) In subsection (5) of that section (which among other matters requires, as a condition for bringing disposal value into account, that the machinery or plant has been in use for the purposes of the trade) for the words from " on the provision of which " to the end of paragraph (c) mere shall be substituted—

(a) on the provision of which for the purposes of the trade he has incurred capital expenditure; and (b) which belongs to him at some time in the chargeable period or its basis period ; and (c) in respect of which, in the chargeable period or its basis period, one of the following events occurs, namely— (i) the machinery or plant ceases to belong to him ; (ii) he loses possession of the machinery or plant in circumstances where it is reasonable to assume that the loss is permanent; (iii) the machinery or plant ceases to exist as such (as a result of destruction, dismantling or otherwise); (iv) the machinery or plant begins to be used wholly or partly for purposes which are other than those of the trade; (v) the trade is permanently discontinued (or is treated by virtue of any provision of the Tax Acts as permanently discontinued); and that is the first such event to occur

.

4

In subsection (1) of section 46 of that Act (machinery and plant on lease) for paragraph (6) there shall be substituted the following paragraph—

(b) at the time when the lessor permanently ceases to let the machinery or plant otherwise than in the course of a trade, the machinery or plant shall be treated for the purposes of this Chapter as being used wholly for purposes other than those of the trade referred to in paragraph (a) above

.

5

• (1) In Schedule 8 to that Act (supplementary provisions) in paragraph 4 (disposal before bringing into use) in sub-paragraph (1) for the words from " the following provisions " onwards there shall be substituted " where—

• (a) a first-year allowance is made in respect of capital expenditure on the provision of machinery or plant, and

• (b) in the chargeable period related to the incurring of that expenditure, the disposal value of that machinery or plant falls to be brought into account in accordance with subsection (5) of section 44 of this Act,

that expenditure shall not, by virtue of sub-paragraph (ii) of paragraph (a) of subsection (4) of that section, be excluded from the capital expenditure referred to in that paragraph ".

• (2) In sub-paragraph (2) of that paragraph for the words " referred to in " there shall be substituted " by reason of which disposal value falls to be brought into account as mentioned in "and for the words from " (a) paragraph (a) " to " referred to were " there shall be substituted " section 44 of this Act, as modified by that subparagraph, shall have effect as if any reference in subsection (4)(a) of that section to capital expenditure incurred were a reference to".

6

In paragraph 5 of that Schedule (use partly for trade etc. purposes and partly for other purposes) for sub-paragraphs (2) to (5) there shall be substituted the following sub-paragraphs—

(2) Where a person carrying on a trade incurs capital expenditure on the provision of machinery or plant partly for the purposes of that trade (in sub-paragraphs (4) to (6) below referred to as "the actual trade") and partly for other purposes, it shall be assumed for the purposes of section 44 of this Act that he incurred the expenditure on the provision of the machinery or plant wholly and exclusively for the purposes of a trade (in sub-paragraphs (4) to (6) below referred to as "the notional trade ") carried on by him separately from the actual trade and any other trade carried on by him. (3) If, for any chargeable period, a person who has incurred expenditure on the provision of machinery or plant for the purposes of a trade (in sub-paragraphs (4) to (6) below referred to as "the actual trade ") is required to bring the disposal value of the machinery or plant into account by reason of it beginning in that chargeable period or its basis period to be used partly, but not wholly, for purposes other than those of the actual trade, it shall be assumed for the purposes of section 44 of this Act that, immediately after the beginning of that chargeable period or its basis period, he incurs capital expenditure equal to that disposal value on the provision of the machinery or plant wholly and exclusively for the purposes of a trade (in sub-paragraphs (4) to (6) below referred to as "the notional trade ") carried on by him separately from the actual trade and any other trade carried on by him. (4) Without prejudice to sub-paragraphs (i) to (iii) of paragraph (c) of subsection (5) of section 44 of this Act, it shall be assumed for the purposes of that section that the notional trade is permanently discontinued on the machinery or plant beginning to be used wholly for purposes other than those of the actual trade. (5) The allowance or charge under section 44 of this Act which, on the above assumptions, and having regard to subparagraph (6) below, would fall to be made for any chargeable period in the case of the notional trade— (a) shall be reduced to such extent as may be just and reasonable having regard to all the relevant circumstances of the case and, in particular, to the extent to which the machinery or plant was used in that chargeable period or its basis period otherwise than for the purposes of the actual trade ; and (b) shall, as so reduced, be made for that chargeable period in the case of the actual trade. (6) If an allowance under section 44 of this Act falling to be made by virtue of this paragraph for any chargeable period in the case of the actual trade is not claimed or is disclaimed under subsection (2A) of that section, or is reduced in amount in accordance with a requirement under the proviso of subsection (2) of that section or under subsection (2A) of that section then, in determining the allowance or charge under that section which would fall to be made for any subsequent chargeable period in the case of the notional trade, any allowance falling to be made in the case of that trade for the first-mentioned chargeable period shall be treated as not claimed or as disclaimed or, as the case may require, as proportionately reduced.

7

• (1) In paragraph 6 of that Schedule (effect of subsidies towards wear and tear) in sub-paragraph (4),—

• (a) for the words from the beginning to " in respect thereof " there shall be substituted " If an allowance has been made under section 44 of this Act for a chargeable period prior to that in which or, as the case may be, in the basis period of which the first sum is so paid in respect of the machinery or plant"; and

• (b) for the words " permanently ceased to be used for the purposes " there shall be substituted " begun to be used wholly for purposes other than those".

• (2) In sub-paragraph (5) of that paragraph—

• (a) in paragraph (a) for the words "the machinery or plant is brought into use" there shall be substituted " capital expenditure was incurred on providing the machinery or plant wholly and exclusively";

• (b) in paragraph (b) for the words from " it ceases " to " with " there shall be substituted " the notional trade is treated by virtue of paragraph (c) below as permanently discontinued " and for the word " being " there shall be substituted " are";

• (c) in paragraph (c) after the word "that" there shall be inserted " without prejudice to sub-paragraphs (i) to (iii) of paragraph (c) of subsection (5) of that section " and for the words from " ceasing " onwards there shall be substituted " beginning to be used wholly or partly for purposes other that those of the actual trade"; and

• (d) paragraph (d) shall be omitted.

• (3) In sub-paragraph (6) of that paragraph—

• (a) after the word " claimed ", in the first place where it occurs, there shall be inserted " or is disclaimed under subsection (2A) of that section";

• (b) after the words " proviso to subsection (2) of that section " there shall be inserted " or under subsection (2A) of that section"; and

• (c) for the words from " claimed ", in the last place where it occurs, onwards there shall be substituted " claimed or as disclaimed or, as the case may require, as proportionately reduced".

8

• (1) In paragraph 7 of that Schedule (effect of use for purposes of trade where no allowances previously available), in: paragraph (a) of sub-paragraph (1) for the words from " but" to " circumstances " there shall be substituted " for purposes which were".

• (2) After that sub-paragraph there shall be inserted the following sub-paragraph—

(1A) Where sub-paragraph (1) above applies, the question whether the provision of the machinery or plant is to be taken to be wholly and exclusively or only partly for the purposes of the trade shall be determined according to whether the use referred to in paragraph (a) or, as the case may be, paragraph (b) of that sub-paragraph is wholly and exclusively or only partly for those purposes.

9

• (1) In paragraph 10 of that Schedule (expensive motor cars), in sub-paragraph (2)—

• (a) in paragraph (a) the words from "immediately" to "the expenditure " shall be omitted and for the words " brings the motor car into use " there shall be substituted " incurred the expenditure on the provision of the motor car wholly and exclusively";

• (b) paragraph (b), except the final word " and", shall be omitted; and

• (c) in paragraph (c), after the word " that" there shall be inserted " without prejudice to sub-paragraphs (i) to (iii) of paragraph (c) of subsection (5) of that section " and for the words from " ceases " onwards there shall be substituted " begins to be used wholly or partly for purposes other than those of the actual trade".

• (2) In sub-paragraph (4) of that paragraph, for the words from the beginning to " applies " there shall be substituted " Where the disposal value of the motor car falls to be taken into account by reason of an event falling within section 44(5)(c)(i) of this Act and that event is such a sale or the performance of such a contract as is referred to in paragraph 3 of this Schedule".

10

In paragraph 15(3) of that Schedule (application of provisions of section 48 of the Capital Allowances Act 1968 relating to successions to trades) after the words "by substituting" there shall be inserted—

(a) in subsection (1), for the words 'in use', in each place where they occur, the words 'either in use or provided and available for use'; and (b) in subsection (2), for the word 'used' the words 'either used or provided and available for use'; and (c)

.

The Finance Act 1974

11

In section 17(1) of the Finance Act 1974 (expenditure on fire safety) the words " and had been in use for the purposes of the trade " shall be omitted.

The Finance Act 1975

12

In section 14(1) of the Finance Act 1975 (expenditure on thermal insulation) the words " and had been in use for the purposes of the trade " shall be omitted.

The Finance (No. 2) Act 1975

13

In section 49(1) of the Finance (No. 2) Act 1975 (expenditure on safety at sports grounds) the words " and had been in use for the purposes of the trade " shall be omitted.

The Finance Act 1980

14

• (1) In section 65 of the Finance Act 1980 (writing-down allowances etc in case of leased assets), in subsection (2),—

• (a) in paragraph (a) the words from " immediately " to " brought into use " shall be omitted and for the words " brings the machinery or plant into use " there shall be substituted " incurred the expenditure on the provision of the machinery or plant wholly and exclusively";

• (b) paragraph (b), except the final word " and", shall be omitted; and

• (c) in paragraph (c), after the word "that" there shall be inserted " without prejudice to sub-paragraphs (i) to (iii) of paragraph (c) of subsection (5) of that section " and for the words from " ceases " onwards there shall be substituted " begins to be used wholly or partly for purposes other than those of the actual trade".

• (2) In subsection (3) of that section,—

• (a) after the word " claimed ", in the first place where it occurs, there shall be inserted " or is disclaimed under subsection (2A) of that section"; and

• (b) after the words " proviso to subsection (2) of that section " there shall be inserted " or under subsection (2A) of that section"; and

• (c) for the words from "claimed", in the last place where it occurs, onwards there shall be substituted " claimed or as disclaimed or, as the case may require, as proportionately reduced".

• (3) In subsection (4) of that section, for the words from "cease" onwards there shall be substituted " begin to be used wholly or partly for purposes other than those of the actual trade".

15

In section 71(1) of that Act (expenditure on quarantine premises) the words "and had been in use for the purposes of the trade " shall be omitted.

The Finance Act 1984

16

In Schedule 16 to the Finance Act 1984 (assumptions for certain calculations relating to foreign companies) in paragraph 10 (capital allowances) for the words from " section 44 " to " balancing adjustments), not" there shall be substituted " Chapter I of Part JJl of the Finance Act 1971 to have been provided for purposes wholly other than those of the trade and not

SCHEDULE 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Ships.

2

Any vehicle which is of such a description that section 43 of the Finance Act 1971 (exclusion of certain road vehicles) precludes the making of a first-year allowance in respect of capital expenditure incurred on its provision.

3

Machinery or plant to which section 46 of that Act applies (machinery or plant let by any person otherwise than in the course of a trade).

4

Machinery or plant falling within paragraph 5(2) of Schedule 8 to that Act (machinery or plant used partly for trade purposes and partly for other purposes).

5

Machinery or plant where the capital expenditure on its provision is expenditure to which paragraph 6 of that Schedule applies (subsidies towards wear and tear).

6

Machinery or plant falling within paragraph 7(1)(a) or paragraph 7(1)(b) of that Schedule (user after user not attracting capital allowances or after receipt by way of gift).

7

Motor cars falling within paragraph 10 of that Schedule.

8

Machinery or plant which is used in such a way that section 64 of the Finance Act 1980 (leased assets) precludes the making of a first-year allowance in respect of expenditure incurred on the provision of it for leasing.

9

Machinery or plant which is leased to two or more persons jointly in such circumstances that section 68 of the Finance Act 1980 precludes the making of a first-year allowance in respect of the whole or part of the capital expenditure incurred on its provision.

10

Television sets in respect of which the amount of a first-year allowance falls to be determined in accordance with paragraph 8 of Schedule 12 to the Finance Act 1980.

11

Machinery or plant in respect of expenditure on which section 70 of the Finance Act 1982 (assets leased outside the United Kingdom) provides for only a 10 per cent, writing-down allowance.

12

Machinery or plant in respect of which first-year allowances continue to be available by virtue of paragraph 2(2) of Schedule 12 to the Finance Act 1984 (contracts entered into on or before 13th March 1984) or paragraph 4 of that Schedule (expenditure qualifying for regional development grants etc.)

SCHEDULE 23. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE 17

Interpretation

1

• (1) In this Schedule—

• " allowance " means an allowance under Chapter I of Part III of the Finance Act 1971 ;

• " fixture " means any such machinery or plant as is referred to in section 59(1) of this Act;

• " interest in land " and " lease " shall be construed in accordance with sub-paragraph (2) below;

• " material purposes " means the purposes of Chapter I of Part III of the Finance Act 1971 ; and

• " relevant land ", in relation to a fixture, means the building or other description of land of which the fixture becomes part.

• (2) In this Schedule " interest in land " means—

• (a) the fee simple estate in the land or an agreement to acquire that estate;

• (b) in Scotland, the estate or interest of the proprietor of the dominium utile (or, in the case of property other than feudal property, of the owner) and any agreement to acquire such an estate or interest;

• (c) any leasehold estate in, or in Scotland lease of, the land (whether in the nature of a head-lease, sub-lease or underlease) and any agreement to acquire such an estate or, in Scotland, lease;

• (d) an easement or servitude or any agreement to acquire an easement or servitude; and

• (e) a licence to occupy land ;

and, except in the context of leasing machinery or plant, any reference in the following provisions of this Schedule to a lease is a reference to such a leasehold estate or, in Scotland, lease as is mentioned in paragraph (c) above or to such an agreement as is mentioned in that paragraph (and, in relation to such an agreement, the expression " grant" shall be construed accordingly).

• (3) If an interest in land is conveyed or assigned by way of security and subject to a right of redemption, then, so long as such a right subsists, the interest held by the creditor shall be treated for the purposes of this Schedule as held by the person having that right.

• (4) Any reference in the following provisions of this Schedule to a person being entitled to an allowance in respect of any capital expenditure incurred on the provision of a fixture is a reference to a case where

• (a) that person is, for any chargeable period, entitled to a first-year allowance in respect of that expenditure, or

• (b) that expenditure is taken into account in determining his qualifying expenditure for a chargeable period for the purposes of subsections (2) and (3) of section 44 of the Finance Act 1971 (whether or not an allowance is made to him for that period),

and any reference to a chargeable period for which a person is so entitled is a reference—

• (i) to the chargeable period referred to in paragraph (a) above; or

• (ii) to the chargeable period referred to in paragraph (b) above; or

• (iii) to any chargeable period which is subsequent to that referred to in paragraph (b) above but is not later than the chargeable period in which he is required to bring the disposal value of the fixture concerned into account for the purposes mentioned in paragraph (.b) above.

Expenditure incurred by holder of interest in land

2

• (1) Subject to sub-paragraph (2) below, in any case where—

• (a) a person incurs capital expenditure on the provision of machinery or plant either for the purposes of a trade carried on byhimor for leasing otherwise than in the course of a trade, and

• (b) the machinery or plant becomes a fixture, and

• (c) at the time the machinery or plant becomes a fixture he has an interest in the relevant land,

then, subject to paragraphs 3 and 7 below, on and after that time the fixture shall be treated for material purposes as belonging to the person concerned in consequence of his incurring the expenditure.

• (2) If, in respect of the same fixture, there are two or more persons with different interests in the relevant land to whom, by virtue of sub-paragraph (1) above, the fixture would (apart from" this sub-paragraph), be treated as belonging for material purposes, the only interest which shall be taken into account under that subparagraph is,—

• (a) if one of the interests is an interest falling within paragraph 1(2)(d) above, that interest;

• (b) if paragraph (a) above does not apply but one of the interests is an interest falling within paragraph 1(2)(e) above, that interest; and

• (c) in any other case,—

• (i) except in Scotland, that interest which is not in reversion (at law or in equity and whether directly or indirectly) on any other interest in the relevant land which is held by any of the persons referred to above; and

• (ii) in Scotland, that of whichever of those persons has, or last had, the right of use of the relevant land.

Expenditure incurred by equipment lessor

3

• (1) In any case where—

• (a) a person (in this Schedule referred to as " the equipment lessor") incurs capital expenditure on the provision of machinery or plant for leasing, and

• (b) an agreement is entered into for the lease, directly or indirectly from the equipment lessor, of the machinery or plant (otherwise than as part of the relevant land) to another person (in this Schedule referred to as " the equipment lessee") for the purposes of a trade carried on by the equipment lessee or for leasing otherwise than in the course of a trade, and

• (c) the machinery or plant becomes a fixture, and

• (d) if the expenditure referred to in paragraph (a) above had been incurred by the equipment lessee, the fixture would, by virtue of paragraph 2 above, have been treated for material purposes as belonging to him in consequence of his incurring the expenditure, and

• (e) the equipment lessor and the equipment lessee elect that this paragraph should apply,

then, subject to paragraph 7 below, on and after the time at which the expenditure is incurred the fixture shall be treated for material purposes as belonging to the equipment lessor in consequence of his incurring the expenditure.

• (2) An election under this paragraph shall be made by notice in writing to the inspector given before the expiry of the period of two years beginning at the end of the chargeable period related to the incurring of the expenditure referred to in sub-paragraph (1)(a) above ; but no election may be made under this paragraph if the equipment lessor and the equipment lessee are connected with each other within the terms of section 533 of the Taxes Act.

• (3) Where an election has been made under this paragraph with respect to a fixture, nothing in paragraph 2 above shall have the effect of treating the fixture for material purposes as belonging to the equipment lessee.

• (4) In the following provisions of this Schedule " equipment lease " means such an agreement as is mentioned in sub-paragraph (1)(b) above or a lease entered into pursuant to such an agreement.

Expenditure included in consideration for acquisition of existing interest in land

4

• (1) In any case where,—

• (a) after any machinery or plant has become a fixture, a person (in this paragraph referred to as " the purchaser ") acquires an interest in the relevant land, being an interest which was in existence prior to his acquisition of it, and

• (b) the consideration which the purchaser gives for that interest is or includes a capital sum which, in whole or in part, falls to be treated for material purposes as expenditure on the provision of the fixture, and

• (c) at the time of the purchaser's acquisition of his interest in the relevant land, either no person has previously become entitled to an allowance in respect of any capital expenditure incurred on the provision of the fixture or, if any person has become so entitled, that person has been or is required to bring the disposal value of the fixture into account under section 44 of the Finance Act 1971,

then, subject to paragraph 7 below, on and after the purchaser's acquisition of his interest in the relevant land, the fixture shall be treated for material purposes as belonging to him in consequence of his incurring expenditure as mentioned in paragraph (b) above.

• (2) If, in a case where paragraph (a) of sub-paragraph (1) above applies,—

• (a) the machinery or plant was, prior to the purchaser's acquisition of the interest in the relevant land, let under an equipment lease, and

• (b) in connection with the acquisition of the interest in the relevant land, the purchaser pays a capital sum to discharge the obligations of the equipment lessee under the equipment lease,

sub-paragraph (1) above shall apply as if that capital sum were such a capital sum as is referred to in paragraph (b) of that sub-paragraph.

Expenditure incurred by incoming lessee : election to transfer right to allowances

5

• (1) In any case where—

• (a) after any machinery or plant has become a fixture, a person (in this paragraph referred to as " the lessor ") who has an interest in the relevant land grants a lease, and

• (b) apart from paragraph 7 below, the lessor would be entitled, for the chargeable period related to the grant of the lease, to an allowance in respect of expenditure incurred on the provision of the fixture, and

• (c) the consideration which the lessee gives for the lease is or includes a capital sum which, in whole or in part, falls to be treated for material purposes as expenditure on the provision of the fixture, and

• (d) the lessor and the lessee make an election under this paragraph,

then, subject to paragraph 7 below, on and after the grant of the lease, the fixture shall be treated for material purposes as belonging to the lessee in consequence of his incurring expenditure as mentioned in paragraph (c) above.

• (2) If in any case the lessor is not within the charge to tax. it shall be assumed that he is within that charge for the purpose of determining whether the condition in sub-paragraph (1)(b) above is fulfilled.

• (3) An election under this paragraph shall be made by notice in writing to the inspector given within two years after the date on which the lease takes effect.

• (4) No election may be made under this paragraph if—

• (a) the lessor and the lessee are connected with each other within the terms of section 533 of the Taxes Act; or

• (b) it appears that the sole or main benefit which may be expected to accrue to the lessor from the grant of the lease and the making of an election is the obtaining of an allowance or deduction or a greater allowance or deduction or the avoidance or reduction of a charge under Chapter I of Part III of the Finance Act 1971.

Expenditure incurred by incoming lessee: lessor not entitled to allowances

6

In any case where—

• (a) after any machinery or plant has become a fixture, a person (in this paragraph referred to as " the lessor ") who has an interest in the relevant land grants a lease, but paragraph 5(1)(b) above does not apply in his case, and

• (b) the consideration which the lessee gives for the lease is or includes a capital sum which, in whole or in part, falls to be treated for material purposes as expenditure on the provision of the fixture, and

• (c) at the time of the grant of the lease, no person has previously become entitled to an allowance in respect of any capital expenditure incurred on the provision of the fixture, and

• (d) the fixture has not before that time been used for the purposes of a trade by the lessor or any person connected with him within the terms of section 533 of the Taxes Act,

then, subject to paragraph 7 below, on and after the grant of the lease, the fixture shall be treated for material purposes as belonging to the lessee in consequence of his incurring expenditure as mentioned in paragraph (b) above.

Cases where fixture is to be treated as ceasing to belong to particular person

7

• (1) The provisions of this paragraph and paragraph 8 below are without prejudice to any other circumstances in which the disposal value of a fixture falls to be brought into account in accordance with section 44 of the Finance Act 1971.

• (2) Subject to sub-paragraph (4) below, if at any time the person to whom a fixture is treated for material purposes as belonging by virtue of any of paragraphs 2, 4, 5 and 6 above ceases (whether by reason of the transfer, surrender, or expiry of the interest or otherwise) to have the qualifying interest, the fixture shall be treated for those purposes as ceasing to belong to him at that time.

• (3) In this paragraph and paragraph 9 below, "the qualifying interest" means—

• (a) where paragraph 2 or paragraph 4 above applies, the interest in the relevant land referred to in that paragraph ; and

• (b) where paragraph 5 or paragraph 6 above applies, the lease referred to in that paragraph ;

but if the qualifying interest is an agreement to acquire an interest in land and that interest in land is subsequently transferred or granted to the person referred to in sub-paragraph (2) above, the interest so transferred or granted shall be treated as the same interest as the qualifying interest.

• (4) For the purposes of sub-paragraph (2) above,—

• (a) if the qualifying interest ceases to exist by reason of its merger in another interest acquired by the person referred to in that sub-paragraph, that other interest shall be treated as the same interest as the qualifying interest;

• (b) if the qualifying interest is a lease and, on its termination, a new lease of the relevant land (with or without other land) is granted to the lessee, the new lease shall be treated as the same interest as the qualifying interest;

• (c) if the qualifying interest is a licence and, on its termination, a new licence to occupy the relevant land (with or without other land) is granted to the licensee, the new licence shall be treated as the same interest as the qualifying interest;

• (d) if the qualifying interest is a lease and, with the consent of the lessor, the lessee remains in possession of the relevant land after the termination of the lease but without a new lease being granted to him, the qualifying interest shall be treated as continuing to subsist so long as the lessee remains in possession of the relevant land.

• (5) At the time at which, by virtue of paragraph 5 above, the fixture concerned begins to be treated for material purposes as belonging to the lessee, it shall be treated for those purposes as ceasing to belong to the lessor (as defined in that paragraph).

• (6) Where, by virtue of sub-paragraph (2) above, on the termination of a lease or licence, a fixture is treated for material purposes as ceasing to belong to the outgoing lessee or licensee, it shall, on that termination, be treated for material purposes as beginning to belong to the person who, immediately before the termination, was the lessor under the lease or, as the case may be, the licensor under the licence.

• (7) If at any time a fixture is permanently severed from the relevant) land (so that it ceases to be a fixture) and, immediately before that time it was treated for material purposes as belonging to any person by virtue of any of the preceding provisions of this Schedule or sub-paragraph (2) or sub-paragraph (4) of paragraph 8 below, then, unless on its severance the fixture does in fact belong to that person, it shall be treated for those purposes as ceasing to belong to him at that time.

Special provisions as to equipment lessors

8

• (1) If, by virtue of an election under paragraph 3 above, a fixture is treated for material purposes as belonging to the equipment lessor and either,—

• (a) the equipment lessor at any time assigns his rights under an equipment lease, or

• (b) the financial obligations of the equipment lessee under an equipment lease are at any time discharged, on the payment of a capital sum or otherwise,

then, at that time (or, as the case may be, at the earliest of those times) the fixture shall be treated for material purposes as ceasing to belong to the equipment lessor by reason of a sale by him of the fixture.

• (2) If paragraph (a) of sub-paragraph (1) above applies, then, on and after the time of the assignment referred to in that paragraphs the fixture to which the agreement in question relates shall be treated for material purposes as belonging to the assignee and the consideration given by him for the assignment shall be treated for those purposes—

• (a) as the price received for the sale of the fixture by the assignor; and

• (b) as expenditure incurred by the assignee on acquiring the fixture.

• (3) On and after an assignment falling within paragraph (a) of sub-paragraph (1) above, that sub-paragraph shall have effect as if the machinery or plant (as a fixture) were treated for material purposes as belonging to the assignee by virtue of an election under paragraph 3 above and, accordingly, as if the assignee were the equipment lessor, as defined in that paragraph.

• (4) Where a capital sum is paid as mentioned in paragraph (b) of sub-paragraph (1) above, that capital sum shall be treated for material purposes—

• (a) as the price received for the sale of the fixture by the equipment lessor; and

• (b) if that capital sum is paid by the equipment lessee, as expenditure incurred by him on the provision of the fixture ;

and, where paragraph (b) above applies, on and after the time of that payment, the fixture shall be treated for material purposes as belonging to the equipment lessee.

• (5) Where the financial obligations of the equipment lessee under an equipment lease have become vested in any other person (by assignment, operation of law or otherwise) any reference in sub-paragraph (1)(b) or sub-paragraph (4) above to the equipment lessee shall be construed as a reference to the person in whom those obligations are for the time being vested when the capital sum is paid.

Disposal value of fixtures in certain cases

9

• (1) In any case where—

• (a) by virtue of paragraph 7 above, a fixture is at any time treated for material purposes as ceasing to belong to any person (in this paragraph referred to as "the former owner "), and

• (b) the qualifying interest continues in existence after that time (whether in the hands of the former owner or any other person) or would so continue but for its becoming merged in another interest, and

• (c) the occasion of the fixture ceasing to belong to the former owner is not its permanent severance from the relevant land (whether on disposal, demolition, destruction or otherwise),

the fixture shall be treated for material purposes as sold at that time by the former owner for a price determined in accordance with sub-paragraphs (2) to (6) below.

• (2) Subject to sub-paragraph (6) below, if the occasion of the fixture ceasing to belong to the former owner is the sale of the qualifying interest, the price referred to in sub-paragraph (1) above is that portion of the sale price of the qualifying interest which falls (or, if the purchaser were entitled to an allowance, would fall) to be treated for material purposes as expenditure incurred by the purchaser on the provision of the fixture.

• (3) If the fixture ceases to belong to the former owner by virtue of sub-paragraph (5) of paragraph 7 above, the price referred to in sub-paragraph (1) above is so much of the capital sum referred to in sub-paragraph (1)(c) of paragraph 5 above as falls to be treated for material purposes as expenditure by the lessee on the provision of the fixture.

• (4) If neither sub-paragraph (2) nor sub-paragraph (3) above applies, the price referred to in sub-paragraph (1) above is that portion of the price which, on a sale of the qualifying interest in the open market, would fall to be treated for material purposes as expenditure by the purchaser on the provision of the fixture.

• (5) The sale referred to in sub-paragraph (4) above shall be assumed to take place immediately before the event which causes the fixture to be treated for material purposes as ceasing to belong to the former owner ; but that event shall be disregarded in determining the open market price on that sale.

• (6) If the sale referred to in sub-paragraph (2) above is at a price lower than that which the qualifying interest would have fetched if sold in the open market, that sub-paragraph shall not apply unless the purchaser's expenditure on the acquisition of the fixture can be taken into account as mentioned in section 44(6)(b)(i) of the Finance Act 1971.

• (7) If the occasion of the fixture ceasing to belong to the former owner is the expiry of the qualifying interest, then, except in so far as the former owner receives any capital sum, by way of compensation or otherwise, by reference to the fixture, the disposal value of the fixture which falls to be brought into account under section 44 of the Finance Act 1971 shall be nil.

• (8) In any case where—

• (a) the disposal value of a fixture falls to be brought into account in accordance with section 44 of the Finance Act 1971 on the permanent discontinuance of the trade in circumstances where that value falls to be determined under paragraph (e) of subsection (6) of that section, and

• (b) before the occurrence of the later event referred to in that paragraph, the fixture is not permanently severed from the relevant land,

that paragraph shall apply as if the reference therein to paragraph (a) and paragraph (b) of that subsection were omitted; but if the event which follows the discontinuance of the trade is the sale of the qualifying interest, the disposal value of the fixture to be brought into account under that section shall be that portion of the sale price referred to in sub-paragraph (2) above.

• (9) If the disposal value of the fixture falls to be brought into account in accordance with section 44 of the Finance Act 1971 on its beginning to be used wholly or partly for purposes which are other than those of the trade, paragraph (f) of subsection (6) of that section shall apply as if the reference to the price which the machinery or plant would have fetched if sold on the open market were a reference to that portion of the price referred to in subparagraph (2) above.

• (10) If, on the occasion of the fixture being treated, by virtue of paragraph 7 above, as ceasing to belong to the former owner, another person incurs expenditure on the provision of the fixture, there shall be disregarded for material purposes so much (if any) of that expenditure as exceeds the disposal value which the former owner is required to bring into account in accordance with section 44 of the Finance Act 1971.

SCHEDULE 18

PART I — Expenditure on Purchase of Patent Rights

1

• (1) For any chargeable period for which a person within subsection (1) of section 378 of the Taxes Act has qualifying expenditure (as defined in paragraph 2 below) which exceeds any disposal value to be brought into account by him in accordance with paragraph 3 below, there shall be made to him,—

• (a) except where paragraph (b) or paragraph (c) below applies, a writing-down allowance of an amount equal, subject to sub-paragraph (2) below, to—

• (i) 25 per cent, of the excess, or

• (ii) a proportionately reduced percentage of the excess if the period is part only of a year, or if, in a case where the period is a year of assessment and the allowance falls to be made in taxing a trade, the trade has been carried on for part only thereof;

• (b) if an allowance falls to be made to that person in taxing his trade and the period is the chargeable period related to the permanent discontinuance of the trade, a balancing allowance equal to the whole of the excess ; and

• (c) if paragraph (b) above does not apply but the period is the chargeable period in which the last of the relevant patent rights comes to an end without any of those rights being revived, a balancing allowance equal to the whole of the excess.

• (2) For the purposes of sub-paragraph (1)(c) above, the " relevant patent rights " at any time are those—

• (a) on the purchase of which the person concerned has incurred capital expenditure which has been taken into account in determining his qualifying expenditure for any chargeable period ; and

• (b) which he has not wholly disposed of.

• (3) For any chargeable period for which a person's qualifying expenditure is less than the disposal value which he is to bring into account, there shall be made on him a balancing charge and the amount on which the charge is made shall be an amount equal to the difference.

2

For the purposes of paragraph 1 above, a person's qualifying expenditure for a chargeable period is the aggregate of the following amounts—

• (a) any capital expenditure incurred by him on the purchase of patent rights, being expenditure incurred during the chargeable period or its basis period or at any previous time, other than expenditure which, or any part of which, has formed part of his qualifying expenditure for any previous chargeable period; and

• (b) if, for the chargeable period immediately preceding the chargeable period in question, there was an excess of qualifying expenditure over disposal value, the balance of that excess after deducting any writing-down allowance under paragraph 1(1)(a) above made by reference thereto.

3

• (1) If, in any chargeable period or its basis period, a person sells the whole or any part of any patent rights on the purchase of which he has incurred capital expenditure, then, for the purposes of paragraphs 1 and 2 above, he is required to bring into account for that chargeable period disposal value equal, subject to sub-paragraphs (2) and (3) below, to the net proceeds to him of that sale.

• (2) The disposal value to be brought into account by any person in respect of any patent rights as a result of one or more sales falling within sub-paragraph (1) above shall not (or, as the case may be, shall not in the aggregate) exceed the capital expenditure incurred by him on the purchase of those rights.

• (3) Where the person mentioned in sub-paragraph (2) above has acquired the patent rights as a result of a transaction which was, or a series of transactions each of which was, between persons who are connected with each other within the terms of section 533 of the Taxes Act, that sub-paragraph shall have effect as if it referred to the capital expenditure on the purchase of the rights incurred by whichever party to that transaction, or to any of those transactions, incurred the greatest such expenditure.

4

Where a person incurs capital expenditure on the purchase of patent rights and either—

• (a) he and the seller are connected with each other within the terms of section 533 of the Taxes Act, or

• (b) it appears with respect to the sale, or with respect to transactions of which the sale is one, that the sole or main benefit which, but for this paragraph, might have been expected to accrue to the parties was the obtaining of an allowance under section 378 of the Taxes Act,

there shall be disregarded for the purposes of paragraphs 1 and 2 above so much (if any) of that expenditure as exceeds the disposal value to be brought into account by virtue of paragraph 3 above by reason of the sale.

PART II — Expenditure on Acquiring Know-How

5

• (1) For any chargeable period for which a person within subsection (1) of section 386 of the Taxes Act has qualifying expenditure (as denned in paragraph 6 below) which exceeds any disposal value to be brought into account by him in accordance with paragraph 7 below, there shall be made to him—

• (a) unless the period is the chargeable period related to the permanent discontinuance of the trade referred to in that subsection, a writing-down allowance of an amount equal, subject to sub-paragraph (2) below, to—

• (i) 25 per cent of the excess, or

• (ii) a proportionately reduced percentage of the excess if the period is part only of a year, or if the period is a year of assessment but the trade has been carried on for part only thereof; and

• (b) if the period is the chargeable period related to the permanent discontinuance of the trade, a balancing allowance equal to the whole of the excess.

• (2) For any chargeable period for which a person's qualifying expenditure is less than the disposal value which he is to bring into account, there shall be made on him a balancing charge and the amount on which the charge is made shall be an amount equal to the difference.

6

For the purposes of paragraph 5 above, a person's qualifying expenditure for a chargeable period is the aggregate of the following amounts—

• (a) any capital expenditure incurred by him on the acquisition of know-how, being expenditure incurred during the chargeable period or its basis period or at any previous time, other than expenditure which, or any part of which, has formed part of his qualifying expenditure for any previous chargeable period; and

• (b) if, for the chargeable period immediately preceding the chargeable period in question, there was an excess of qualifying expenditure over disposal value, the balance of that) excess after deducting any writing-down allowance under paragraph 5(1)(a) above made by reference thereto.

7

If, in any chargeable period or its basis period, a person sells any know-how, on the acquisition of which for use in a trade carried on by him he has incurred expenditure falling within subsection (1) of section 386 of the Taxes Act, then, for the purposes of paragraphs 5 and 6 above, he is required to bring into account for that chargeable period disposal value equal to the net proceeds to him of that sale.

8

Subsections (7) and (8) of section 386 of the Taxes Act (meaning of "know-how" and treatment of certain consideration) apply for the purposes of this Part of this Schedule as they apply for the purposes of that section.

SCHEDULE 19

Part I

1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part II

6

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part III

8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consideration for options

15

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part IV — Identification of Securities etc.

16

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part V

20

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part VI

22

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE 20

Part I

1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part II

Disposals on which relief may be given

5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gains qualifying for relief

6

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The amount available for relief : the basic rule

13

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aggregation of earlier business periods

14

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Relief given on earlier disposal

15

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aggregation of spouse’s interest in the business

16

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE 21

1

• (1) This Schedule has effect for determining the original market value of assets and the aggregate market value of assets as mentioned in subsection (1)(b) of section 71 of this Act (in this Schedule referred to as “the principal section”).

• (2) Expressions used in this Schedule have the same meaning as in the principal section.

2

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE 22

Introduction

1

• (1) In this Schedule " the first date " means 28th February 1985, " the second date " means 27th February 1986, and " the year " means the period beginning with the first date and ending with the second date.

• (2) In this Schedule—

• " chargeable securities" means the securities held by a person at any time in the year which fall within paragraph 3 below, and

• " deemed interest" means the interest he would have received in the year in respect of the chargeable securities if he were entitled to receive interest accruing in the period in which he held them in the year and interest had accrued from day to day and been apportioned accordingly.

The charge

2

• (1) This paragraph applies where the person has been served with a notice under paragraph 6 below.

• (2) If no interest was received by the person in the year in respect of the chargeable securities, he shall be treated as receiving on the second date annual profits or gains whose amount is equal to the deemed interest.

• (3) If interest was received by the person in the year in respect of the chargeable securities, and the amount of the deemed interest exceeds an amount equal to 110 per cent, of the amount so received, he shall be treated as receiving on the second date annual profits or gains whose amount is equal to the excess.

• (4) Profits or gains treated as received under sub-paragraph (2) or (3) above shall be chargeable to tax under Case VI of Schedule D for the chargeable period in which they are treated as received.

Chargeable securities

3

• (1) If the aggregate nominal value of securities held by the person on the second date is not more than the aggregate nominal value of securities held by him on the first date, the securities which fall within this paragraph are all the securities held by him at any time in the year other than those held by him throughout the year.

• (2) If the aggregate nominal value of securities held by the person on the second date (value A) exceeds the aggregate nominal value of securities held by him on the first date (value B) the securities which fall within this paragraph are those mentioned in sub-paragraph (5) below (for the purposes of which sub-paragraphs (3) and (4) below apply).

• (3) If the aggregate nominal value of securities of a particular kind held by the person on the second date exceeds the aggregate nominal value of securities of that kind held by him on the first date, securities which are of that kind, which are of a total nominal value equal to the excess and which were acquired by him in the year shall be taken into account for the purposes of sub-paragraph (4) below.

• (4) Securities (of one or more kinds) which are to be taken into account for the purposes of this sub-paragraph and which are of a total nominal value equal to the excess of value A over value B are excluded securities for the purposes of sub-paragraph (5) below.

• (5) The securities which fall within this paragraph are all the securities held by the person at any time in the year other than—

• (a) those which are excluded securities, and

• (b) those held by him throughout the year.

• (6) This is how to ascertain what securities are held by a person throughout the year—

• (a) find, for securities of each kind held by him at any time in the year, the lowest nominal value held in the year (value Q ;

• (b) take securities of that kind of a total nominal value equal to value C;

• (c) the securities so ascertained (of one or more kinds) are for the purposes of this paragraph held by him throughout the year.

• (7) In determining under sub-paragraph (3) or (4) above which securities to take into account or (as the case may be) which securities are excluded securities*—

• (a) those the person acquired later must be chosen before those he acquired earlier, and

• (b) as between those acquired on the same day those whose choice produces a smaller charge under paragraph 2 above must be chosen before those whose choice produces a greater charge.

• (8) In determining under sub-paragraph (6)(b) above which securities to take, those which the person acquired on terms entitling him to receive all interest payable on them on or after the first date must be chosen before others.

Charge eliminated or reduced

4

• (1) if the person makes a claim under this paragraph, then—

• (a) if amount E exceeds or is equal to amount D, he shall not be treated as receiving annual profits or gains under paragraph 2 above;

• (b) if amount D exceeds amount E, the amount of annual profits or gains he is treated as receiving under paragraph 2(2) or (3) above (as the case may be) shall be, instead of the amount there mentioned, the amount by which amount D exceeds amount E ;

and amounts D and E shall be determined as mentioned in the following provisions of this paragraph.

• (2) Amount D is the amount the person is treated as receiving under paragraph 2(2) above or (if paragraph 2(3) applies) the amount he would be treated as receiving under paragraph 2(3) if "110" were " 100 ".

• (3) Amount E is to be found by applying the formula—

$Y×1096Z×3$

.

• (4) Y is the amount of annual profits or gains the person would be treated as having received under this Schedule (ignoring this paragraph) if—

• (a) the references in paragraph 1(1) above to 28th February 1985 and 27th February 1986 were (respectively) to the appropriate day and 27th February 1985, and "the year" were construed accordingly,

• (b) paragraph 2(1) above were omitted,

• (c) in paragraph 2(3) above (where it would apply) " 110 " were " 100 ", and

• (d) in paragraph 5(5) below " 1985-86 " were " 1984-85 ".

• (5) Z is the number of days beginning with the appropriate day and ending with 27th February 1985.

• (6) " The appropriate day " means—

• (a) if the person held no securities on 28th February 1982, the first day (falling after 28th February 1982 and before 28th February 1985) on which he acquired securities, and

• (b) in any other case, 28th February 1982.

Exceptions

5

• (1) For the purposes of this Schedule a person is to be treated as not entitled to securities on a day if he carries on a trade on the day and if, were he to transfer them on that day, that transfer would fall to be taken into account for the purposes of the Tax Acts in computing the profits or losses of that trade.

• (2) Paragraph 2(2) or (3) above (as the case may be) does not apply if—

• (a) the person is an individual and on no day in the year the nominal value of securities held byhimexceeded £5,000,

• (b) the person is a personal representative and on no day in the year the nominal value of securities held by him as the deceased's personal representative exceeded £5,000,

• (c) the person is trustee of a settlement of property held on a disabled person's trusts and on no day m the year the nominal value of securities held by him as trustee of the settlement exceeded £5,000, or

• (d) the person does not fulfil the residence requirement for the year and is not a non-resident United Kingdom trader in the year.

• (3) For the purposes of this Schedule a person is to be treated as not entitled to securities if he is not ordinarily resident in the United Kingdom during the year and, if he became entitled in the year to any interest on the securities, it would not be liable to income tax by virtue of section 99 of the Taxes Act (securities free of income tax for residents abroad).

• (4) For the purposes of this Schedule a person who is not domiciled in the United Kingdom at any time in the year, and is either not ordinarily resident in the United Kingdom during the year or a non-resident United Kingdom trader in the year, is to be treated as not entitled to securities which are FOTRA securities.

• (5) For the purposes of this Schedule a person who is an individual is to be treated as not entitled to securities in the case of which, if he became entitled in the year of assessment 1985-86 to any interest on them, he would be liable, in respect of the interest, to tax chargeable under Case IV or Case V of Schedule D and computed on the amount of sums received in the United Kingdom.

• (6) Paragraph 2(2) or (3) above (as the case may be) does not apply if the person is an individual who dies in the year.

• (7) Paragraph 2(2) or (3) above (as the case may be) applies, in a case where the person is a company and the second date does not fall within an accounting period of the company, as if the reference to the second date were to the last day which does so fall.

• (8) For the purposes of this paragraph a person fulfils the residence requirement for the year if he is resident in the United Kingdom during any part of the year or is ordinarily resident in the United Kingdom during the year.

• (9) For the purposes of this paragraph a person is a non-resident United Kingdom trader in the year if during any part of it he is (though neither resident during any part of it nor ordinarily resident during it) carrying on a trade in the United Kingdom through a branch or agency.

• (10) But if (apart from this sub-paragraph) a person who is a non-resident United Kingdom trader in the year would for the purposes of this Schedule be treated as entitled to securities at a time in the year, he is not to be treated as so entitled for those purposes unless the securities were at some time in the year used or held for the purposes of the branch or agency and (except where the person concerned is a company) situated in the United Kingdom.

• (11) For the purposes of this paragraph " disabled person's trusts " means trusts falling within paragraph 5(1) of Schedule 1 to the Capital Gains Tax Act 1979, " branch or agency " has the meaning given by section 12(3) of that Act, and the place where securities are situated shall be determined in accordance with section 18(4) of that Act.

• (12) For the purposes of this paragraph " FOTRA securities " means securities issued with the condition mentioned in section 22(1) of the Finance (No. 2) Act 1931 (securities free of tax for residents abroad) as modified by virtue of section 60(1) of the Finance Act 1940.

Information etc.

6

• (1) Any person upon whom notice is served by an inspector, requiring the person to furnish a statement of and particulars relating to any securities held by the person at any time in the year, shall furnish such a statement and such particulars in the form and within the time (not being less than 28 days) required by the notice ; and an inspector may serve further notices whenever he considers it necessary for the purposes of this Schedule until complete particulars have been furnished to his satisfaction.

• (2) If a person fails to furnish any statement or particulars required under this paragraph, or if an inspector is not satisfied with any statement or particulars furnished under this paragraph, he may make an estimate of the amount of the annual profits or gains which the person is to be treated as receiving under the preceding provisions of this Schedule.

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

Paragraph 6(1) of Schedule 22 to the Finance Act 1985

.

Offshore funds

7

• (1) Any amount which, on the assumptions mentioned in subparagraph (2) below, an offshore fund would be treated as receiving as annual profits or gains by virtue of paragraph 2(2) or (3) above (as the case may be) shall for the purposes of Schedule 19 to the Finance Act 1984 be taken to be part of the United Kingdom equivalent profits of the fund for the account period of the fund in which 27th February 1986 falls.

• (2) The assumptions are—

• (a) that the offshore fund is a company which is resident in the United Kingdom during the period beginning with the appropriate day and ending with 27th February 1986,