Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN16 Alternative finance arrangements

Who is likely to be affected?

1   Individuals and companies wishing to invest in, and companies wishing to raise funds through, alternative finance arrangements that are similar to debt securities ("sukuk").

General description of the measure

2   Legislation will be introduced in Finance Bill 2007 to provide new rules on the taxation of certain types of investment bonds, known as "sukuk", which satisfy the Shari'a law prohibition on paying or receiving interest. These products replicate the economic effect of debt securities on which interest is payable, and the measure will ensure that they are taxed on a par with equivalent conventional securities.

3   The measure will also make a small change to previous legislation on alternative finance, to put the tax treatment of profit share agency arrangements beyond doubt.

Operative date

4   The changes will apply to arrangements entered into on or after 6 April 2007 for income tax purposes and 1 April 2007 for corporation tax purposes. For companies, they will also apply to profits or losses arising on or after 1 April 2007 from existing investment bonds within the statutory definition. For income tax payers, they will apply to amounts received or paid on or after 6 April 2007 in relation to arrangements entered into before that date.

Current law and proposed revisions

5   Finance Act 2005 and FA 2006 introduced legislation to enable finance arrangements that are structured so that they do not involve the payment or receipt of interest, to be taxed in a similar manner to those involving interest.

6   The new provisions build on the legislation in FA 2005 and FA 2006 by providing for alternative financial arrangements involving the issue of certain types of investment bonds ("sukuk") that are broadly equivalent to debt securities, to be taxed in a similar manner to such securities.

7   The new rules will provide that where the arrangements meet certain conditions, amounts paid by the issuer to the holders of such bonds will be deductible under the tax rules on loan relationships in the hands of the issuer, and taxable as if they were interest where the holder is subject to income tax, or under the loan relationships rules where the holder is subject to corporation tax. A gain on disposal of a bond by a person other than a company will be taxable under capital gains tax rules, except where the bond will be treated under the new rules as a qualifying corporate bond, and will come with the loan relationships rules in the case of a company. Bonds that are convertible into, or exchangeable for, shares will be taxed in the same way as conventional convertible or exchangeable securities.

8   The legislation will also make a small amendment to section 49A of FA 2005 to make it clear that in alternative finance arrangements involving a profit share agency, the agent is treated, for all tax purposes, as entitled to the profits taxable under that section.

Further advice

9   Draft legislation and an explanatory note have been published today and are available on the HM Revenue & Customs website.

10 If you have any questions about this change, or any comments on the draft legislation, please contact Tony Sadler on 020 7147 2608 (email: tony.sadler@hmrc.gsi.gov.uk) or Lesley Hamilton on 020 7147 2564 (email: lesley.hamilton@hmrc.gsi.gov.uk). A Regulatory Impact Assessment on these changes, together with other information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk