Schedule 6
Finance (No. 2) Bill
5:00 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I wish to raise some worries that the Chartered Institute of Taxation had about the original paragraph 6 that the amendment would delete and I wish to clarify whether those worries have been addressed by the amendments tabled by the Paymaster General. The institute is worried about the way in which the measures relate to sub-participations in loans and how they are dealt with. For the sake of clarity, I shall set out how matters work. What usually happens in respect of a funded sub-participation is that the originator would derecognise part of its assets for accounting purposes. Let us suppose that a loan of £100 is originated, of which 40 per cent. is sub-participated. The originator only shows a loan of £60 on its balance sheet, the profit and loss account only shows income of £60 and nothing is recorded for the remaining 40 per cent. asset or the 40 per cent. liability under the sub-participation agreement.
The Chartered Institute of Taxation believed that, under the original paragraph 6, the proposed new section 85C of the Finance Act 1996 will now require an originator to recognise income on the full £100 of the loan asset. When the sub-participation agreement is a loan relationship under proposed new section 85C, the originator will, in addition to taxing the debits and credits on the whole £100 of the loan asset, be able to recognise the debits and credits on the loan liability of £40, so the net result is that it still shows an asset of£60 and it shows the income of £60 on its profit and loss account.
The Chartered Institute of Taxation’s worry about the matter and the Government’s original proposals was that, when the sub-participation agreement is not a loan relationship under proposed new section 85C, the originator seems to be taxed on the income of£100 from the loan asset, but there is no mechanism to give relief to the amounts paid away on the sub-participation agreement. Therefore, it would be taxed on £100 in its profit and loss account, but it would have no relief on the interest it pays on the 40 per cent. ithas given away—as it were—to someone involvedin sub-participation, unless of course the “fairly represent” provision in section 84 of the FinanceAct 1996 overrides that position. I should be grateful if the Paymaster General would say whether she believes that the “fairly represent” provision in section 84 does override the treatment of the sub-participation where there is not a loan relationship in accordance with proposed new section 85C.
There are a couple of other issues to do with this relationship that I ought to go through. Under proposed new section 85C, there are potential consequences for originators in relation to what might happen where the underlying asset is impaired. Proposed new section 85C requires the originator to recognise the entire loss. The originator would also be entitled to recognise the gain under the sub-participation agreement. There should be no impact overall in respect of this, unless one of two conditions are met. Either the section 209 “results dependent” provision of the Income and Corporation Taxes Act 1988 applies to deny interest deductions, or the sub-participant is a connected party. Section 209
“could apply wherever the sub-participation counterparty is not within charge to corporation tax (eg neither a UK bank nor a UK branch)”
and that would then deny the interest deductions required to balance out the interest of £100 on this sub-participation.