EXPLANATORY NOTE

This clause amends the transitional rules to the loan relationships regime for corporate debt introduced in 1996. The changes ensure that amounts accrued on deep discount and deep gain securities held by subsidiaries of banks before the 1996 legislation will be brought into charge to tax under those rules. In particular, the clause affects amounts frozen at 28 November 1994 under special rules for banking subsidiaries, and differences which arose on a change of accounting basis on transition to the new regime for loan relationships. Provision is also made for the frozen amounts to be charged immediately if the company becomes non-resident, to prevent companies from escaping tax on them in this way. The clause will take effect from 15 February 1999, the date the change was announced.

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Subsections 1 and 2 insert new subparagraphs into paragraphs 19 and 20 respectively of Schedule 15 Finance Act 1996. These paragraphs deal among other things with securities which fell within the deep discount security and deep gain security regimes before 1996 and which were within the rules in section 61-66 Finance Act 1993 that applied to securities held by subsidiaries or associates of banks and also to certain securities issued cross border by members of groups.

The new paragraphs now make it clear that any income that accrued before the rules for bank subsidiaries (and certain cross-border loans by groups) came into force and which was held over until disposal of the security is to be brought into account as a non-trading credit under the loan relationships rules in Finance Act 1996.

Subsection 3 corrects an error in the transitional provisions for deep discounted securities which entered the loan relationships regime on 1 April 1996. Before the amendment made by the subsection, the transitional rules which bridged the gap between the tax value of the security at 31 March 1996 and its tax value at 1 April 1996 did not apply to deep discounted securities that were within the special regime for cross-border loans and for associates and subsidiaries of banks. The effect of the sub-section is to bring those particular securities within the transitional provisions.

Subsections 4 and 5 amend the rules for discounted securities held by associates and subsidiaries of banks and others. They change the list of occasions which trigger the bringing into account for tax of the amounts accrued up to the start of those rules. As well as a transfer or redemption of the security there is now added any occasion which would be a disposal of a security for the purposes of the Taxation of Chargeable Gains Act 1992. This includes in particular an occasion on which a company ceases to be resident in the United Kingdom. Under section 185 of that Act a company which ceases to be resident is treated as if it disposed of its assets.

Sub-sections 6 to 8 set out the commencement rules for different parts of the section. In general the subsections apply in relation to any occasion on which income arises or assets are disposed of on or after 15 February 1999, the date the government announced its intention to legislate.

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Generally under provisions enacted in 1984 and 1989 the profit represented by the discount on securities held by persons other than financial traders (such as banks) was taxed only on redemption or transfer. In 1993 legislation was introduced to stop a cross-border mismatch involving companies within the same group but in different tax jurisdictions. Where a UK company held a discounted security issued by a non-resident associate, it was taxed on any accruing discount year by year as it accrued.

These rules were extended in 1995 to all discounted securities held by associates and subsidiaries of banks. Banks had been seeking to lend on discounted terms, but in order to prevent the yearly recognition for tax purposes of the accruing discount, they arranged for the loans to be made by non-trading subsidiaries which fell within the 1984 and 1989 rules. The 1995 amendments to the 1993 rules prevented this.

But under the 1993 and 1995 rules any accruing discount on these securities up to 28 November 1994 (or 1 April 1993 for certain cross-border loans) - the dates the legislation started - was "frozen" and only brought into account on the disposal or redemption of the security.

In the Finance Act 1996 a complete new system of taxation for debt securities held and issued by companies was introduced. This applied an annual accruals basis to discounts and so the previous rules were no longer needed and were repealed from 31 March 1996.

Where a security affected by the 1993 and 1995 rules was still held at 31 March 1996, paragraphs 19 and 20 of Schedule 15 Finance Act 1996 preserved the "frozen" income but did not make it clear how it was to be brought into account for tax purposes.