House of Commons portcullis
House of Commons
Session 2003 - 04
Internet Publications
Other Bills before Parliament

Finance Bill


Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership

105

 

(5)   

For the purposes of subsections (2) and (3) the part of an amount that

derives from a capital allowance or a deduction made under section

42(1) of the Finance (No. 2) Act 1992 shall be determined on such basis

as is just and reasonable.

(6)   

In this section “the first restricted year” and “the pre-announcement

5

allowance” have the meanings given by section 118ZJ.”

(2)   

In section 117(2) of the Taxes Act 1988, in paragraph (a) of the definition of “the

aggregate amount”, after “a relevant year of assessment” there is inserted “or a

qualifying year of assessment within the meaning of section 118ZE”.

(3)   

Section 118ZB of the Taxes Act 1988 (restriction on relief: members of limited

10

liability partnerships) is renumbered as subsection (1) of that section and after

that provision there is added—

“(2)   

However, section 117 does not apply in relation to a loss sustained by

an individual in a trade, or interest paid by him in connection with the

carrying on of a trade, in a qualifying year of assessment within the

15

meaning of section 118ZE.”

(4)   

In section 118ZD of the Taxes Act 1988 (carry forward of unrelieved losses by

members of limited liability partnerships), in subsection (2), for “and 118” there

is substituted “, 118 and 118ZE”.

Individuals in partnership: exit charge

20

120     

Losses derived from exploiting licence: introductory

(1)   

Section 121 (charge to income tax) applies in relation to an individual who

carries on or has carried on a trade in partnership if—

(a)   

there is a disposal on or after 10 February 2004 of—

(i)   

any licence acquired in carrying on the trade; or

25

(ii)   

any rights to income under any agreement that is related to or

contains such a licence;

(b)   

the individual receives any non-taxable consideration for the disposal

(“relevant consideration”); and

(c)   

he has made a claim under section 380 or 381 of the Taxes Act 1988 in

30

respect of a licence-related loss sustained in the trade in a qualifying

year (“a relevant claim”).

(2)   

A “licence-related loss” means a loss that derives to any extent from

expenditure incurred in the trade in exploiting the licence.

(3)   

In relation to an individual who carried on the trade at any time before 26

35

March 2004, the reference in subsection (2) to expenditure does not include

expenditure incurred before 10 February 2004.

(4)   

A “qualifying year” means a year of assessment at any time during which the

individual carried on the trade in partnership which is also—

(a)   

the year of assessment in which the trade is first carried on by him or

40

any of the next three years of assessment; and

(b)   

a year of assessment in which he did not devote a significant amount of

time to the trade (within the meaning given by section 124).

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership

106

 

(5)   

The reference in subsection (1)(b) to “non-taxable” consideration is to

consideration—

(a)   

that (apart from section 121) is not chargeable to income tax; and

(b)   

whose receipt is not an exit event for the purposes of section 114;

   

and it is immaterial for the purposes of subsection (1)(b) whether the non-

5

taxable consideration is the only consideration received by the individual for

the disposal.

(6)   

For the purposes of this section and sections 121 to 123, an agreement is related

to a licence if they are entered into in pursuance of the same arrangement

(regardless of the date on which either is entered into).

10

(7)   

For the purposes of this section and sections 121 to 123 an agreement, or part

of an agreement, that imposes an obligation to do a thing (rather than merely

conferring authority to do it) is not for that reason to be regarded as not being

a licence; and references to “exploiting” a licence shall be construed

accordingly.

15

121     

Charge to income tax

(1)   

A chargeable event occurs whenever, on or after 10 February 2004, an

individual who carries on or has carried on a trade in partnership—

(a)   

receives relevant consideration, if by the time he has received it he has

(at any time) made a relevant claim; or

20

(b)   

makes a relevant claim, if by the time he has made it he has received

relevant consideration.

(2)   

Where, as respects an individual, one or more chargeable events occurs in a

year of assessment in relation to a licence (“the licence in question”), so much

of the total consideration as does not exceed the chargeable amount shall be

25

treated as—

(a)   

annual profits or gains of the individual of that year of assessment; and

(b)   

chargeable to income tax under Case VI of Schedule D.

(3)   

The “total consideration” means the total amount or value of the relevant

consideration that by the end of that year of assessment has been received by

30

the individual (whether or not in that year of assessment).

(4)   

To find the chargeable amount—

(a)   

take so much of the total consideration as does not exceed the net-

licence related loss; and

(b)   

reduce the amount found under paragraph (a) (but not below nil) by

35

the amount of any relevant consideration that by reason of this section

has been treated as annual profits or gains of previous years of

assessment.

(5)   

The net licence-related loss is the amount, computed as at the end of the year

of assessment in which the chargeable event occurs, by which A exceeds B,

40

where—

   

A is the total of the individual’s claimed licence-related losses for

qualifying years; and

   

B is the total of his licence-related profits for any years of assessment.

(6)   

In subsections (3) and (4), the references to relevant consideration are to

45

relevant consideration received on or after 10 February 2004 and relating to the

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership

107

 

licence in question (and where relevant consideration is received for a disposal

of rights to income under any agreement related to or containing a licence, the

consideration shall be regarded for the purposes of this section as relating to

the licence).

(7)   

In this section “relevant consideration”, “relevant claim” and “qualifying year”

5

have the meanings given by section 120.

122     

Definitions for purposes of section 121

(1)   

This section applies for the purposes of section 121(5).

(2)   

The individual’s “claimed licence-related loss” for a qualifying year is so much

of the loss (if any) sustained by him in the trade in that year as derives from

10

expenditure incurred in the trade in exploiting the licence in question and is

loss—

(a)   

in respect of which he has claimed relief under section 380 or 381 of the

Taxes Act 1988; or

(b)   

that he has claimed as an allowable loss under section 72 of the Finance

15

Act 1991 (c. 31).

(3)   

For the purposes of subsection (2) the part of a loss that falls within that

subsection shall be determined on such basis as is just and reasonable.

(4)   

In relation to an individual who carried on the trade at any time before 26

March 2004, the reference in subsection (2) to expenditure does not include

20

expenditure incurred before 10 February 2004.

(5)   

As respects any year of assessment, the individual’s “licence-related profit” is

such part of his profit (if any) from the trade for that year of assessment as

derives from income arising from any agreement that is related to or contains

the licence in question.

25

(6)   

The part of a profit that derives from such income shall be determined on such

basis as is just and reasonable.

123     

Disposals to which section 120 applies

(1)   

The reference in section 120(1)(a) to a disposal of such a licence or rights as are

there mentioned includes, in particular—

30

(a)   

the revocation of the licence;

(b)   

the disposal, giving up or loss by the individual, or by a partnership of

which he is a member, of any right under the licence;

(c)   

any disposal, giving up or loss by the individual, or by a partnership of

which he is a member, of any right to any income (or any part of any

35

income) under an agreement that is related to or contains the licence (“a

licence-related agreement”);

(d)   

any default in the payment of income to which the individual, or a

partnership of which he is a member, has a right under a licence-related

agreement;

40

(e)   

a change in the individual’s entitlement to any profits deriving to any

extent from such income, such that his share of the profits is reduced or

extinguished;

(f)   

a change in the individual’s entitlement to any losses deriving to any

extent from expenditure incurred in exploiting the licence, such that he

45

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership

108

 

becomes entitled to a share, or a greater share, of the losses without

becoming entitled to a corresponding share of profits;

(g)   

the disposal, giving up or loss of the individual’s interest in a

partnership that has the licence or a right to income under a licence-

related agreement, including the dissolution of the partnership.

5

(2)   

It is immaterial for the purposes of section 120(1)(a) and subsection (1)(b) and

(c) whether the licence or right is disposed of alone or as part of a larger

disposal (and the references here to disposal of a right include giving up or

loss).

(3)   

If there is an agreement under which the individual is entitled—

10

(a)   

to a particular share of any profits or losses arising in a period, and

(b)   

to a different share of any profits or losses arising in a succeeding

period (“the later period”),

   

his entitlement to the profits or losses arising in the later period shall be treated

for the purposes of subsection (1)(e) and (f) as changing at the beginning of the

15

later period; and in paragraph (a) and (b) of this subsection a “share” of profits

or losses includes a nil share.

124     

“A significant amount of time”

(1)   

For the purposes of section 120(4)(b) the individual shall be treated as having

“devoted a significant amount of time to the trade” in a given year of

20

assessment if, for the whole of the relevant period, he spent an average of at

least ten hours a week personally engaged in activities carried on for the

purposes of the trade.

(2)   

“The relevant period” means the basis period for the year of assessment in

question, except that—

25

(a)   

if the basis period is less than six months and begins with the date when

the individual first carried on the trade, “the relevant period” means six

months beginning with that date; and

(b)   

if the basis period is less than six months and ends with the date when

the individual ceased to carry on the trade, “the relevant period” means

30

six months ending with that date.

(3)   

In this section “basis period” means (subject to subsection (4)) the basis period

given by sections 60 to 63 of the Taxes Act 1988 as applied by section 111(4) and

(5) of that Act.

(4)   

The basis period for a year of assessment to which section 61(1) of that Act

35

applies is to be taken for the purposes of this section to be the period beginning

with the date when the individual first carried on the trade and ending with

the end of the year of assessment.

Companies in partnership

125     

Companies in partnership

40

(1)   

This section applies if—

(a)   

on or after 17 March 2004, a company that is or has been a member of a

partnership—

(i)   

directly or indirectly draws out or receives back any capital

from the partnership; or

45

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership

109

 

(ii)   

receives consideration for a disposal on or after 17 March 2004

of all or any of its interest in the partnership;

(b)   

as at the relevant time, the sum of—

(i)   

the total amount of any relevant withdrawals, and

(ii)   

the total amount or value of any relevant consideration,

5

   

exceeds the company’s contribution to the partnership;

(c)   

that excess (or any part of it) results directly or indirectly from an

arrangement under which any relevant profit was shared in such a way

that the company was not allocated all or part of its due share of the

profit; and

10

(d)   

if the company’s due shares of relevant profits had been allocated to the

company, some or all of them would have been chargeable to

corporation tax.

(2)   

For the purposes of this section—

(a)   

“the relevant time” means the time immediately after the capital is

15

drawn out or received back or (as the case may be) the consideration is

received;

(b)   

a “relevant withdrawal” means any capital that the company has,

directly or indirectly, drawn out or received back from the partnership

at any time on or after 17 March 2004;

20

(c)   

“relevant consideration” means consideration received by the company

at any time on or after 17 March 2004 for the disposal on or after that

date of all or any of its interest in the partnership;

(d)   

“the company’s contribution to the partnership” means the sum of—

(i)   

the amount that it has contributed to the partnership as capital

25

(excluding any amount originally contributed by a person from

whom the company acquired an interest in the partnership);

and

(ii)   

any amount paid by the company to such a person for such an

interest;

30

(e)   

a “relevant profit” is the profit of the partnership computed for any

period, but does not include any profit, or any part of a profit, that

derives from income arising before 17th March 2004;

(f)   

the company’s “due share” of any relevant profit is the share of the

profit that the company would have been allocated if it had been

35

allocated a share calculated by reference to the percentage of the total

capital contributed (as defined by subsection (3)) that was contributed

by it.

(3)   

To find “the total capital contributed” for the purposes of subsection (2)(f)—

(a)   

find, as respects the end of each day in the period for which the profit

40

was computed, the total amount of capital that as at that time had been

contributed to the partnership and had not been drawn out or received

back;

(b)   

aggregate those amounts; and

(c)   

divide by the number of days in that period.

45

(4)   

Where this section applies, the company shall be treated as receiving, at the

relevant time, annual profits or gains which are of an amount equal to the

chargeable amount and chargeable to tax under Case VI of Schedule D.

(5)   

The chargeable amount is the lower of—

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous

110

 

(a)   

the amount by which, at the relevant time, the sum of the total amount

of any relevant withdrawals and the total amount or value of any

relevant consideration exceeds the company’s contribution to the

partnership; and

(b)   

the amount by which, at the relevant time, the total amount of the

5

company’s due shares of relevant profits exceeds the total amount of

the shares of relevant profits that were actually allocated to the

company.

(6)   

Where this section applies on more than one occasion in relation to the same

company and partnership, on each occasion after the first the amount found

10

under each of paragraphs (a) and (b) of subsection (5) shall be reduced (but not

below nil) by any amount found under that paragraph on any of the previous

occasions that gave rise to a charge to tax.

126     

Companies in partnership: supplementary

(1)   

In section 125 and this section “capital” includes—

15

(a)   

anything accounted for as partners’ capital, or partners’ equity, in the

accounts of the partnership drawn up in accordance with generally

accepted accountancy practice; or

(b)   

if no such accounts are drawn up, anything that would be so accounted

for if such accounts had been drawn up.

20

(2)   

Where a partnership is dissolved by reason of one of the partners acquiring the

interests of the others, the remaining partner is to be treated for the purposes

of section 125 as having drawn out his and the others’ shares of capital from

the partnership.

(3)   

For the purposes of section 125(2)(e), where a profit for a period derives partly

25

from income arising before 17th March 2004, the part of the profit that derives

from such income shall be determined on such basis as is just and reasonable.

(4)   

For the purposes of section 125(2)(f) the capital contributed by the company

shall be taken to include amounts originally contributed as mentioned in

section 125(2)(d)(i).

30

(5)   

In section 125(3) the reference to capital that had been contributed includes

amounts purporting to be provided by way of loan where the loan—

(a)   

carries no interest; or

(b)   

carries interest at a rate less than that which might have been expected

if the loan had been between independent persons dealing at arm’s

35

length.

(6)   

For the purposes of section 125 a partnership is to be treated as the same

partnership notwithstanding a change in membership if any person who was

a member before the change remains a member after it.

Chapter 10

40

Avoidance: miscellaneous

127     

Finance leasebacks

(1)   

After section 228 of the Capital Allowances Act 2001 (c. 2) (sale and leaseback:

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 10 — Avoidance: miscellaneous

111

 

election) insert—

“Finance leaseback: parties’ income and profits

228A  Application of sections 228B to 228E

(1)   

Sections 228B to 228E apply where—

(a)   

plant or machinery is the subject of a sale and finance leaseback

5

for the purposes of section 221, and

(b)   

section 222 (restriction of disposal value) applies.

(2)   

Sections 228B to 228D also apply, with the modifications set out in

section 228F, where plant or machinery is the subject of a lease and

finance leaseback (as defined in section 228F).

10

228B     Lessee’s income or profits: deductions

(1)   

For the purpose of income tax or corporation tax, in calculating the

lessee’s income or profits for a period of account the amount deducted

in respect of amounts payable under the leaseback may not exceed the

permitted maximum.

15

(2)   

The permitted maximum is the total of—

(a)   

finance charges shown in the accounts, and

(b)   

depreciation, taking the value of the plant or machinery at the

beginning of the leaseback to be the restricted disposal value.

(3)   

In relation to a period of account during which the leaseback

20

terminates, the permitted maximum shall also include an amount

calculated in accordance with subsection (4).

(4)   

The calculation is—equation: cross[(*s12.00s*)times[char[C],char[u],char[r],char[r],char[e],char[n],char[t],string[

" "],char[B],char[o],char[o],char[k],string[" "],char[V],char[a],char[l],char[u],

char[e]],over[(*s12.00s*)times[char[O],char[r],char[i],char[g],char[i],char[n],char[

a],char[l],string[" "],char[(*s12.00s*)C],char[o],char[n],char[s],char[i],char[d],

char[e],char[r],char[a],char[t],char[i],char[o],char[n]],times[(*s12.00s*)char[O],

char[r],char[i],char[g],char[(*s12.00s*)i],char[(*s12.00s*)n],char[a],char[l],string[

" "],char[B],char[o],char[o],char[k],string[" "],char[V],char[a],char[l],char[u],

char[e]]]]

where—

“Current Book Value” means the net book value of the leased plant

25

or machinery immediately before the termination,

“Original Consideration” means the consideration payable to S for

entering into the relevant transaction, and

“Original Book Value” means the net book value of the leased

plant or machinery at the beginning of the leaseback.

30

228C  Lessee’s income or profits: termination of leaseback

(1)   

Subsection (2) applies where the leaseback terminates.

(2)   

For the purpose of the calculation of income tax or corporation tax, the

income or profits of the lessee from the relevant qualifying activity for

the period in which the termination occurs shall be increased by an

35

amount calculated in accordance with subsection (3).

(3)   

The calculation is—equation: cross[(*s12.00s*)times[char[N],char[e],char[t],string[" "],char[C],char[o],char[

n],char[s],char[i],char[d],char[e],char[r],char[a],char[t],char[i],char[o],char[

n]],over[(*s12.00s*)times[(*s12.00s*)char[(*s12.00s*)C],char[(*s12.00s*)u],char[

(*s12.00s*)r],char[(*s12.00s*)r],char[(*s12.00s*)e],char[(*s12.00s*)n],char[(*s12.00s*)t],

string[" "],char[B],char[o],char[o],char[k],string[" "],char[V],char[a],char[l],

char[u],char[e]],times[(*s12.00s*)char[O],char[r],char[i],char[g],char[(*s12.00s*)i],

char[(*s12.00s*)n],char[a],char[l],string[" "],char[B],char[o],char[o],char[k],string[

" "],char[V],char[a],char[l],char[u],char[e]]]]

where—

 

 

 
previous section contents continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 2004
Revised 6 April 2004