Finance Bill

House of Commons

Session 2003 - 04
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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
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(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.
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(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
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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;
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(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
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(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
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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—
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—
where—