Finance Bill

House of Commons

Session 2002 - 03
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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
113

Individuals in partnership: exit charge
126
Losses derived from exploiting licence: introductory
(1)
Section 127 (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—
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(i)
any licence acquired in carrying on the trade; or
(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
10
(c)
he has made a claim under section 380 or 381 of the Taxes Act 1988 in
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.
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(3)
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
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—
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(a)
the year of assessment in which the trade is first carried on by him or
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 130).
(5)
The reference in subsection (1)(b) to “non-taxable” consideration is to
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consideration—
(a)
that (apart from section 127) is not chargeable to income tax; and
(b)
whose receipt is not an exit event for the purposes of section 119;

and it is immaterial for the purposes of subsection (1)(b) whether the non-
taxable consideration is the only consideration received by the individual for
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the disposal.
(6)
For the purposes of this section and sections 127 to 129, 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).
(7)
For the purposes of this section and sections 127 to 129 an agreement, or part
35
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.
127
Charge to income tax
40
(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

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
114

(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
5
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
10
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
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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,
20
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
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relevant consideration received on or after 10 February 2004 and relating to the
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).
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(7)
In this section “relevant consideration”, “relevant claim” and “qualifying year”
have the meanings given by section 126.
128
Definitions for purposes of section 127
(1)
This section applies for the purposes of section 127(5).
(2)
The individual’s “claimed licence-related loss” for a qualifying year is so much
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of the loss (if any) sustained by him in the trade in that year as derives from
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
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(b)
that he has claimed as an allowable loss under section 72 of the Finance
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.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
115

(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
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
5
derives from income arising from any agreement that is related to or contains
the licence in question.
(6)
The part of a profit that derives from such income shall be determined on such
basis as is just and reasonable.
129
Disposals to which section 126 applies
10
(1)
The reference in section 126(1)(a) to a disposal of such a licence or rights as are
there mentioned includes, in particular—
(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;
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(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
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
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partnership of which he is a member, has a right under a licence-related
agreement;
(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;
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(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
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
30
partnership that has the licence or a right to income under a licence-
related agreement, including the dissolution of the partnership.
(2)
It is immaterial for the purposes of section 126(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
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loss).
(3)
If there is an agreement under which the individual is entitled—
(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”),
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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
later period; and in paragraph (a) and (b) of this subsection a “share” of profits
or losses includes a nil share.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
116

130
“A significant amount of time”
(1)
For the purposes of section 126(4)(b) the individual shall be treated as having
“devoted a significant amount of time to the trade” in a given year of
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
5
purposes of the trade.
(2)
“The relevant period” means the basis period for the year of assessment in
question, except that—
(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
10
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
six months ending with that date.
(3)
In this section “basis period” means (subject to subsection (4)) the basis period
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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
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
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the end of the year of assessment.
Companies in partnership
131
Companies in partnership
(1)
This section applies if—
(a)
on or after 17 March 2004, a company that is or has been a member of a
25
partnership—
(i)
directly or indirectly draws out or receives back any capital
from the partnership; or
(ii)
receives consideration for a disposal on or after 17 March 2004
of all or any of its interest in the partnership;
30
(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,

exceeds the company’s contribution to the partnership;
(c)
that excess (or any part of it) results directly or indirectly from an
35
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
(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
40
corporation tax.
(2)
For the purposes of this section—
(a)
“the relevant time” means the time immediately after the capital is
drawn out or received back or (as the case may be) the consideration is
received;
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 9 — Avoidance involving loss relief or partnership
117

(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;
(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
5
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
(excluding any amount originally contributed by a person from
whom the company acquired an interest in the partnership);
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and
(ii)
any amount paid by the company to such a person for such an
interest;
(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
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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
allocated a share calculated by reference to the percentage of the total
capital contributed (as defined by subsection (3)) that was contributed
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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
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
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back;
(b)
aggregate those amounts; and
(c)
divide by the number of days in that period.
(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
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chargeable amount and chargeable to tax under Case VI of Schedule D.
(5)
The chargeable amount is (subject to subsections (6) and (7)) so much of A as
does not exceed B, where—

A is 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
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any relevant consideration exceeds the company’s contribution to the
partnership; and

B is the amount by which, at the relevant time, the total amount of the
company’s due shares of relevant profits exceeds the total amount of
the shares of relevant profits that were actually allocated to the
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company.
(6)
Subsection (7) applies if this section applies on more than one occasion in
relation to the same company and partnership (whether because of two or
more receipts by the company of consideration relating to the same disposal or
for any other reason).
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(7)
On each occasion after the first, the amount found under subsection (5) shall be
reduced (but not below nil) by the total of the chargeable amounts found
(under that subsection read with this) on the previous occasions.