House of Commons portcullis
House of Commons
Session 2002 - 03
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

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—

5

(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.

15

(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—

20

(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

25

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

30

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

15

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

25

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).

30

(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

35

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

40

(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;

15

(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

20

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;

25

(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

35

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”),

40

   

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

15

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

20

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;

45

 

 

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);

10

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

15

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

20

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

25

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

30

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

35

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

40

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).

45

(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.

 

 

 
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 29 June 2004