Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
Internet Publications
Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
362

848
Assessment of partnerships
Unless otherwise indicated (whether expressly or by implication), a firm is not
to be regarded for income tax purposes as an entity separate and distinct from
the partners.
Calculation of partners’ shares
5
849
Calculation of firm’s profits or losses
(1)
If—
(a)
a firm carries on a trade, and
(b)
any partner in the firm is chargeable to income tax,

the profits or losses of the trade are calculated on the basis set out in subsection
10
(2) or (3), as the case may require.
(2)
For any period of account in which the partner is a UK resident individual, the
profits or losses of the trade are calculated as if the firm were a UK resident
individual.
(3)
For any period of account in which the partner is non-UK resident, the profits
15
or losses of the trade are calculated as if the firm were a non-UK resident
individual.
850
Allocation of firm’s profits or losses between partners
(1)
For any period of account a partner’s share of a profit or loss of a trade carried
on by a firm is determined for income tax purposes in accordance with the
20
firm’s profit-sharing arrangements during that period.

This is subject to subsections (2) and (4).
(2)
If for the period of account the calculation under section 849 in relation to the partner
produces a profit, but there is at least one loss-making partner—
(a)
each loss-making partner’s share is neither a profit nor a loss, and
25
(b)
each profit-making partner’s share is given by the formula in subsection (3).
(3)
The formula is—

where—
FP is the amount of the firm’s profit calculated under section 849 in relation to
the partner,
30
PP is the amount determined under subsection (1) to be the profit of the profit-
making partner in question, and
TP is the total of the amounts determined under subsection (1) to be the profits of
all the profit-making partners.
(4)
If for the period of account the calculation under section 849 in relation to the partner
35
produces a loss, but there is at least one profit-making partner—
(a)
each profit-making partner’s share is neither a profit nor a loss, and
(b)
each loss-making partner’s share is given by the formula in subsection (5).

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
363

(5)
The formula is—

where—
FL is the amount of the firm’s loss calculated under section 849 in relation to the
partner,
PL is the amount determined under subsection (1) to be the loss of the loss-making
5
partner in question, and
TL is the total of the amounts determined under subsection (1) to be the losses of
all the loss-making partners.
(6)
In this section—
“loss-making partner” means a partner whose share is determined under
10
subsection (1) to be a loss,
“partner”, in relation to a firm, means any partner in the firm, whether or not
chargeable to income tax,
“profit-making partner” means a partner whose share is determined under
subsection (1) to be a profit, and
15
“profit-sharing arrangements” means the rights of the partners to share in the
profits of the trade and the liabilities of the partners to share in the losses of the
trade.
851
Calculations etc. where firm has other income or losses
(1)
This section applies if—
20
(a)
sections 849 and 850 apply in relation to the profits or losses of a trade
carried on by a firm, and
(b)
the firm has other income or losses.
(2)
Those sections also apply as if references to the profits or losses of the trade
were references to the other income or losses.
25
Firms with trading income
852
Carrying on by partner of notional trade
(1)
For each tax year in which a firm carries on a trade (the “actual trade”), each
partner’s share of the firm’s trading profits or losses is treated, for the purposes
of Chapter 15 of Part 2 (basis periods), as profits or losses of a trade carried on
30
by the partner alone (the “notional trade”).
(2)
A partner starts to carry on a notional trade at the later of—
(a)
when becoming a partner in the firm, and
(b)
when the firm starts to carry on the actual trade.

This is subject to subsection (3).
35
(3)
If the partner carries on the actual trade alone before the firm starts to carry it
on, the partner starts to carry on the notional trade when the partner starts to
carry on the actual trade.
(4)
A partner permanently ceases to carry on a notional trade at the earlier of—
(a)
when the partner ceases to be a partner in the firm, and
40

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
364

(b)
when the firm permanently ceases to carry on the actual trade.

This is subject to subsections (5) and (6).
(5)
If the partner carries on the actual trade alone after the firm permanently ceases
to carry it on, the partner permanently ceases to carry on the notional trade
when the partner permanently ceases to carry on the actual trade.
5
(6)
If—
(a)
the firm carries on the actual trade wholly or partly outside the United
Kingdom, and
(b)
the partner becomes or ceases to be UK resident,

the partner is treated as permanently ceasing to carry on one notional trade
10
when the change of residence occurs and starting to carry on another
immediately afterwards.
(7)
Subsection (6) does not prevent a loss made before the change of residence
from being carried forward under section 385 of ICTA and set against profits
arising after the change.
15
853
Basis periods for partners’ notional trades
(1)
The basis period of a partner’s notional trade is determined by applying the
rules in Chapter 15 of Part 2 as if—
(a)
the trade were carried on by an individual, and
(b)
its accounts were drawn up to the same dates as the accounts of the
20
actual trade.

This is subject to subsection (2).
(2)
If, on the assumption that the actual trade is carried on by an individual,—
(a)
section 216 (change of accounting date in later tax year) would apply in
relation to the actual trade, but
25
(b)
the basis period for the actual trade would be given by subsection (4) of
that section (ineffective change of accounting date), because the
conditions in section 217 (conditions for basis period to end with new
accounting date) would not be met in relation to that trade,

the accounts of the actual trade are treated for the purposes of subsection (1) as
30
drawn up to the old accounting date.
(3)
For the purposes of determining whether, on the assumption that the actual
trade is carried on by an individual, the conditions in section 217 would be met
in relation to that trade—
(a)
a notice under section 217(2) must be given by one of the partners in the
35
firm nominated by them for the purposes of this subsection, and
(b)
any appeal under section 218(4) against a notice by the Inland Revenue
must be made by a partner so nominated.
(4)
Section 207 (treatment of business start-up payments received in overlap
period) applies as a result of this section in relation to a partner’s notional trade
40
so that—
(a)
the requirement in subsection (1)(a) of that section becomes a
requirement that the partner’s share of the firm’s profits so far as
attributable to a business start-up payment falls within two basis
periods, and
45

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
365

(b)
the reference in subsection (2) of that section to the payment is a
reference to any part of the partner’s share of the firm’s profits which
is so attributable.
Firms with trading and other source income
854
Carrying on by partner of notional business
5
(1)
For each tax year in which a firm—
(a)
carries on a trade, and
(b)
has untaxed income or relievable losses from other sources,

each partner’s share of the firm’s untaxed income or relievable losses other
than trading profits or losses is treated, for the purposes of Chapter 15 of Part
10
2, as profits or losses of a trade carried on by the partner alone (the “notional
business”).
(2)
A partner starts to carry on a notional business at the later of—
(a)
when becoming a partner in the firm, and
(b)
when the firm starts to carry on a trade.
15
(3)
A notional business continues even if either or both of the following occur—
(a)
separate sources of income that comprise the business start and cease,
and
(b)
no income arises during a particular tax year.

This is subject to subsections (4) and (5).
20
(4)
A partner permanently ceases to carry on a notional business at the earlier of—
(a)
when the partner ceases to be a partner in the firm, and
(b)
when the firm permanently ceases to carry on a trade.
(5)
If—
(a)
the firm carries on the trade wholly or partly outside the United
25
Kingdom, and
(b)
the partner becomes or ceases to be UK resident,

the partner is treated as permanently ceasing to carry on one notional business
when the change of residence occurs and starting to carry on another
immediately afterwards.
30
(6)
In this section “untaxed income” means any income that is not—
(a)
income from which income tax has been deducted,
(b)
income from or on which income tax is treated as having been deducted
or paid, or
(c)
dividends or other distributions of a company chargeable under
35
Chapter 3 of Part 4.
855
Basis periods for partners’ notional businesses
(1)
The general rule is that the basis period for a partner’s notional business is the
same as the basis period for a partner’s notional trade, but subject to the
exceptions in subsections (2) and (3).
40
(2)
If the partner carries on the actual trade alone before the firm starts to carry it
on the partner is treated as starting to carry on the notional business when the
partnership is set up.

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
366

(3)
If the partner carries on the actual trade alone after the firm permanently ceases
to carry it on the partner is treated as permanently ceasing to carry on the
notional business when the firm permanently ceases to carry on the actual
trade.
856
Overlap profits from partners’ notional businesses
5
(1)
This section applies if—
(a)
the basis period for a partner’s notional business for a tax year is given
by—
(i)
section 215 (change of accounting date in third tax year), or
(ii)
section 216(3) (change of accounting date in later tax year),
10
(b)
a deduction is to be made for overlap profit under section 220 in
calculating the profits of the notional business of the tax year, and
(c)
the amount to be deducted exceeds the amount which would otherwise
be the amount of the profits of the notional business of the tax year.
(2)
This section also applies if—
15
(a)
the basis period for a partner’s notional business for a tax year is given
by section 202 (final tax year),
(b)
a deduction is to be made for overlap profit under section 205 in
calculating the profits of the notional business of the tax year, and
(c)
the amount to be deducted exceeds the amount which would otherwise
20
be the amount of the profits of the notional business of the tax year.
(3)
The amount of the excess is to be deducted in calculating the partner’s income
for the tax year.
Firms with a foreign element
857
Partners to whom the remittance basis may apply
25
(1)
This section applies if—
(a)
a firm carries on a trade wholly or partly outside the United Kingdom,
(b)
the control and management of the trade is outside the United
Kingdom, and
(c)
a partner who is a UK resident individual—
30
(i)
meets condition A or B in section 831 (conditions to be met for
income to be charged on the remittance basis), and
(ii)
makes a claim to that effect for a tax year.
(2)
The partner’s share of the profits of the trade arising in the United Kingdom is
determined in accordance with sections 849 to 856.
35
(3)
The partner’s share of the profits of the trade arising outside the United
Kingdom is treated as relevant foreign income for the purposes of this Act (see
Part 8).
858
Resident partners and double taxation agreements
(1)
This section applies if—
40
(a)
a UK resident (“the partner”) is a member of a firm which—
(i)
resides outside the United Kingdom, or

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
367

(ii)
carries on a trade the control and management of which is
outside the United Kingdom, and
(b)
by virtue of any arrangements having effect under section 788 of ICTA
(“the arrangements”) any of the income of the firm is relieved from
income tax in the United Kingdom.
5
(2)
The partner is liable to income tax on the partner’s share of the income of the
firm despite the arrangements.
(3)
If the partner’s share of the income of the firm consists of or includes a share in
a qualifying distribution—
(a)
made by a UK resident company, and
10
(b)
chargeable to tax under Chapter 3 of Part 4,

the partner (and not the firm) is, despite the arrangements, entitled to the share
of the tax credit which corresponds to the partner’s share of the distribution.
Miscellaneous
859
Special provisions about farming and property income
15
(1)
The rule in section 9(2) (farming trades) operates in relation to firms so that—
(a)
all farming in the United Kingdom which a firm carries on, other than
farming carried on as part of another trade, is treated as one trade, but
(b)
the farming carried on by a firm which is treated as one trade is not
included in any farming trade of any partner in the firm.
20
(2)
Section 264 (UK property business) operates in relation to firms so that—
(a)
every business and transaction mentioned in that section carried on, or
entered into, by a firm constitutes the firm’s UK property business, but
(b)
each business or transaction included in the firm’s UK property
business is not included in any UK property business of any partner in
25
the firm.
(3)
Section 265 (overseas property business) operates in relation to firms so that—
(a)
every business and transaction mentioned in that section carried on, or
entered into, by a firm constitutes the firm’s overseas property
business, but
30
(b)
each business or transaction included in the firm’s overseas property
business is not included in any overseas property business of any
partner in the firm.
860
Adjustment income
(1)
A change in the persons carrying on a trade from one period of account to the
35
next does not prevent Chapter 17 of Part 2 (adjustment income) applying in
relation to the trade so long as a person carrying on the trade immediately
before the change continues to carry on the trade immediately after the change.
(2)
A change in the persons carrying on a trade does not constitute the permanent
cessation of the trade for the purposes of Chapter 17 of Part 2 so long as a
40
person carrying on the trade immediately before the change continues to carry
on the trade immediately after the change.
(3)
In the case of a trade carried on by a firm the amount of any adjustment under
Chapter 17 of Part 2 is calculated as if the firm were a UK resident individual.

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
368

(4)
Each partner’s share of any amount of adjustment income is determined
according to the firm’s profit-sharing arrangements for the 12 months ending
immediately before the date on which the new basis was adopted.
(5)
Any election under Chapter 17 of Part 2 must be made jointly by all the persons
who have been members of the firm in that 12 month period.
5
(6)
For the purposes of this section—
(a)
“adjustment income” and “change of basis” have the same meaning as
in Chapter 17 of Part 2,
(b)
“profit-sharing arrangements” means the rights of the partners to share
in the profits of the trade, and
10
(c)
references to the date on which a new basis was adopted are to the first
day of the first period of account for which the new basis was adopted.
(7)
Sections 849 to 856 do not apply so far as this section applies.
861
Sale of patent rights: effect of partnership changes
(1)
This section applies if—
15
(a)
a person (“the trader”) sells the whole or part of any patent rights in
carrying on a trade, and
(b)
the tax condition, the partnership condition and the non-cessation
condition are met.
(2)
The tax condition is that—
20
(a)
tax is charged under section 587 on the proceeds of the sale or on any
instalment of those proceeds, and
(b)
by virtue of any of sections 590(2) or (4), 591(2) or 592(2), one sixth of
the amount chargeable is charged in the tax year in which the trader
receives the proceeds or the instalment and in each of the 5 subsequent
25
tax years.
(3)
The partnership condition is that—
(a)
the trader is a firm at the time of the sale, or
(b)
the trade is carried on in partnership at any time during the period
beginning with the tax year in which the trader receives the proceeds
30
or the instalment and ending with the last of the 5 subsequent tax years
(“the tax spreading period”).
(4)
The non-cessation condition is that—
(a)
there is a change in the persons carrying on the trade during the tax
spreading period, and
35
(b)
a person who carried on the trade immediately before the change
continues to carry on the trade immediately after the change.
(5)
Any amounts chargeable under section 587 during the remainder of the tax
spreading period are charged on the person or persons for the time being
carrying on the trade.
40
(6)
Such amounts are charged as if—
(a)
that person or those persons had at all times been carrying on the trade,
and