Clause 833: Income treated as remitted: repayment of UK-linked debts

1662.     This clause contains anti-avoidance measures to defeat the practice of taking out loans in the United Kingdom and subsequently arranging for the debt to be transferred abroad and repaid out of unremitted relevant foreign income. It is based on section 65(6) to (9) of ICTA.

1663.     The source legislation has already been rewritten for the purposes of employment income. See section 33 of ITEPA.

Clause 834: Arrangements treated as repayment of UK-linked debts

1664.     This clause supplements clause 833 and deals with indirect methods of repaying UK-linked debts using relevant foreign income. It is based on section 65(8) and (9) of ICTA.

1665.     Subsection (4) extends the meaning of lender to include any person for the time being entitled to repayment (i.e. not necessarily the person who lent the money).

Clause 835: Relief for delayed remittances

1666.     This clause allows income chargeable to tax for a tax year on the remittance basis to be reduced by sums which, for reasons outside the taxpayer's control, could not be remitted in an earlier tax year ("delayed income"). Those sums are then treated as remitted in the year in which they arose and taxed for that year. The clause is based on section 585 of ICTA.

1667.     A claim may be made in respect of some or all of the delayed remittances. See Change 136 in Annex 1.

1668.     Condition B for delayed income refers to the impossibility of obtaining currency in the territory in question and makes explicit that this means currency that can be transferred to the United Kingdom (whether the currency of that or another territory). See Change 135 in Annex 1.

1669.     The source legislation refers to "foreign currency". This means a currency other than the currency of the territory in question. Since the local currency must be obtainable, it is superfluous to add that currency not obtainable is 'foreign'.

1670.     The requirement in the source legislation, that the inability to transfer the income to the United Kingdom was not due to any want of reasonable endeavours on the part of the claimant, is omitted. See Change 135 in Annex 1.

1671.     For periods preceding Self Assessment the basis year may be different from the tax year. Section 585(3) to (5) of ICTA contains rules which cater for that possibility. By 2005-06 no claim will be possible for a period preceding Self Assessment. For periods of Self Assessment the basis period is always the tax year, whether the amount chargeable is calculated by reference to the income arising or remitted. The rules in section 585(3) to (5) of ICTA have therefore not been rewritten in this Chapter. (But see the transitional provision in Part 11 of Schedule 2 to this Bill, which applies the rules where a claim is made under this Chapter and the tax year in which the income arose was 1996-97 or earlier.)

Clause 836: Relief for delayed remittances: backdated pensions

1672.     This clause is based on section 585(2) of ICTA. It provides relief under clause 835 for pension arrears charged under Part 9 of ITEPA. Schedule 1 to this Bill amends the relevant provisions of ITEPA to treat the income as relevant foreign income, so that the provisions of this Part may apply to such income.

1673.     Arrears of pension income do not arise before the pension etc is granted, even if the grant is retrospective. So, but for this clause, arrears of pension income would not meet condition A for delayed income in clause 835 for all years before the year for which relief is claimed.

1674.     Subsection (3) disapplies condition B for delayed income in clause 835 for any period before the arrears become payable.

Clause 837: Claims for relief on delayed remittances

1675.     This clause provides administrative rules for claims for relief under clause 835. It is based on section 585 of ICTA.

Chapter 3: Relevant foreign income charged on arising basis: deductions and reliefs

Overview

1676.     This Chapter provides certain deductions and a relief that may affect the calculation of the amount of relevant foreign income charged on the arising basis. "Relevant foreign income" is defined for these purposes in clause 830.

1677.     The deductions are of limited scope. They were introduced in FA 1914, when the remittance basis was withdrawn from most types of Schedule D Cases IV and V income for persons domiciled and ordinarily resident in the United Kingdom.

Clause 838: Expenses attributable to collection or payment of relevant foreign income

1678.     This clause is based on section 65(1) of ICTA. The source legislation makes deductions available only to income not received in the United Kingdom. But in practice the deductions are given whether or not the income in question has been received in the United Kingdom. This clause reflects practice, so the words "subject in the case of income not received in the United Kingdom" are not rewritten. See Change 137 in Annex 1.

1679.     The source legislation does not identify exactly what deductions are envisaged. The words used "the same deductions and allowances as if [the income] had been received [in the United Kingdom]" date from FA 1914 when taxpayers found their income taxed on the arising rather than the remittance basis. But it is an unhelpful analogy because the remittance basis does not allow any deductions (except in the case of trading income - see section 65(3) of ICTA). Rather than relying on an analogy, the clause therefore specifies the deductions intended. This includes, for example, banking costs involved in the collection and forwarding of dividends. See Change 138 in Annex 1.

1680.     The clause applies to all relevant foreign income, including trading profits within the definition of that term. It does not rewrite the restriction in section 65(3) of ICTA denying these deductions to such trading profits. See Change 138 in Annex 1.

1681.     See also Chapter 2 of Part 10 of this Bill for further rules that may qualify the deductions available under this clause.

Clause 839: Annual payments payable out of relevant foreign income

1682.     This clause is based on section 65(1) of ICTA.

1683.     By virtue of subsection (3), which refers to a payment that "would have been chargeable" to tax under certain provisions, the range of annual payments falling within condition B is in fact reduced by any that are within the exemption provided by clause 727(certain annual payments by individuals).

1684.     Subsection (6) reflects differences in the source legislation between the rules for calculating income arising in the Republic of Ireland and those for calculating other relevant foreign income.

Clause 840: Relief for backdated pensions charged on the arising basis

1685.     This clause is new. It enacts ESC A55, but adopts the method used in clause 836 (and the administrative rules in clause 837) as a model for providing relief. That is, the income is treated as arising in an earlier year than the year in which it in fact arose, rather than a tax adjustment being made in the later year. See Change 139 in Annex 1.

Chapter 4: Unremittable income

Overview

1686.     This Chapter provides relief from income tax if income arising in a territory outside the United Kingdom cannot be remitted to the United Kingdom. The Chapter also invokes the relevant charges outside Part 8 of this Bill if such income ceases to be unremittable. And it explains how unremittable income is to be valued where no claim is made for the relief. The relief applies only to income charged on the arising basis so does not apply to income charged on the remittance basis (Chapter 2 of this Part). The Chapter is based on section 584 of ICTA.

1687.     The Chapter applies to "income arising in a territory outside the United Kingdom". This is a wider term than relevant foreign income. So the relief may apply, for example, to some of the income charged in the source legislation under a non-schedular charge or under Schedule D Case VI. (Chapter 13 of Part 2 to this Bill provides an equivalent relief in respect of unremittable receipts of a trade, profession or vocation; clause 272 (profits of a property business: application of trading income rules) applies that Chapter for the purposes of Part 3 of this Bill.)

1688.     The Chapter does not rewrite the appeal jurisdiction rules in section 584(9) of ICTA. An appeal on the application of the clause may therefore be heard by General Commissioners (and the taxpayer retains the right to elect for a hearing by the Special Commissioners). See Change 142 in Annex 1.

Clause 841: Unremittable income: introduction

1689.     This clause is based on section 584 of ICTA.

1690.     The source legislation refers to "foreign currency". This means a currency other than the currency of the territory in question. Since the local currency must be obtainable, it is superfluous to add that currency not obtainable is 'foreign'.

1691.     Condition A for unremittable income refers to the impossibility of obtaining currency in the territory in question and makes explicit that this means currency that can be transferred to the United Kingdom (whether the currency of that or another territory). See Change 135 in Annex 1

1692.     The requirement in the source legislation, that the inability to transfer the income to the United Kingdom was not due to any want of reasonable endeavours on the part of the claimant, is omitted. See Change 135 in Annex 1.

Clause 842: Claim for relief for unremittable income

1693.     This clause is based on section 584 of ICTA.

1694.     Subsection (1) provides that unremittable income is not taken into account for income tax purposes. This means primarily that it is omitted from taxable income in the year in which it arises.

1695.     Subsection (4) defines an Export Credit Guarantee Department payment ("ECGD payment"). The statutory references in the source legislation have been updated. As section 13(1) of the Export and Investment Guarantees Act 1991 delegates the functions of the Secretary of State under section 2 of the 1991 Act to the Export Credits Guarantee Department, the role of that Department (rather than the Secretary of State) in administering this scheme is recognised.

1696.     Subsection (5) sets out the time limit for making a claim under this section. The time limit is tied to the tax year for which the income would otherwise be chargeable, rather than to the tax year in which the income arises (as in the source legislation). This brings the time limit into line with the normal time limit for claims. See Change 140 in Annex 1.

Clause 843: Withdrawal of relief

1697.     This clause brings together the consequences both of unremittable income becoming remittable and of a payment being made by the Export Credits Guarantee Department. It is based on section 584 of ICTA.

1698.     Subsections (3) to (5) set out when, and at what value, income ceasing to be unremittable is treated as arising. Income so treated as arising is charged under the provision appropriate to the income type (or types) that would otherwise have applied to the income when it arose. (Clause 844 provides rules for charging income if the source of the income has ceased before the tax year in which it is treated under this section as arising.)

1699.     Subsection (4) provides that, when an ECGD payment is made, income is treated as arising at that time, to the extent of the payment. This reflects the intention of the legislation as originally drafted. Amendments made by FA 1996 obscured the point. See Change 141 in Annex 1.

1700.     Subsection (6) indicates that subsections (3) to (5) do not apply if the income has otherwise been treated as arising as a result of this section. For example, if relief has been withdrawn because an ECGD payment is received, there is no further charge under this clause if the income itself subsequently becomes remittable.

Clause 844: Income charged on withdrawal of relief after source ceases

1701.     The clause is based on section 584 of ICTA.

1702.     It provides that, where relief given under this Chapter cannot be withdrawn in accordance with clause 843, because the trade, profession, vocation or property business in question has permanently ceased, the amount in respect of which relief is withdrawn is dealt with as a post-cessation receipt under the relevant Chapter of Part 2 or Part 3 of this Bill. See Change 22 in Annex 1.

1703.     For other unremittable income becoming remittable, the clause provides that the income should be taxed as if the source had not ceased.

1704.     Income charged by virtue of this clause is not "relevant foreign income", as defined in clause 830 (see subsection (3) of that clause). In the source legislation, the charge is under Schedule D Case VI (rather than Schedule D Cases IV or V).

Clause 845: Valuing unremittable income

1705.     This clause is based on section 584 of ICTA.

Part 9: Partnerships

Overview

1706.     This Part of the Bill contains the rules that apply to partnerships.

1707.     Section 1 of the Partnership Act 1890 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". Section 4 of the Partnership Act 1890 explains that "firm" is the term used for the purposes of that Act for persons in partnership.

1708.     The clauses in this Bill follow the Partnership Act 1890 and refer to the partners collectively as a "firm". But the word "partnership" is commonly used as a synonym for "firm". So the title of the Part and some of the titles of the clauses use the word "partnerships", again following the lead of the Partnership Act 1890.

1709.     The rules in this Part of the Bill determine each partner's share of the income of the firm. That income share is then charged under the normal rules for the type of income concerned.

Clause 846: Overview of Part 9

1710.     This clause introduces this Part of the Bill. It is new.

Clause 847: General provisions

1711.     This clause introduces the concept of a "firm". It is based on section 111 of ICTA.

1712.     Subsection (2) adopts the same approach as the trading income Part of this Bill. Most of the Chapters in the trading income Part of the Bill have a rule that the trading income rules apply to professions and vocations as they apply to trades. The rules themselves refer only to trades. The clauses in this Part refer to trades. They apply also to professions (but not to vocations, which cannot be carried on in partnership). Paragraph (a) of the subsection ensures that there is no need to repeat the phrase "trade or profession". If the firm has other income, there are special rules for assessing it. The clauses then have to deal with businesses other than trades or professions - paragraph (b) caters for that possibility.

Clause 848: Assessment of partnerships

1713.     This clause makes it clear that, for income tax purposes, a firm is not an entity distinct from the partners in the firm. It is based on section 111(1) of ICTA.

1714.     In the case of firms established under English law this provision merely confirms their position under that law. But Scottish firms, for example, are legal entities. This provision ensures that all firms are treated in the same way.

Clause 849: Calculation of firm's profits or losses

1715.     This clause contains the basic rules for calculating the profits of a firm. It is based on section 111 of ICTA.

1716.     If some of a firm's partners are resident in the United Kingdom and some are not, the profits of the firm's trade must be calculated on different bases. For the resident partners, the calculation includes profits arising outside the United Kingdom; for the non-resident partners, the calculation is restricted to profits arising in the United Kingdom.

1717.     Section 111 of ICTA is not explicit that the profits may have to be calculated on more than one basis. This clause brings together the rules for resident and non-resident partners. Subsection (1) introduces the idea that more than one calculation may be needed.

1718.     The source legislation refers to the computation of the profits from the actual trade "for any period". Profits are calculated for a period of account. So subsections (2) and (3) make it clear that the clause applies to a period of account. It is possible for a partner to be both resident (for one tax year) and non-resident (for another) within a single period of account. In such a case, the firm's profit has to be calculated twice to arrive at the partner's share of the profits.

1719.     Subsection (2) sets out the normal basis for calculating the profits, for an individual resident in the United Kingdom. The profits are calculated as if the firm were an individual resident in the United Kingdom.

1720.     Subsection (3) sets out an additional basis for calculating the profits. If the partner (who may be a non-resident company liable to income tax) is not resident in the United Kingdom the profits of the firm are calculated as if the firm were an individual not resident in the United Kingdom.

Clause 850: Allocation of firm's profits or losses between partners

1721.     This clause is the link between the firm's profits and the amounts assessable on the partners. It is based on section 111(3) of ICTA.

1722.     Subsections (2) and (3) set out what happens if the calculation of a partner's share of the firm's profits under subsection (1) produces a loss, even though the overall result for the firm is a profit. This is most likely to arise when one or more partners are entitled to a salary or interest on the firm's capital. The "loss" determined under subsection (1) is reallocated to the other partners, to reduce their shares of the profit. See Change 143 in Annex 1.

1723.     It is also possible for the calculation of a partner's share under subsection (1) to produce a profit, even though the overall result for the firm is a loss.

1724.     Subsections (4) and (5) set out what happens in the case of an overall loss. The "profit" determined under subsection (1) is reallocated to the other partners, to reduce their shares of the loss. See Change 143 in Annex 1.

1725.     Subsection (6) contains definitions. If at least one of the partners in the firm is liable to corporation tax, the firm's profit (FP) or loss (FL) will include part of the profits or losses allocated to the partner liable to corporation tax, even though that part of the profits is not charged to income tax. So it is necessary, in the reallocation of the profits under subsection (3) or losses under subsection (5), that the total profits (TP) or losses (TL) include those allocated to the partner liable to corporation tax. The definition of "partner" for the purposes of the clause makes it clear that partners liable to corporation tax are part of the picture.

Clause 851: Calculations etc. where firm has other income or losses

1726.     This clause sets out the rule for a firm's non-trading income. It is based on section 111(7) of ICTA.

1727.     Clause 847(2)(a) applies to this clause but clause 847(2)(b) does not. So the reference to a "trade" in subsection (1)(a) of this clause is to be read as including a profession but not a business.

1728.     A trading firm may have income that does not arise from the trade or from a business. Such income is calculated and allocated to the partners in the same way as trading income, in accordance with clauses 849 and 850. Each partner's share is assessed using the basis period rules set out in clause 854.

Clause 852: Carrying on by partner of notional trade

1729.     This clause gives the rules for determining when a partner's notional trade starts and ceases. It is based on sections 110, 111 and 112 of ICTA.

1730.     Subsection (1) introduces the "notional trade" carried on by each partner. This phrase is used instead of the "deemed trade or profession" in section 111(4) of ICTA. The basis period rules in Chapter 15 of Part 2 of this Bill apply to the notional trade carried on by each partner.

1731.     Subsection (2) deals with a partner joining the firm. The general rule is that the notional trade starts when the partner joins the firm. The subsection makes it clear that the notional trade may start when the firm starts to trade. This is merely implicit in section 111 of ICTA.

1732.     Subsection (3) is an exception to the general rule. If a firm is formed by a sole trader taking another person into partnership to carry on the same trade, the original trader is treated as starting to carry on a notional trade at the start of the actual trade. This provides continuity of treatment for the original trader.

1733.     Subsection (4) deals with a partner leaving the firm. The general rule is that the partner ceases to carry on the notional trade when the partner leaves the firm. The subsection makes it clear that the notional trade may end when the firm ceases to trade. This is merely implicit in section 111 of ICTA.

1734.     Subsection (5) is an exception to the general rule. If a firm is dissolved and its trade is continued by a sole trader, the continuing partner's notional trade is treated as ceasing only when the actual trade ceases. This provides continuity of treatment for the continuing trader.

1735.     Subsection (6) is the equivalent for partners of the general rule for individuals in clause 17.

1736.     Section 112(1B) of ICTA operates by treating a partner who changes tax residence as ceasing to be a partner. That triggers a cessation of the deemed trade or profession in accordance with section 111(4)(e) of ICTA. This subsection says directly that a continuing partner who becomes, or ceases to be, resident in the United Kingdom is treated as ceasing to carry on one notional trade and starting another.

1737.     Subsection (7) preserves the partner's right to carry forward trading losses even if the notional trade is treated as ceasing by subsection (6).

Clause 853: Basis periods for partners' notional trades

1738.     This clause sets out the rules for determining the basis periods for the assessment of each partner's share of the firm's profits or loss. It is based on section 111 of ICTA.

1739.     Subsection (1) sets out the general rule that the basis periods for the partner's notional trade are determined by reference to the accounting dates of the firm's actual trade. The subsection repeats the assumption in section 111(2) of ICTA that the notional trade is carried on by an individual.

1740.     Section 111(4)(c) of ICTA ensures that, in most cases, the basis period for the partner's deemed trade or profession is determined by reference to the same periods of account as are used by the firm. Section 111(4)(d) of ICTA also ensures that, even if the firm has a change of accounting date, the general rule usually still applies.

1741.     This result is stated explicitly in subsection (1)(b) of the clause.

1742.     Subsection (2) deals with an exception to the general rule.

1743.     Section 111(5) of ICTA applies if the firm has an "ineffective" change of accounting date. In that case, the basis period rules are applied as if the accounts were drawn up to the old accounting date. The description of the change as ineffective does not appear in the source legislation or elsewhere in the text of the Bill. But it appears in the heading to clause 219 and is used here in conjunction with a cross-reference to clause 216.

1744.     Subsection (3) sets out how a firm can give the notice required by clause 217. It goes on to set out how the firm can appeal against a notice by the Inland Revenue under clause 218.

1745.     Subsection (4) is a special rule to deal with the case of enterprise allowance received by an individual partner. It explains how clause 207 operates so that the allowance is taxed only once.

Clause 854: Carrying on by partner of notional business

1746.     This clause gives the rules for determining when a partner starts or ceases to carry on a notional business. It is based on sections 111 and 112 of ICTA.

1747.     Subsection (1) introduces the "notional business" carried on by each partner in the firm. The notional business consists of the partner's share of the untaxed income of the firm that is not trade profits.

1748.     Subsection (2) deals with the start of the notional business.

1749.     The general rule in section 111(8) of ICTA is that a partner's income from the notional business (in ICTA, "the second deemed trade or profession") is assessed using the same basis periods as those for the notional trade (in ICTA, "the deemed trade or profession") carried on by the partner. But this rule applies only if section 111(2) and (3) of ICTA apply in relation to the profits of an actual trade (see section 111(7) of ICTA). So, if a firm is formed to receive non-trading income, the general rule does not apply and the non-trading income is assessed on the usual tax year basis.

1750.     A problem may arise if the members of an existing firm start trading for the first time. A strict interpretation of section 111(8)(b) of ICTA seems to require that the basis periods for each partner's notional business are determined to be the same as those for the notional trade, not only for the year in which trading starts but also for all the years since the firm was formed. Subsection (2)(b) of this clause makes it clear that the partner's "notional business" does not start until the firm starts to trade. See Change 144 in Annex 1.

1751.     Subsection (3) makes it clear that the notional business continues even though particular sources of untaxed income may start and cease.

1752.     The date on which a partner starts to carry on a notional business is determined by the date on which the partner joins a firm, or (if later) the date on which the firm starts the actual trade. It does not matter when the firm starts to receive untaxed income. Nor does it matter whether in a particular year there is income from the notional business. The basis periods for a partner's notional business may be determined before the firm starts to receive untaxed income. And, once the basis periods are established for the partner, they change only if the accounting date of the actual trade changes.

1753.     Subsection (4) deals with the date on which a partner ceases to carry on a notional business. This happens when the partner leaves the firm or (if earlier) when the firm ceases to carry on the actual trade.

1754.     Subsection (5) is the equivalent for partners of the general rule for individuals in clause 17.

1755.     Section 112(1B) of ICTA operates by treating a partner who changes tax residence as ceasing to be a partner. That triggers a cessation of the second deemed trade or profession in accordance with section 111(8)(d) of ICTA. This subsection says directly that a continuing partner who becomes, or ceases to be, resident in the United Kingdom is treated as ceasing to carry on one notional business and starting another.