Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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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
30
relation to the partner,
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.
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(4)
If for the period of account the calculation under section 849 in relation to the
partner 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).
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Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
363

(5)
The formula is—

(6)
where—
FL is the amount of the firm’s loss calculated under section 849 in relation
to the partner,
5
PL is the amount determined under subsection (1) to be the loss of the
loss-making 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.
(7)
In this section—
10
“loss-making partner” means a partner whose share is determined under
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
15
under subsection (1) to be a profit, and
“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
20
(1)
This section applies if—
(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
25
were references to the other income or losses.
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
30
of Chapter 15 of Part 2 (basis periods), as profits or losses of a trade carried on
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.
35

This is subject to subsection (3).
(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.

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

(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
(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
5
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.
(6)
If—
(a)
the firm carries on the actual trade wholly or partly outside the United
Kingdom, and
10
(b)
the partner becomes or ceases to be UK resident,

the partner is treated as permanently ceasing to carry on one notional trade
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
15
from being carried forward under section 385 of ICTA and set against profits
arising after the change.
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—
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(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
actual trade.

This is subject to subsection (2).
(2)
If, on the assumption that the actual trade is carried on by an individual,—
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(a)
section 216 (change of accounting date in later tax year) would apply in
relation to the actual trade, but
(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
30
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
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
35
in relation to that trade—
(a)
a notice under section 217(2) must be given by one of the partners in the
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.
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(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
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
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Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
365

attributable to a business start-up payment falls within two basis
periods, and
(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.
5
Firms with trading and other source income
854
Carrying on by partner of notional business
(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,
10

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
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—
15
(a)
when becoming a partner in the firm, and
(b)
when the firm starts to carry on a trade.
(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
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(b)
no income arises during a particular tax year.

This is subject to subsections (4) and (5).
(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.
25
(5)
If—
(a)
the firm carries on the 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 business
30
when the change of residence occurs and starting to carry on another
immediately afterwards.
(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
35
or paid, or
(c)
dividends or other distributions of a company chargeable under
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
40
same as the basis period for a partner’s notional trade, but subject to the
exceptions in subsections (2) and (3).

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
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(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.
(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
5
notional business when the firm permanently ceases to carry on the actual
trade.
856
Overlap profits from partners’ notional businesses
(1)
This section applies if—
(a)
the basis period for a partner’s notional business for a tax year is given
10
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),
(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
15
(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—
(a)
the basis period for a partner’s notional business for a tax year is given
by section 202 (final tax year),
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(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
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
25
for the tax year.
Firms with a foreign element
857
Partners to whom the remittance basis may apply
(1)
This section applies if—
(a)
a firm carries on a trade wholly or partly outside the United Kingdom,
30
(b)
the control and management of the trade is outside the United
Kingdom, and
(c)
a partner who is a UK resident individual—
(i)
meets condition A or B in section 831 (conditions to be met for
income to be charged on the remittance basis), and
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(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.
(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
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Part 8).