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
367

858
Resident partners and double taxation agreements
(1)
This section applies if—
(a)
a UK resident (“the partner”) is a member of a firm which—
(i)
resides outside the United Kingdom, or
(ii)
carries on a trade the control and management of which is
5
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.
(2)
The partner is liable to income tax on the partner’s share of the income of the
10
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
(b)
chargeable to tax under Chapter 3 of Part 4,
15

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
(1)
The rule in section 9(2) (farming trades) operates in relation to firms so that—
20
(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.
(2)
Section 264 (UK property business) operates in relation to firms so that—
25
(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
the firm.
30
(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
(b)
each business or transaction included in the firm’s overseas property
35
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
next does not prevent Chapter 17 of Part 2 (adjustment income) applying in
40
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.

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

(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
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
5
Chapter 17 of Part 2 is calculated as if the firm were a UK resident individual.
(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
10
who have been members of the firm in that 12 month period.
(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
15
in the profits of the trade, and
(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
20
(1)
This section applies if—
(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.
25
(2)
The tax condition is that—
(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
30
receives the proceeds or the instalment and in each of the 5 subsequent
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
35
beginning with the tax year in which the trader receives the proceeds
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
40
spreading period, and
(b)
a person who carried on the trade immediately before the change
continues to carry on the trade immediately after the change.

Income Tax (Trading and Other Income) Bill
Part 9 — Partnerships
369

(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.
(6)
Such amounts are charged as if—
(a)
that person or those persons had at all times been carrying on the trade,
5
and
(b)
everything done to or by the predecessors of that person or those
persons in carrying on the trade had been done to or by that person or
those persons.
862
Sale of patent rights: effect of later cessation of trade
10
(1)
This section applies if—
(a)
a person (“the trader”) sells the whole or part of any patent rights in
carrying on a trade,
(b)
by virtue of section 861 a charge under section 587 falls to be made on
any person for the time being carrying on the trade in partnership,
15
(c)
any such person permanently ceases to carry on the trade thereafter,
and
(d)
no person who carried on the trade immediately before the cessation
continues to carry on the trade immediately after the cessation.
(2)
Any amounts which would have been chargeable in later tax years are charged
20
in the tax year in which the cessation occurs.
(3)
Each partner’s share (or, if the partner is dead, the share of the partner’s
personal representatives) of any additional amount chargeable under
subsection (2) is determined in accordance with the firm’s profit-sharing
arrangements immediately before the cessation.
25
(4)
If an additional amount is chargeable under subsection (2), the person liable
may elect that the amount of income tax payable should be reduced to the
amount that would have been payable on the assumptions mentioned in
subsection (5).
(5)
The assumptions are—
30
(a)
that subsection (2) does not apply, and
(b)
that the total of the amounts that would have been charged in later tax
years is charged in equal instalments in each of the tax years—
(i)
beginning with the year in which the trader received the
proceeds of the sale or instalment of those proceeds, and
35
(ii)
ending with the year in which the cessation occurs.
(6)
The election must be made on or before the first anniversary of the normal self-
assessment filing date for the tax year in which the cessation occurred.
(7)
For the purposes of this section “profit-sharing arrangements” means the rights
of the partners to share in the profits of the trade.
40
863
Limited liability partnerships
(1)
For income tax purposes, if a limited liability partnership carries on a trade,
profession or business with a view to profit—

Income Tax (Trading and Other Income) Bill
Part 10 — General provisions
Chapter 1 — Introduction
370

(a)
all the activities of the limited liability partnership are treated as carried
on in partnership by its members (and not by the limited liability
partnership as such),
(b)
anything done by, to or in relation to the limited liability partnership
for the purposes of, or in connection with, any of its activities is treated
5
as done by, to or in relation to the members as partners, and
(c)
the property of the limited liability partnership is treated as held by the
members as partnership property.

References in this subsection to the activities of the limited liability partnership
are to anything that it does, whether or not in the course of carrying on a trade,
10
profession or business with a view to profit.
(2)
For all purposes, except as otherwise provided, in the Income Tax Acts—
(a)
references to a firm include a limited liability partnership in relation to
which subsection (1) applies,
(b)
references to members of a firm include members of such a limited
15
liability partnership,
(c)
references to a company do not include such a limited liability
partnership, and
(d)
references to members of a company do not include members of such a
limited liability partnership.
20
(3)
Subsection (1) continues to apply in relation to a limited liability partnership
which no longer carries on any trade, profession or business with a view to
profit—
(a)
if the cessation is only temporary, or
(b)
during a period of winding up following a permanent cessation,
25
provided—
(i)
the winding up is not for reasons connected in whole or in part
with the avoidance of tax, and
(ii)
the period of winding up is not unreasonably prolonged.

This is subject to subsection (4).
30
(4)
Subsection (1) ceases to apply in relation to a limited liability partnership—
(a)
on the appointment of a liquidator or (if earlier) the making of a
winding-up order by the court, or
(b)
on the occurrence of any event under the law of a territory outside the
United Kingdom corresponding to an event specified in paragraph (a).
35
Part 10
General provisions
Chapter 1
Introduction
864
Overview of Part 10
40
This Part —
(a)
contains general rules which are of wider application than to a
particular Part of this Act including certain calculation rules (see
Chapter 2), and

Income Tax (Trading and Other Income) Bill
Part 10 — General provisions
Chapter 2 — General calculation rules etc.
371

(b)
deals with supplementary matters including general definitions (see
Chapter 3).
Chapter 2
General calculation rules etc.
Unpaid remuneration
5
865
Unpaid remuneration: non-trades and non-property businesses
(1)
This section applies if, in calculating profits or other income of a period of
account for income tax purposes—
(a)
an amount is charged in the accounts for the period in respect of
employees’ remuneration, and
10
(b)
a deduction for the remuneration would otherwise be allowable for the
period.
(2)
For this purpose “profits or other income” does not include the profits of—
(a)
a trade, profession or vocation, or
(b)
a property business,
15

but see subsection (6).
(3)
No deduction is allowed for the remuneration for the period of account unless
it is paid before the end of the period of 9 months immediately following the
end of the period of account.
(4)
If the remuneration is paid after the end of that 9 month period, a deduction for
20
it is allowed for the period of account in which it is paid.
(5)
Section 37 (supplementary provision) applies for the purposes of this section
as it applies for the purposes of section 36 (unpaid remuneration: trades,
professions and vocations).
(6)
Provision corresponding to that made by this section is made by—
25
(a)
sections 36 and 37 (in relation to trades, professions and vocations), and
(b)
section 272 (in relation to property businesses).
Employee benefit contributions
866
Employee benefit contributions: non-trades and non-property businesses
(1)
This section applies if, in calculating a person’s profits or other income of a
30
period for income tax purposes—
(a)
the profits or other income of the period are required to be calculated
for those purposes, and
(b)
a deduction would otherwise be allowable for the period for any
employee benefit contributions made or to be made by the person (“the
35
employer”) (but see subsection (5)).
(2)
For this purpose “profits or other income” does not include the profits of—
(a)
a trade, profession or vocation, or
(b)
a property business,

Income Tax (Trading and Other Income) Bill
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Chapter 2 — General calculation rules etc.
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but see subsection (7).
(3)
No deduction is allowed for the contributions for the period except so far as—
(a)
qualifying benefits are provided, or qualifying expenses are paid, out
of the contributions during the period or within 9 months from the end
of it, or
5
(b)
if the making of the contributions is itself the provision of qualifying
benefits, the contributions are made during the period or within 9
months from the end of it.
(4)
An amount disallowed under subsection (3) is allowed as a deduction for a
subsequent period so far as—
10
(a)
qualifying benefits are provided out of the contributions before the end
of the subsequent period, or
(b)
if the making of the contributions is itself the provision of qualifying
benefits, the contributions are made before the end of the subsequent
period.
15
(5)
This section does not apply to any deduction that is allowable for—
(a)
anything given as consideration for goods or services provided in the
course of a trade or profession,
(b)
contributions under a registered pension scheme or under a
superannuation fund to which section 615(3) of ICTA applies,
20
(c)
contributions under a qualifying overseas pension scheme in respect of
an individual who is a relevant migrant member of the pension scheme
in relation to the contributions, or
(d)
contributions under an accident benefit scheme.

For the purposes of paragraph (c) “qualifying overseas pension scheme” and
25
“relevant migrant member” have the same meaning as in Schedule 33 to FA
2004 (see paragraphs 4 to 6 of that Schedule).
(6)
Sections 39 to 44 (supplementary provisions) apply for the purposes of this
section as they apply for the purposes of section 38 (employee benefit
contributions: trades, professions and vocations).
30
(7)
Provision corresponding to that made by this section is made by—
(a)
sections 38 to 44 (in relation to trades, professions and vocations), and
(b)
section 272 (in relation to property businesses).
Business entertainment and gifts
867
Business entertainment and gifts: non-trades and non-property businesses
35
(1)
This section applies for the purpose of calculating profits or other income
charged to income tax which arise from the carrying on of a business.
(2)
For this purpose “business” does not include—
(a)
a trade, profession or vocation, or
(b)
a property business,
40

but see subsection (7).
(3)
The general rule is that no deduction is allowed in calculating the profits or
other income for expenses incurred in providing entertainment or gifts in
connection with the business.

Income Tax (Trading and Other Income) Bill
Part 10 — General provisions
Chapter 2 — General calculation rules etc.
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(4)
A deduction for expenses which are incurred—
(a)
in paying sums to or on behalf of an employee of the person carrying
on the business, or
(b)
in putting sums at the disposal of an employee of that person,

is prohibited by the general rule if (and only if) the sums are paid, or put at the
5
employee’s disposal, exclusively for meeting expenses incurred or to be
incurred by the employee in providing the entertainment or gift.
(5)
The general rule is subject to—
section 46 (business entertainment: exceptions), and
section 47 (business gifts: exceptions),
10

which apply in relation to a business as they apply in relation to a trade (but as
if the reference to a basis period were to a tax year).
(6)
For the purposes of this section and those two sections as so applied—
(a)
“employee”, in relation to a company, includes a director of the
company and a person engaged in the management of the company,
15
(b)
“entertainment” includes hospitality of any kind, and
(c)
the expenses incurred in providing entertainment or a gift include
expenses incurred in providing anything incidental to the provision of
entertainment or a gift.
(7)
Provision corresponding to that made by this section is made by—
20
(a)
sections 45 to 47 (in relation to trades, professions and vocations), and
(b)
section 272 (in relation to property businesses).
Social security contributions
868
Social security contributions: non-trades etc.
(1)
This section applies for the purpose of calculating profits or other income
25
charged to income tax.
(2)
For this purpose “profits or other income” does not include—
(a)
the profits of a trade, profession, or vocation,
(b)
the profits of a property business, or
(c)
employment income,
30

but see subsection (6).
(3)
No deduction is allowed for any contribution paid by any person under—
(a)
Part 1 of the Social Security Contributions and Benefits Act 1992 (c. 4),
or
(b)
Part 1 of the Social Security Contributions and Benefits (Northern
35
Ireland) Act 1992 (c. 7).
(4)
But this prohibition does not apply to an employer’s contribution.
(5)
For this purpose “an employer’s contribution” means—
(a)
a secondary Class 1 contribution,
(b)
a Class 1A contribution, or
40
(c)
a Class 1B contribution,