Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
371

(a)
the total amount of film-related losses made by the individual in the
trade so far as they are losses for which the individual has made a
relevant claim, less
(b)
the amount of any relevant recovered relief.
(4)
“The amount of any relevant recovered relief” means—
5
(a)
amount A, or
(b)
if less, amount B.
(5)
Amount A is the total amount of income treated as received by the individual
under section 725 (recovery of excess relief) as a result of the application of that
section in relation to claims for relief for losses made by the individual in the
10
trade.
(6)
Amount B is the total amount of film-related losses within subsection (7) for
which the individual has made a relevant claim.
(7)
A loss is within this subsection if it is made by the individual in the trade—
(a)
in a tax year at a time during which the individual carries on the trade
15
as a member of an LLP or as a limited partner, or
(b)
in an early tax year during which the individual carries on the trade as
a non-active partner.
(8)
Expressions used in subsection (7) are to be read as if contained in Chapter 3 of
Part 4.
20
(9)
Subsection (10) applies if—
(a)
the individual has made a relevant claim for a film-related loss made in the
trade as a partner in a firm, and
(b)
the firm is carrying on, or has carried on, more than one trade.
(10)
For the purpose of determining the individual’s claimed film-related losses—
25
(a)
apply subsection (3)(a) in relation to each of the trades and then add the results
together,
(b)
apply subsection (5) as if the reference to the trade were a reference to any of
the trades, and
(c)
apply subsections (6) and (7) in relation to each of the trades and then add the
30
results together.
734
Meaning of “capital contribution”
(1)
This section applies for the purposes of section 730.
(2)
The individual’s capital contribution is the amount which the individual has
contributed to the trade as capital less so much of that amount (if any) as is
35
within subsection (6).

This is subject to subsection (3).
(3)
If the individual has made a relevant claim for a film-related loss made in the
trade as a partner in a firm, the individual’s capital contribution is the amount
which the individual has contributed to the firm as capital less so much of that
40
amount (if any) as is within subsection (6).
(4)
In particular, the individual’s share of any profits of the firm is to be included
for the purposes of subsection (3) in the amount which the individual has

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
372

contributed to the firm as capital so far as that share has been added to the
firm’s capital.
(5)
In subsection (4) the reference to profits are to profits calculated in accordance
with generally accepted accounting practice (before any adjustment required
or authorised by law in calculating profits for income tax purposes).
5
(6)
An amount of capital is within this subsection if it is an amount which—
(a)
the individual has previously drawn out or received back,
(b)
the individual is entitled to draw out or receive back,
(c)
another person has reimbursed to the individual, or
(d)
the individual is entitled to require another person to reimburse to the
10
individual.
(7)
But if a chargeable event occurs, anything treated for the purposes of section
730(5)(a) as consideration received by the individual for a relevant disposal is
not to be treated as capital within subsection (6) in calculating the individual’s
capital contribution for the purposes of section 730(5)(b).
15
(8)
In this section—
(a)
any reference to drawing out, receiving back or reimbursing an amount
is to doing so directly or indirectly,
(b)
any reference to drawing out or receiving back an amount does not
include drawing out or receiving back an amount which, because of its
20
being drawn out or received back, is chargeable to income tax as profits
of a trade, and
(c)
any reference to reimbursing an amount includes discharging or
assuming all or part of a liability of the individual,

but the express provision made by paragraph (c) does not affect what counts
25
as the receipt back or reimbursement of an amount.
(9)
This section needs to be read with any regulations made under section 735
(specified amounts to be excluded in calculating a partner’s capital
contribution for the purposes of section 730).
735
Exclusion of amounts in calculating capital contribution by a partner
30
(1)
This section applies if an individual makes a relevant claim for a film-related
loss made by the individual in a trade as a partner in a firm.
(2)
The Commissioners for Her Majesty’s Revenue and Customs may by
regulations provide that any amount of a specified description is to be
excluded in calculating the individual’s capital contribution for the purposes
35
of section 730.
(3)
“Specified” means specified in the regulations.
(4)
The regulations may—
(a)
make provision having retrospective effect,
(b)
contain incidental, supplemental, consequential and transitional
40
provision and savings, and
(c)
make different provision for different cases or purposes.
(5)
The provision which may be made as a result of subsection (4)(b) includes
provision amending or repealing any provision of an Act passed before FA
2005.
45

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
373

(6)
No regulations may be made under this section unless a draft of them has been
laid before and approved by a resolution of the House of Commons.
736
Prohibition against double counting
(1)
Subsections (2) and (3) apply for the purpose of calculating the amount of
income received under section 730 on a chargeable event in respect of the
5
individual and the trade.
(2)
If chargeable events have previously occurred in respect of the individual and
the trade, any consideration taken into account in calculating the amount of
income received on an earlier chargeable event is left out of account.
(3)
If chargeable events have previously occurred in respect of the individual and
10
the trade, the amount of income received as a result of section 730(5)(b) is
reduced (but not below nil) by the total amount of income received on earlier
chargeable events as a result of that provision.
(4)
In a case to which section 733(10) (cases in which firm is carrying on, or has
carried on, more than one trade) applies—
15
(a)
subsections (2) and (3) of this section have effect as if references to the
trade were references to any of the firm’s trades, and
(b)
if chargeable events in respect of the individual and any of the firm’s
trades occur at the same time, to find the total amount of income
received under section 730 at that time on those chargeable events—
20
(i)
calculate separately the income received on each chargeable
event ignoring the other chargeable events,
(ii)
add the results from sub-paragraph (i) together, and
(iii)
reduce the total amount of income resulting from sub-
paragraph (ii) so far as necessary to ensure that no amount is
25
included more than once in that total.
Individuals in partnership claiming relief for licence-related trading losses
737
Charge to tax on income treated as received under section 738
(1)
Income tax is charged on income treated as received by an individual under
section 738.
30
(2)
Tax is charged under this section on the amount of the income treated as
received in the tax year.
(3)
The person liable for any tax charged under this section is the individual
treated as receiving the income.
738
Partners claiming relief for licence-related trading losses
35
(1)
This section applies if—
(a)
an individual carries on a trade as a non-active partner during an early
tax year,
(b)
the individual makes a loss in the trade in that tax year for which the
individual claims sideways relief or capital gains relief (a “relevant
40
claim”),

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
374

(c)
the loss derives to any extent from expenditure incurred in the trade in
exploiting a licence acquired in carrying on the trade, and
(d)
there is a relevant disposal of the licence.
(2)
For the purposes of this section and section 739 there is a relevant disposal of
the licence whenever the individual receives non-taxable consideration for—
5
(a)
a disposal of the licence, or
(b)
a disposal of a right to income under an agreement related to or
containing the licence.
(3)
If one or more chargeable events occur in any tax year, the individual is treated
as receiving an amount of income in the tax year.
10

The income is treated as arising otherwise than as profits of the trade.
(4)
For the purposes of this section and section 739 a chargeable event occurs
whenever—
(a)
there is a relevant disposal of the licence (if by that time the individual
has made a relevant claim), or
15
(b)
the individual makes a relevant claim (if by that time there has been a
relevant disposal of the licence).
(5)
For the purposes of this section and section 739 consideration is non-taxable
if—
(a)
(apart from section 737) it is not chargeable to income tax, and
20
(b)
its receipt is not an exit event for the purposes of section 730.
(6)
For the purposes of this section and section 739 it does not matter—
(a)
if the individual (or anyone else) is still carrying on the trade when a
chargeable event occurs,
(b)
if the individual receives both non-taxable and taxable consideration
25
for a relevant disposal of the licence, or
(c)
if a relevant disposal of the licence is part of a larger disposal.
739
Calculation of amount of income treated as received by the individual

The amount of income treated under section 738 as received by the individual
in the tax year is calculated by taking the following steps.
30


Step 1

Calculate, at the end of the tax year, the total amount of the claimed losses (so
far as relating to the licence) made by the individual in the trade in any early
tax year during which the individual carried on the trade as a non-active
35
partner.


Step 2

Calculate, at the end of the tax year, the total amount of the profits (so far as
relating to the licence) made by the individual in the trade in any tax year.
40


Step 3

Deduct the total calculated at Step 2 from the total calculated at Step 1.

The result is “the net licence-related loss”.

If the net licence-related loss is nil or a negative figure—
45
(a)
the income treated as received in the tax year is nil, and

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
375

(b)
ignore Steps 4 and 5.


Step 4

Calculate, at the end of the tax year, the total amount or value of all non-taxable
consideration received by the individual for relevant disposals (including
5
consideration received in previous tax years).


Step 5

Deduct from—
(a)
the net licence-related loss, or
10
(b)
if less, the total calculated at Step 4,

the total amount of all income treated under section 738 as received by the
individual in previous tax years as a result of chargeable events.

The result is the amount of the income treated as received in the tax year.

(If the result is a negative figure, the income is nil.)
15
740
Supplementary provision relating to calculation in section 739
(1)
This section applies for the purposes of section 739.
(2)
For the purposes of Step 1, the amount of a loss made in a tax year that relates
to the licence is so much of the loss in the tax year as derives from expenditure
incurred in the trade in exploiting the licence.
20
(3)
The amount of the loss that derives from such expenditure is determined on a
just and reasonable basis.
(4)
For the purposes of Step 1, a loss is a claimed loss if the individual has claimed
sideways relief or capital gains relief for the loss.
(5)
For the purposes of Step 2, the amount of profits made in a tax year that relates
25
to the licence is so much of the individual’s profits from the trade in the tax
year as derives from income arising from an agreement related to or containing
the licence.
(6)
The amount of the profits that derives from such income is determined on a just
and reasonable basis.
30
741
Meaning of “disposal of the licence” etc
(1)
For the purposes of section 738 any reference to—
(a)
a disposal of a licence acquired in carrying on a trade, or
(b)
a disposal of a right to income under an agreement related to or
containing a licence acquired in carrying on a trade (“a licence-related
35
agreement”),

includes, in particular, any of events A to E.
(2)
Event A is the revocation of the licence.
(3)
Event B is the disposal, giving up or loss of—
(a)
a right under the licence, or
40
(b)
a right to income (or any part of any income) under a licence-related
agreement,

by the individual or by a firm in which the individual is a partner.

Income Tax Bill
Part 12 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
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It does not matter if the right is disposed of, given up or lost as part of a larger
disposal, giving up or loss.
(4)
Event C is the disposal, giving up or loss of the individual’s interest in a firm
that has the licence or a right to income under a licence-related agreement
(including the dissolution of the firm).
5
(5)
Event D is a default in the payment of income to which—
(a)
the individual, or
(b)
a firm in which the individual is a partner,

has a right under a licence-related agreement.
(6)
Event E is a change in the individual’s entitlement to any profits or losses
10
relating to the licence the effect of which is that—
(a)
the individual’s share of any profits is reduced (including to nil), or
(b)
the individual becomes entitled to a share, or a greater share, of any
losses without becoming entitled to a corresponding share of profits.
(7)
The changes covered by event E include cases where there is an agreement
15
under which the individual is entitled—
(a)
to a particular share of any profits or losses relating to the licence in a
period (including a nil share), and
(b)
to a different share of any such profits or losses in a succeeding period
(including a nil share).
20
(8)
In such cases the change in the individual’s entitlement is treated for the
purposes of section 738 as occurring at the beginning of the succeeding period.
(9)
For the purposes of this section—
(a)
references to any profits relating to the licence are to any profits
deriving to any extent from income to which the individual has a right
25
under a licence-related agreement, and
(b)
references to any losses relating to the licence are to losses deriving to
any extent from expenditure incurred in exploiting the licence.
742
Other definitions
(1)
References in sections 738 and 739 to an individual carrying on a trade as a non-
30
active partner in an early tax year are to be read as if those sections were
contained in Chapter 3 of Part 4 (see, in particular, section 112).
(2)
But for that purpose, section 112(1)(b) (which contains a requirement that the
individual does not carry on the trade as a limited partner at any time during
the tax year) is treated as if it were omitted.
35
(3)
For the purposes of sections 738 to 741 an agreement is related to a licence if the
agreement and licence are entered into under the same arrangement
(regardless of when the agreement or licence is entered into).
(4)
For the purposes of sections 738 to 741 an agreement, or part of an agreement,
is not prevented from being a licence merely because it imposes an obligation
40
to do a thing (rather than merely gives authority to do it).

References to exploiting a licence are to be read in that light.

Income Tax Bill
Part 13 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
377

Part 13
Income tax liability: miscellaneous rules
Chapter 1
Limits on liability to income tax of non-UK residents
Introduction
5
743
Overview of Chapter
(1)
This Chapter provides for limits on the liability to income tax of non-UK
residents.
(2)
See sections 744 to 747 in the cases of—
(a)
a non-UK resident, other than a company, and
10
(b)
a non-UK resident company liable as a trustee.
(3)
See sections 748 and 749 in the case of a non-UK resident company which is
liable otherwise than as a trustee.
Limit for non-UK resident individuals, trustees etc
744
Limit on liability to income tax of non-UK residents
15
(1)
This section applies to income tax to which—
(a)
a non-UK resident, other than a company, is liable, or
(b)
a non-UK resident company is liable as a trustee.
(2)
Subsection (1) is subject to section 745 (case where limit not to apply).
(3)
The non-UK resident’s liability to income tax for a tax year is limited to the sum
20
of amounts A and B.
(4)
Amount A is the sum of—
(a)
any sums representing income tax deducted from the non-UK
resident’s disregarded income for the tax year (see section 746),
(b)
any sums representing income tax that are treated as deducted from or
25
paid in respect of that income, and
(c)
any tax credits in respect of that income.
(5)
Amount B is the amount that, apart from this section, would be the non-UK
resident’s liability to income tax for the tax year, if the following were left out
of account—
30
(a)
the non-UK resident’s disregarded income for the tax year, and
(b)
any relief mentioned in subsection (6) to which the non-UK resident is
entitled for the tax year as a result of—
(i)
section 56(3) or 460(3) of this Act or section 278(2) of ICTA
(residence etc of claimants), or
35
(ii)
double taxation arrangements.
(6)
The reliefs referred to in subsection (5) are—