Clause 719: Recovery of tax where consideration receivable by person not assessed

2077.     This clause deals with recovery of tax where consideration is receivable by a person (B) other than the person assessed (A). It is based on section 777(8) and (13) of ICTA.

2078.     Under subsection (3) A is entitled to recover from B any part of the tax which A has paid. To assist with this, A may obtain a certificate of tax paid. See the commentary on clause 720.

2079.     Clause 719 also includes a "tie-breaker" provision. This is a minor change in the law. See Change 110 in Annex 1.

Clause 720: Recovery of tax: certificates of tax paid etc

2080.     This clause deals with certificates of tax paid for the purposes of clause 719(3). It is based on section 777(8) of ICTA.

2081.     Section 777(8) of ICTA provides that the certificate is to be furnished by "the Board or an inspector". In 1969, when this legislation was introduced, section 5 of Income Tax Management Act 1964 provided that all assessments to income tax at the standard rate were to be made by an inspector and all assessments to surtax were to be made by the Board. A consequential amendment to the reference to "the Board" in section 777(8) appears to have been missed on the abolition of surtax. This clause therefore now omits "the Board" as redundant and, following section 7 of CRCA, refers to "an officer of Revenue and Customs" rather than "an inspector".

2082.      Subsection (3) gives a signpost to the clause of Part 14 (Deduction of tax at source) which rewrites section 777(9) of ICTA.

Clause 721: Power to obtain information

2083.     This clause enables HMRC to obtain information which is relevant to this Chapter. It is based on section 778 of ICTA.

2084.     Section 778 of ICTA refers to "the Board or an inspector" and "the Board or the inspector". For the reason given in the note on clause 720, consequential amendments to the references to "the Board" in section 778 appear to have been missed on the abolition of surtax. This clause therefore now omits "the Board" as redundant and, following section 7 of CRCA, refers to "an officer of Revenue and Customs" rather than "an inspector".

2085.     Subsection (1) includes a minor change in the law: it expressly restricts the particulars to be provided to those which an officer of Revenue and Customs may reasonably require. See Change 107 in Annex 1.

Clause 722: Minor definitions

2086.     This clause non-exhaustively defines "company" and "share". It is based on section 777(13) of ICTA.

Chapter 5: Avoidance involving trading losses

Overview

2087.     The Chapter provides for the recovery of certain loss reliefs if regulations apply to reduce an individual's contribution to the firm so that the contribution becomes lower, or even lower, than relief already given to the individual.

2088.     This Chapter also sets out provisions about avoidance involving trade losses made by individuals in a trade exploiting a film or licence. The provisions tackle schemes used by individuals to try to convert a tax deferral into a permanent tax gain.

2089.     The Chapter is based on Chapter 9 of Part 3 of FA 2004 and Chapter 7 of Part 2 of FA 2005.

Clause 723: Overview of Chapter

2090.     This clause provides an overview of the Chapter. It is new.

2091.     Subsection (1) signposts the clauses dealing with the three sets of circumstances addressed by the Chapter.

2092.     The definition of "capital gains relief" refers to section 261B of TCGA, which is inserted by Schedule 1 to this Bill.

Clause 724: Charge to tax on income treated as received under section 725

2093.     This clause imposes a charge to tax on income treated as received under clause 725. It is based on section 74(4) of FA 2005.

2094.     The clause follows the approach to charging provisions adopted in ITTOIA.

Clause 725: Partners claiming excess sideways or capital gains relief

2095.     This clause treats an individual as receiving income in certain cases where regulations made under clause 114 of this Bill result in the individual having claimed excessive sideways relief or capital gains relief for post-1 December 2004 trade losses made by the individual as a limited partner, a member of a limited liability partnership or a non-active partner. It is based on section 74 of FA 2005.

2096.     The clause specifies that income is treated as arising when a "chargeable event" occurs, and that such an event occurs at any time when the regulations result in the individual having claimed excessive relief. Such excesses (of losses so claimed over the individual's contribution to the firm) arise because the individual's contribution to the firm is treated by the regulations as reduced on the occurrence of certain events. Such an event might be, for example, the release of a loan taken out to finance the individual's contribution to the firm (see Condition 3 of Regulation 4(1) of SI 2005/2017, as consequentially amended by Schedule 2 Part 5 (application of existing regulations under sections 114 and 735)).

2097.     Subsection (2)(b) refers to "capital gains relief" as part of making explicit the interaction between section 72 of FA 1991 and the provisions in ICTA, FA 2004 and FA 2005 which restrict the giving of sideways relief. See Change 13 in Annex 1.

2098.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 726: Calculating the amount of income treated as received

2099.     This clause specifies how the amount of income treated as received by the previous clause is to be calculated. It is based on section 75 of FA 2005.

2100.     The basic proposition is that the amount is the reduction in the individual's contribution to the firm resulting from the application of the regulations. Nevertheless, the amount of income treated as received cannot exceed the amount of post-1 December 2004 trade losses claimed (and not reclaimed). Neither can it exceed the excess of the trade losses claimed (and not reclaimed) over the contribution to the firm.

2101.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 727: Meaning of "the total amount of trade losses claimed" etc

2102.     This clause defines "the total amount of the trade losses claimed", "the individual's contribution to the firm" and other terms. It is based on section 74 of FA 2005.

2103.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 728: Meaning of "post-1 December 2004 loss"

2104.     This clause defines "post-1 December 2004 loss". It is based on section 76 of FA 2005.

Clause 729: Charge to tax on income treated as received under section 730

2105.     This clause imposes a charge to tax on income treated as received under clause 730. It is based on section 119(4) of FA 2004.

2106.     The clause follows the approach to charging provisions adopted in ITTOIA.

Clause 730: Individuals claiming sideways or capital gains relief for film-related losses

2107.     This clause sets out circumstances in which an individual, who has claimed sideways or capital gains relief for film-related losses, is treated as receiving income. It is based on section 119 of FA 2004.

2108.     The clause specifies that income is treated as arising when a "chargeable event" occurs, and that such an event occurs at the time that the last of three conditions (relevant claim, relevant disposal and exit event) become satisfied.

2109.     Subsection (2) specifies that an exit event will occur every time an individual receives non-taxable consideration for a relevant disposal, as well as certain times when the individual makes a further claim for sideways relief or capital gains relief or the individual's contribution to the firm is reduced. So a number of exit events may occur for any particular relevant disposal. And a number of chargeable events may occur for a particular tax year.

2110.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 731: Meaning of "non-taxable consideration" etc

2111.     This clause defines "non-taxable consideration". It is based on sections 122(3) and 123(2) of FA 2004.

2112.     In particular, the clause makes it clear that, if the consideration is received after deduction of costs or any other payment relating to the relevant disposal or exit event, it is the gross amount that is treated as the non-taxable consideration.

Clause 732: Meaning of "disposal of a right of the individual to profits" etc

2113.     This clause specifies a number of things that are to count as a disposal of a right of an individual to profits arising from a trade. It is based on section 120 of FA 2004.

Clause 733: Meaning of "film-related losses" etc

2114.     This clause defines various terms. It is based on sections 121(1) and (1A) and section 123(1) of FA 2004.

2115.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 734: Meaning of "capital contribution"

2116.     This clause defines capital contribution. It is based on sections 121 and 122(1) of FA 2004.

2117.      There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 735: Exclusion of amounts in calculating capital contribution by a partner

2118.     This clause enables regulations to be made, which can apply on a retrospective basis, to exclude certain amounts from the calculation of an individual's capital contribution. It is based on section 122A of FA 2004.

2119.     Regulations under this provision are subject to the affirmative resolution procedure.

2120.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

2121.      Some regulations have been made under section 122A of FA 2004. See the Partnerships (Restrictions on Contributions to a Trade) Regulations 2005 (SI 2005/2017) and the Partnerships (Restrictions on Contributions to a Trade) Regulations 2006 (SI 2006/1639). See also the commentary on Parts 5 and 13 of Schedule 2 about consequential amendments made to these regulations by this Bill.

2122.     In subsection (5), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See Change 145 in Annex 1, clause 952 and the commentary on that clause.

Clause 736: Prohibition against double counting

2123.     This clause ensures that consideration is only brought into account once. It is based on section 122(2) of FA 2004.

2124.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on Chapter 3 of Part 4 (restrictions on relief for certain partners) and Change 16 in Annex 1.

Clause 737: Charge to tax on income treated as received under section 738

2125.     This clause imposes a charge to tax on income treated as received under clause 738. It is based on section 127(2) of FA 2004.

2126.     The clause follows the approach to charging provisions adopted in ITTOIA.

Clause 738: Partners claiming relief for licence-related trading losses

2127.     This clause sets out circumstances in which an individual, who was a non-active partner in an early year, and who has claimed sideways relief or capital gains relief for a loss deriving from expenditure related to a licence, is treated as receiving income. It is based on sections 126 and 127 of FA 2004.

2128.     The meaning of non-active partner is explained in clause 742, by reference to provisions in Chapter 3 of Part 4.

2129.     There must be a relevant disposal of the licence which requires that the individual receives non-taxable consideration (defined in subsection (5)).

2130.     Income is treated as arising when a "chargeable event" occurs which could be at any time when an individual receives non-taxable consideration for a disposal or the individual makes a further claim for sideways relief or capital gains relief. So a number of chargeable events may occur for a particular tax year.

Clause 739: Calculation of amount of income treated as received by the individual

2131.     This clause sets out a step calculation for finding the income which the individual is treated as receiving. It is based on section 127(4) to (6) of FA 2004.

Clause 740: Supplementary provision relating to calculation in section 739

2132.     This clause supplements clause 739. It is based on section 128 of FA 2004.

Clause 741: Meaning of "disposal of the licence" etc

2133.     This clause specifies a number of things that are to count as a disposal of a licence. It is based on section 129 of FA 2004.

Clause 742: Other definitions

2134.     This clause includes various definitions used in relation to the restrictions for losses related to a licence. It is based on sections 126, 127(7) and 130 of FA 2004.

Part 13: Income tax liability: miscellaneous rules

Overview

2135.     This Part contains four Chapters setting out various miscellaneous rules. Chapters 1 to 3 contain rules relating respectively to limits on the liability to income tax of non-UK residents, to residence for income tax purposes of individuals and companies and to liability to income tax in respect of income from property held in the joint names of spouses or civil partners. Chapter 4 contains a miscellany of other rules.

Chapter 1: Limits on liability to income tax of non-UK residents

Overview

2136.     This Chapter brings together the provisions of FA 2003 limiting the liability to income tax of non-UK resident companies (liable otherwise than as trustees) and those of FA 1995 limiting such liability of all other non-UK residents (including companies liable as trustees).

2137.     This Chapter is based on:

• section 128 of FA 1995 which limits the liability to income tax of non-UK residents, except the liability of non-UK resident companies liable otherwise than as trustees;

• section 127 of FA 1995 so far as it supplements section 128 of that Act;

• section 151 of FA 2003 which limits the liability to income tax of non-UK resident companies liable otherwise than as trustees; and

• Schedule 26 to FA 2003 so far as it supplements section 151(2)(c) of that Act.

2138.     So far as they respectively supplement section 128 of FA 1995 and section 151(2)(c) of FA 2003, section 127 of FA 1995 and Schedule 26 to FA 2003 are in many respects substantially the same. Those provisions have, as far as possible, been combined in this Chapter.

2139.     Section 127 of FA 1995 continues in force for the purpose of supplementing section 126 of that Act (UK representatives of non-residents) and Schedule 26 to FA 2003 continues in force for the purpose of supplementing section 148(3) of that Act (meaning of "permanent establishment").

Clause 743: Overview of Chapter

2140.     This clause identifies the categories of non-UK residents to which this Chapter applies and provides signposts to the clauses applicable to each category. It is new.

Clause 744: Limit on liability to income tax of non-UK residents

2141.     This clause relates to the liability to income tax for a tax year of non-UK residents other than companies and of non-UK resident companies liable as trustees. It is based on section 128(1), (2), (4) and (12) of FA 1995.

2142.     This clause does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non-UK resident would otherwise be liable.

2143.     The combined effect of subsections (4) and (5) is that the non-UK resident is not liable to income tax in respect of disregarded income (see clause 746), except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.

2144.     Subsection (5)(a) is drafted in terms of the non-UK resident's disregarded income being left out of account, rather than in terms of its being deducted from total income as provided in section 128(1)(a)(i) of FA 1995.

2145.     Subsection (5)(b) provides that personal reliefs are to be left out of account. A non-UK resident may be entitled to such reliefs under section 278(2)(a) of ICTA, under clause 56 or 460 of this Bill or by virtue of a double taxation agreement. See the overview commentary on Part 3 for the interrelation of section 278(2)(a) of ICTA and clauses 56 and 460 of this Bill.

2146.     All the reliefs to which section 278 of ICTA and clauses 56 and 460 of this Bill apply are listed in subsection (6).

Clause 745: Case where limit not to apply

2147.     This clause provides that the liability of non-UK resident trustees to income tax is not limited, if a beneficiary of the trust has a residence connection with the United Kingdom. It is based on section 128(5) and (6) of FA 1995.

Clause 746: Meaning of "disregarded income"

2148.     This clause sets out the various descriptions of income which are defined as "disregarded income". It is based on section 128(2) and (3) of FA 1995.

2149.     Subsection (2) provides that income is not disregarded income if the non-UK resident has a UK representative in relation to the income. This is the case if, for example, the non-UK resident has income within the description of disregarded savings and investment income in clause 758 which is brought into account in computing the profits of a manufacturing business carried on by the non-UK resident through a branch in the United Kingdom.

2150.     The definition of "disregarded pension income" in subsection (3) is based on section 128(3)(cc), (cca) and (cd) of FA 1995. Section 128(3)(cd) of FA 1995 relates to income which arises from a source in the United Kingdom and is chargeable to tax under Part 9 of ITEPA because section 609, 610 or 611 of that Act applies to it.

2151.     Each of sections 609, 610 and 611 of ITEPA states that the section applies to an annuity which arises from a source outside the United Kingdom only if it is paid to a person resident in the United Kingdom. The definition of disregarded pension income omits the reference to the income arising from a source in the United Kingdom, on the basis that the wording of those sections of ITEPA makes it unnecessary.

Clause 747: Meaning of "disregarded transaction income"

2152.     This clause defines "disregarded transaction income". It is based on sections 127(1) and (15) and 128(3)(d) of FA 1995.

2153.     Subsections (1) and (2) relate to income arising from a business carried on through a broker in the United Kingdom and introduce the conditions, referred to as "the independent broker conditions", which must be met if the income is to be disregarded transaction income.

2154.     Subsections (3) and (4) relate to income arising from a business carried on through an investment manager in the United Kingdom and introduce the conditions, referred to as "the independent investment manager conditions", which must be met if the income is to be disregarded transaction income.

2155.     The independent broker conditions in clause 750 and the independent investment manager conditions in clauses 751 to 757 replace for the purposes of subsections (2) and (4) the indirect references in section 128(3)(d) of FA 1995, through section 127(1)(b) and (c) of that Act, to section 127(2) and (3) of that Act.

2156.     The words "without being chargeable as mentioned in paragraphs (a) to (ce) above" in section 128(3)(d) of FA 1995 have been omitted in subsections (2) and (4) on the basis that they are unnecessary.

2157.     Subsection (5) defines the term "transaction income". This definition includes the provisions of section 127(15)(b) of FA 1995 which explain what is meant by income arising from so much of a business as relates to transactions carried out through a branch or agency on behalf of a non-UK resident.

Clause 748: Limit on liability to income tax of non-UK resident companies

2158.     This clause relates to the liability to income tax for a tax year of a non-UK resident company which is liable otherwise than as a trustee. It is based on section 151(1), (3) and (4) of FA 2003.

2159.     This clause does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non-UK resident company would otherwise be liable.

2160.     The combined effect of subsections (3) and (4) is that the non-UK resident company is not liable to income tax in respect of disregarded company income except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.

2161.     Subsection (4) is drafted in terms of the non-UK resident company's disregarded company income being left out of account, rather than in terms of its being deducted from total income as provided in section 151(1)(a)(i) of FA 2003.

2162.     Section 151(1)(a)(ii) of FA 2003, which disregards reliefs to which a company is entitled under section 788 of ICTA, has been omitted. It is not appropriate to companies. See Change 113 in Annex 1.

Clause 749: Meaning of "disregarded company income"

2163.     This clause sets out the various descriptions of income which are defined as "disregarded company income". It is based on section 151(2) of FA 2003 and paragraphs 1(1) and (2), 2(1) and 3(1) of Schedule 26 to that Act.

2164.     The term "disregarded company income" mirrors the term "disregarded income" defined in clause 746 for the purposes of clause 744. Section 151(2) of FA 2003 sets out the "income to which this section applies", but does not make use of a defined term.

2165.     Subsection (1)(c) relates to income arising from transactions carried out through a broker in the United Kingdom and introduces the conditions, referred to as "the independent broker conditions", which must be met if the income is to be disregarded company income.

2166.     Subsection (1)(d) relates to income arising from investment transactions carried out through an investment manager in the United Kingdom and introduces the conditions, referred to as "the independent investment manager conditions", which must be met if the income is to be disregarded company income.

2167.     Subsection (1)(c) and (d) are based on section 151(2)(c) of FA 2003, which refers to a transaction carried out through a broker or investment manager in the United Kingdom "acting as an agent of independent status in the ordinary course of his business". Schedule 26 to that Act then sets out the conditions which must be met if the broker or investment manager is to be treated as so acting.

2168.     This structure has been simplified so that subsection (1)(c) and (d) refer directly to the independent broker conditions in clause 750 and the independent investment manager conditions in clauses 751 to 757.

2169.     The effect of the words "in the course of that company's trade" in paragraph 1(1) of Schedule 26 to FA 2003 has been preserved by including the equivalent words in subsection (1)(c) and (d).