Clause 750: The independent broker conditions

2170.     This clause sets out the independent broker conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by a broker in the United Kingdom for the purposes of clauses 746 and 749. It is based on the provisions of sections 127(1) and (2) and 128(3) of FA 1995 and section 151(2) of and paragraph 2(1) and (2) of Schedule 26 to FA 2003.

2171.     Three of the conditions, in section 127(2)(a) to (c) of FA 1995 and paragraph 2(2)(a) to (c) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to C, in subsections (2) to (4), which apply to all non-UK residents, including non-UK resident companies.

2172.     The final condition in section 127(2)(d) of FA 1995 is not substantively the same as the final condition in paragraph 2(2)(d) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.

2173.     Condition D in subsection (5), based on the condition in section 127(2)(d) of FA 1995, applies for the purposes of clause 746.

2174.     Condition E in subsection (6), based on the condition in paragraph 2(2)(d) of Schedule 26 to FA 2003, applies for the purposes of clause 749.

2175.     In subsection (5), the words "amounts which are chargeable to capital gains tax" reflect the words "other amounts" in section 127(2)(d) of FA 1995. Those other amounts are the "amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non-residents)" in section 126(2)(c) of that Act.

2176.     In subsection (5), a reference to "transaction income" has been substituted for the reference in section 127(2)(d) of FA 1995 to "taxable sums" The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent broker conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(2)(d) of FA 1995, the non-UK resident will not, under section 126(2) of that Act, have the broker as the non-UK resident's UK representative in relation to such chargeable gains.

2177.     In subsection (6), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to broking transactions.

Clause 751: The independent investment manager conditions

2178.     This clause sets out the independent investment manager conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by an investment manager in the United Kingdom for the purposes of clauses 746 and 749. It is based on the provisions of sections 127(1) and (3) and 128(3) of FA 1995 and section 151(2) of and paragraphs 3(1) and (2) and 7(2) of Schedule 26 to FA 2003.

2179.     Five of the conditions, in section 127(3)(a) to (e) of FA 1995 and paragraph 3(2)(a) to (e) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to E, in subsections (2) to (6), which apply to all non-UK residents, including non-UK resident companies.

2180.     The final condition in section 127(3)(f) of FA 1995 is not substantively the same as the final condition in paragraph 3(2)(f) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.

2181.     Condition F in subsection (7), based on the condition in section 127(3)(f) of FA 1995, applies for the purposes of clause 746.

2182.     Condition G in subsection (8), based on the condition in paragraph 3(2)(f) of Schedule 26 to FA 2003, applies for the purposes of clause 749.

2183.     In subsection (7), the words "amounts which are chargeable to capital gains tax" reflect the words "other amounts" in section 127(3)(f) of FA 1995. Those other amounts are the "amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non-residents)" in section 126(2)(c) of that Act.

2184.     In subsection (7), a reference to "transaction income" has been substituted for the reference in section 127(3)(f) of FA 1995 to "taxable sums". The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent investment manager conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(3)(f) in FA 1995, the non-UK resident will not under section 126(2) of that Act have the investment manager as the non-UK resident's UK representative in relation to such chargeable gains.

2185.     In subsection (8), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to investment transactions.

Clause 752: Investment managers: the 20% rule

2186.     This clause sets out the "20% rule" for investment managers. It is based on section 127(4) of FA 1995 and paragraph 4(1) of FA 2003 which are substantively the same.

2187.     The 20% rule has two requirements. The first requirement is that the investment manager and connected persons must intend that any interest that they may have in the non-UK resident's "relevant disregarded income" will not exceed 20% of that income. The second requirement applies if that intention is not fulfilled. The 20% rule will continue to be met if the intention is not fulfilled only because of matters outside the control of the investment manager or connected persons and of their not having taken reasonable steps to mitigate the effect of those matters.

Clause 753: Meaning of "qualifying period"

2188.     This clause defines the term "qualifying period". It is based on section 127(7) of FA 1995 and paragraph 4(2) of Schedule 26 to FA 2003.

2189.     Subsection (2), based on section 127(7) of FA 1995, makes use of the term "transaction income", defined in clause 747(5), in substitution for the term "taxable sums" in the source legislation. "Taxable sums" includes not only income but also chargeable gains, but in this context a reference to chargeable gains is otiose and has been omitted.

2190.     Subsection (3), based on paragraph 4(2) of Schedule 26 to FA 2003, makes explicit that the accounting period referred to is that of the non-UK resident company.

2191.     The separate definitions in subsections (2) and (3) preserve the difference between their respective source provisions and ensure that those subsections remain in line with those provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.

Clause 754: Meaning of "relevant disregarded income"

2192.     This clause defines the term "relevant disregarded income". It is based on section 127(5) of FA 1995 and paragraph 4(3) of Schedule 26 to FA 2003.

2193.     In subsection (2), a reference to "the total of the non-UK resident's income" has been substituted for the reference in section 127(5) of FA 1995 to "the aggregate of such of the profits and gains of the non-resident". As section 127(5)(b) of FA 1995 requires that this aggregate falls to be treated (apart from the 20% rule) as excluded income, the reference to "such of the profits and gains" is limited by the source legislation to so much of the profits and gains as is income. The substitution makes this clear.

2194.     In subsection (3), a reference to "the total of the non-UK resident company's income" has been substituted for the reference in paragraph 4(3) of Schedule 26 to FA 2003 to "the aggregate of such of the chargeable profits of the company". See Change 114 in Annex 1.

2195.     The separate definitions in subsections (2) and (3) preserve the difference between the respective source provisions and ensure that those subsections remain in line with those provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.

2196.     In subsection (4) it is made clear that the transactions referred to are investment transactions. That only investment transactions are referred to in section 127(5) of FA 1995 is clear as the profits or gains there mentioned must be excluded income. But paragraph 4(3) of Schedule 26 to FA 2003 refers only to transactions. That paragraph does not, however, cover any wider class of transactions than section 127(5) of FA 1995.

2197.     In subsection (4)(b), the words:

in relation to which the independent investment manager conditions are met, ignoring the requirements of the 20% rule

are substituted both for the words in section 127(5)(b) of FA 1995:

for the purposes of section 128 below would fall (apart from the requirements of subsection (4) above) to be treated as excluded income for any of those chargeable periods

and for the words in paragraph 4(3) of Schedule 26 to FA 2003:

in relation to which the manager does not (apart from the requirements of the 20% rule) fall to be treated as a permanent establishment of the company.

2198.     The substituted words do not change the law relating to the limit on the liability of a non-UK resident other than a company in clause 744. Only income deriving from investment transactions is measured for the purposes of the 20% rule in section 127(4) of FA 1995. Income arising from any other type of transaction is irrelevant.

2199.     Income is only "relevant excluded income" under section 127(5) of FA 1995 if it derives from investment transactions carried out by the manager while acting on the non-resident's behalf (see section 127(5)(a) where the word "transactions" refers back to "investment transactions" in section 127(1)(c)). Under section 127(5)(b) of FA 1995, it also has to be treated as "excluded income" under section 128(3) of that Act. The only way that income arising from so much of a business as relates to investment transactions can be "excluded income" is if the conditions in section 127(3) of FA 1995 (the investment manager conditions) are met.

2200.     In relation to the limit on the liability of a non-UK resident company in clause 748, this substitution avoids the need for the reader to refer to section 148 of and Schedule 26 to FA 2003 in order to determine whether the investment manager is a permanent establishment. The substituted words do not change the law. If the independent investment manager conditions are met, or would be if the 20% rule were met, the investment manager cannot be a permanent establishment of the company in relation to the transaction.

Clause 755: Meaning of "beneficial entitlement"

2201.     This clause defines the term "beneficial entitlement". It is based on section 127(6) of FA 1995 and paragraph 4(4) of Schedule 26 to FA 2003, which are substantively the same.

Clause 756: Treatment of transactions where requirements of 20% rule not met

2202.     This clause provides that, if the 20% rule is not met but all the other independent investment manager conditions are met, only the income in relation to which the 20% rule is not met is not relevant disregarded income. It is based on section 127(8) of FA 1995 and paragraph 4(5) of Schedule 26 to FA 2003.

2203.     So far as that section and that paragraph differ in approach, the difference is preserved by subsection (2) so that those provisions remain in line with their source provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.

2204.     A reference to "transaction income", which is defined in clause 747(5), has been substituted in subsection (2)(a) for the reference to "taxable sums" in section 127(8) of FA 1995. The term "taxable sums", as defined in section 127(3) of that Act read with sections 127(1) and 126(2)(c) of that Act, includes amounts chargeable to capital gains tax under section 10 of TCGA. But, in relation to section 127(8) of FA 1995 as it has effect for the purposes of determining whether income is excluded income within section 128(3)(d) of that Act, reference to chargeable gains is unnecessary.

2205.     In subsection (2)(b), a reference to "the income of the non-UK resident company" has been substituted for the reference in paragraph 4(5) of Schedule 26 to FA 2003 to "the chargeable profits of the non-resident company". See Change 114 in Annex 1.

Clause 757: Application of 20% rule to collective investment schemes

2206.     This clause modifies the 20% rule where the non-UK resident is a participant in a collective investment scheme. It is based on section 127(9), (10) and (11) of FA 1995 and paragraph 5 of Schedule 26 to FA 2003, which are substantively the same.

2207.     This clause applies at the level of the scheme itself, treating it as if it were a non-UK resident company, see subsection (3).

2208.     Subsection (4) applies to a scheme which, if it was assumed to be a non-UK resident company, would not be regarded as carrying on a trade in the United Kingdom. The 20% rule is treated as satisfied in relation to such a scheme.

2209.     Subsection (5) applies to a scheme which, if it was assumed to be a non-UK resident company, would be regarded as carrying on a trade in the United Kingdom. The 20% rule applies to such a scheme with the modifications in subsection (6).

2210.     The definition of "the appropriate relevant period" in subsection (7) links into the meaning of "qualifying period" given by clause 753. The reference to the term "transaction income" in paragraph (a) of that definition follows from the reference to that term in clause 753(2)(a). See the commentary on clause 753(2).

Clause 758: Meaning of "disregarded savings and investment income"

2211.     This clause defines the term "disregarded savings and investment income" which is principally used in clauses 746 and 749. It is based on the corresponding parts of paragraph (a) of section 128(3) of FA 1995 and of paragraph (a) of section 151(2) of FA 2003 and on paragraph (aa) of each of those subsections, all of which are substantively the same.

2212.     Income chargeable under Chapter 5 of Part 4 of ITTOIA (stock dividends from UK resident companies) has been included in subsection (1)(a) as an additional description of disregarded income. See Change 115 in Annex 1.

Clause 759: Meaning of "disregarded annual payments"

2213.     This clause defines the term "disregarded annual payments" which is principally used in clauses 746 and 749. It is based on the corresponding parts of section 128(3)(a) of FA 1995 and section 151(2)(a) of FA 2003 other than those on which clause 758 is based.

Clause 760: Meaning of "investment manager" and "investment transaction"

2214.     This clause defines the terms "investment manager" and "investment transactions" which underlie the independent investment manager conditions. It is based on section 127(12) and (13) of FA 1995 and paragraphs 3(1), (3) and (4) of Schedule 26 to FA 2003.

2215.     Subsection (1) is based on the definition of an "investment manager" in paragraph 3(1) of Schedule 26 to FA 2003 rather than the slightly different, but substantively the same, definition of "the manager" in section 127(3)(a) of FA 1995.

2216.     The definition of "transaction" in subsections (2) and (3) is based on section 127(12) and (13) of FA 1995 and paragraph 3(3) and (4) of Schedule 26 to FA 2003, which are identical.

2217.     Clause 948 containing general provision for the making of regulations applies for the purposes of subsection (2)(c).

2218.     Regulations (SI 2003/2172 and SI 2003/2173) have been made in identical terms under the source legislation, section 127(12)(c) of FA 1995 and paragraph 3(3)(c) of Schedule 26 to FA 2003, designating as investment transactions swap contracts settled in cash or foreign currency (other than contracts relating to land, insurance or capital redemption business).

Clause 761: Transactions through brokers and investment managers

2219.     This clause explains when a person is to be regarded as carrying out a transaction on behalf of another and makes provision for a person part only of whose business is as a broker or investment manager. It is based on section 127(14) and (15) of FA 1995 and paragraph 7(1) and (4) of Schedule 26 to FA 2003.

2220.     There is a slight difference between the wording of section 127(14) of FA 1995 which refers to:

a person who..provides investment management services

and that of paragraph 7(4) of Schedule 26 to FA 2003 which refers to:

a person who..provides investment services.

2221.     The words in paragraph 7(4) of Schedule 26 to FA 2003 are not capable, in practice, of having any different meaning from those in section 127(14) of FA 1995 and subsection (2) accordingly applies for all purposes of this Chapter.

Chapter 2: Residence

Overview

2222.     This Chapter contains provisions relating to the determination of residence for the purposes of liability to income tax.

2223.     The question whether or not a person is UK resident is primarily to be determined in accordance with case law. A limited number of statutory rules either supplement or disapply the case law rules in specific circumstances.

2224.     Clauses 762 to 766 contain provisions relating to the residence of individuals, clause 767 contains the provision relating to the residence of personal representatives and clause 768 provides signposts to provisions relating to the residence of trustees and companies.

Clause 762: Residence of individuals temporarily abroad

2225.     This clause provides that an individual who is ordinarily UK resident is not treated as becoming non-UK resident for income tax purposes if the individual has left the United Kingdom for the purpose only of occasional residence abroad. It is based on section 334 of ICTA.

2226.     Section 334 of ICTA applies only to a person who is a Commonwealth citizen or a citizen of the Republic of Ireland. This clause is not limited in this way. In addition, it is made explicit that the rule in this clause applies only if the individual is UK resident, as well as ordinarily UK resident, at the time the individual leaves the United Kingdom. See Change 116 in Annex 1.

2227.     The provisions in section 334 of ICTA can be traced back to the Napoleonic period and have been in continuous existence since the reintroduction of income tax by the Income Tax Act 1842, where the provisions were to be found in section 39. A lengthy discussion of the history of the provisions (then to be found in section 49 of ICTA 1970) can be found in the judgment of Nicholls J in Reed (HM Inspector of Taxes) v Clark (1985), 58 TC 528 Ch D ¹¹.

¹¹      [1985] STC 323

2228.     This clause moves away from the historic language which has caused the effect of section 334 of ICTA and its predecessors to be somewhat obscured. During the course of his judgment in Reed v Clark, Nicholls J stated (at page 552E-G) that:

Section 49 is a puzzling section, in that precisely what was its intended purpose is not at all easy to perceive. This makes interpretation of its terms the more difficult. ..

Despite this I am in no doubt that section 49 is a substantive charging provision.

2229.     Subsection (1) makes clear that this clause applies only to determine the residence status of individuals and the term "individual" is, accordingly, used throughout this clause in place of "person" in section 334 of ICTA.

2230.     The term "occasional residence abroad" has been retained, as it has been the subject of judicial interpretation in the decided cases on section 334 of ICTA and its predecessors.

2231.     Subsection (2) replaces the words in section 334 of ICTA providing that the individual to whom the section applies shall:

(a)     ..be assessed and charged to income tax notwithstanding that at the time the assessment or charge is made he may have left the United Kingdom..

(b)     ..be charged as a person actually residing in the United Kingdom upon the whole amount of his profits or gains, whether they arise from property in the United Kingdom or elsewhere, or from any allowance, annuity or stipend, or from any trade, profession, employment or vocation in the United Kingdom or elsewhere.

2232.     Unlike the provisions of section 334 of ICTA as interpreted in Reed v Clark, subsection (2) does not impose a separate charge to income tax but treats the individual as UK resident for the purpose of determining the individual's liability to income tax for a tax year, leaving the charging provisions of the Income Tax Acts to determine whether and to what extent the individual is so liable in respect of any particular source of income. The effect on the liability of the individual is the same.

2233.     Subsection (2) also clarifies that the provision continues to apply for any tax year in which the individual remains outside the United Kingdom for the purpose only of occasional residence abroad. See the judgment of the Lord President in Lloyd v Sulley (1884), 2 TC 37 (Court of Exchequer (Scotland) - First Division) at page 42, referring to section 39 of the Income Tax Act 1842:

Now that is a very important provision as extending the meaning of the words in the taxing clause, 'residing in the United Kingdom'. It extends it to a person who is not for a time actually residing in the United Kingdom, but who has constructively his residence there because his ordinary place of abode and his home is there, although he is absent for a time from it, however long continued that absence may be.

2234.     Subsection (2) does not itself determine whether or not the individual's residence abroad is occasional. That is to be determined in accordance with the principles set out in the cases in which section 334 of ICTA and its predecessors have been considered.

2235.     Like section 334 of ICTA, this clause does not include anything concerning the ordinary residence of the individual after the individual has left the United Kingdom. The question whether the individual continues to be ordinarily UK resident falls to be determined in accordance with case law.

Clause 763: Residence of individuals working abroad

2236.     This clause provides that, in the cases to which it applies, the fact that living accommodation in the United Kingdom is available for the individual's use is to be ignored in determining whether or not the individual is UK resident. It is based on section 335 of ICTA.

2237.     Subsection (1) makes clear that this clause relates only to the residence status of individuals and the term "individual" is, accordingly, used throughout this clause in place of "person" in section 335 of ICTA.

2238.     In subsection (2) the phrase "any living accommodation available in the United Kingdom for the individual's use" has been substituted for the phrase "any place of abode maintained in the United Kingdom for his use" in section 335(1) of ICTA. The reference to the availability of living accommodation brings the wording into line with the wording in HMRC booklet IR20 (Residents and non-residents: Liability to tax in the UK) and with the phrase "living accommodation available in the United Kingdom for his use" in section 336(3) of ICTA, on which clauses 764(1) and 765(1) are based.

2239.     This does not amount to a change in the law. To the extent that there is any difference between "living accommodation" and "place of abode maintained", "living accommodation" is the broader concept. In any event, available living accommodation which does not amount to a place of abode maintained for the use of an individual to whom section 335 of ICTA applies does not fall to be taken into account for the purposes of determining the individual's residence status.

Clause 764: Foreign income of individuals in the United Kingdom for temporary purpose

2240.     This clause provides that an individual who is in the United Kingdom for a temporary purpose and stays there for only a limited period is not to be treated as UK resident for the purposes of certain charges to income tax on income from a source outside the United Kingdom. It is based on section 336(1), (1A) and (3) of ICTA.

2241.     The provisions of section 336(2) of ICTA which deals with employment income of individuals in the United Kingdom for a temporary purpose are contained in clause 765.

2242.     The language of section 336(1) of ICTA dates back to Napoleonic times, while that of section 336(2) dates back only just over 50 years. These differences in language have been preserved where necessary.

2243.     Subsection (1), which describes to whom this clause applies, makes clear that this clause relates only to the residence status of individuals and the term "individual" is used throughout this clause in place of "person" in section 336 of ICTA.

2244.     Subsection (1)(a) retains the distinction between section 336(1)(a) of ICTA which refers to the person not being in the United Kingdom (emphasis added):

with any view or intent of establishing his residence there

and section 336(2) of that Act which refers to the person not being in the United Kingdom (emphasis added):

with the intention of establishing his residence there.

2245.     Subsection (1)(a) refers only to "view" and omits reference to "intent" on the basis that "view" is wider than "intent" or "intention".

2246.     Section 336(1)(b) of ICTA refers to the person having:

not actually resided in the United Kingdom at one time or several times for a period equal in the whole to six months in any year of assessment

while section 336(2) of that Act refers to the person having:

not in the aggregate spent at least six months in the United Kingdom in the year of assessment.

2247.     Subsection (1)(b) retains the expression "actually resided" rather than adopting the expression "spent", as "actually resided" may not in every circumstance be synonymous with "spent". But the language of section 336(1)(b) of ICTA relating to the determination of the period has been modernised, including by substituting reference to 183 days for the reference to six months in section 336(1)(b) of ICTA. See Change 117 in Annex 1.

2248.     Subsection (2) restates the provisions listed in section 336(1A) of ICTA. Rule 1 is based on section 336(1A)(b) and (c) and Rule 2 on section 336(1A)(a) of that Act.

2249.     The reference in each Rule to treating the individual as non-UK resident follows the approach of section 336(2) of ICTA and replaces the reference in section 336(1) of that Act to the person not being charged "as a person residing in the United Kingdom".

2250.     The words "income arising from a source outside the United Kingdom" in both Rules give effect to the words "profits or gains received in respect of possessions or securities out of the United Kingdom" in section 336(1) of ICTA.

2251.     Subsection (3) supplements paragraph (e) of Rule 1 with a reminder that a claim has to have been made under section 647 of ITEPA and to have been accepted by the Commissioners for Her Majesty's Revenue and Customs for the individual to have the benefit of the exemption in section 651 of that Act.

2252.     Subsections (4) and (5) are based on the final words of section 336(1)(b) of ICTA:

but if any such person resides in the United Kingdom for such a period he shall be so chargeable for that year.