Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 13 — Tax avoidance
Chapter 5 — Avoidance involving trading losses
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795
Meaning of “post-1 December 2004 loss”
(1)
For the purposes of sections 792 and 793 a “post-1 December 2004 loss”
means—
(a)
any loss made by an individual in a trade in a tax year the basis period
for which begins on or after 2 December 2004, or
5
(b)
the post-1 December 2004 part of any loss made by an individual in a
trade in a tax year the basis period for which includes 2 December 2004
(but begins before that date).
(2)
The “post-1 December 2004 part” of any loss made by an individual in a trade
means the individual’s share of any losses made by the relevant firm in the
10
trade in the period—
(a)
beginning with 2 December 2004, and
(b)
ending with the end of the basis period for the tax year concerned.
(3)
For this purpose “the relevant firm” means the firm in which the individual
carried on the trade, and—
15
(a)
the losses of that firm are calculated as if that period were one for which
profits and losses had to be calculated for the purposes of section 849 of
ITTOIA 2005 (calculation of firm’s profits or losses), and
(b)
the individual’s share of the losses is determined in accordance with
the individual’s interest in the firm during that period.
20
(4)
In this section “basis period”, in relation to an individual with a notional trade,
means the basis period for the notional trade (within the meaning of Part 9 of
ITTOIA 2005).
Individuals claiming relief for film-related trading losses
796
Charge to tax on income treated as received under section 797
25
(1)
Income tax is charged on income treated as received by an individual under
section 797.
(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
30
treated as receiving the income.
797
Individuals claiming sideways or capital gains relief for film-related losses
(1)
This section applies if—
(a)
an individual makes a film-related loss (see section 800) in a trade for
which the individual claims sideways relief or capital gains relief (a
35
“relevant claim”),
(b)
there is a disposal of a right of the individual to profits arising from the
trade (a “relevant disposal”) (see section 799), and
(c)
an exit event occurs.
(2)
An exit event occurs whenever—
40
(a)
the individual receives any non-taxable consideration (see section 798)
for a relevant disposal, or

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(b)
an increase in the individual’s claimed film-related losses (see section
800) or a decrease in the individual’s capital contribution (see section
801) results in—
(i)
those losses becoming greater than that contribution, or
(ii)
an increase in the amount by which those losses exceed that
5
contribution.
(3)
The individual is treated as receiving an amount of income every time a
chargeable event occurs.

The income is treated as arising otherwise than as profits of the trade.
(4)
A chargeable event occurs whenever—
10
(a)
the individual makes a relevant claim (if by that time a relevant
disposal and an exit event have occurred),
(b)
a relevant disposal occurs (if by that time an exit event has occurred and
the individual has made a relevant claim), or
(c)
an exit event occurs (if by that time a relevant disposal has occurred and
15
the individual has made a relevant claim).
(5)
The amount of income treated as received when a chargeable event occurs is
equal to the sum of—
(a)
the total amount or value of all non-taxable consideration received by
the individual for relevant disposals, and
20
(b)
the amount (if any) by which the individual’s claimed film-related
losses exceed the individual’s capital contribution.

The calculation in this subsection is made immediately after the chargeable
event occurs and is subject to section 803.
(6)
For the purposes of this section it does not matter—
25
(a)
if the individual (or anyone else) is still carrying on the trade when a
chargeable event occurs, or
(b)
if the individual receives both non-taxable and taxable consideration
for a relevant disposal.
798
Meaning of “non-taxable consideration” etc
30
(1)
This section applies for the purposes of section 797.
(2)
Consideration is non-taxable if (apart from section 796) it is not chargeable to
income tax.
(3)
Non-taxable consideration from which a deduction within subsection (4) is
made is treated as received free of the deduction.
35
(4)
A deduction is within this subsection if it is in consideration of any person’s
agreeing to, or facilitating, any relevant disposal or exit event.
799
Meaning of “disposal of a right of the individual to profits” etc
(1)
For the purposes of section 797 any reference to a disposal of a right of an
individual to profits arising from a trade includes, in particular, any of events
40
A to D.
(2)
Event A is the disposal, giving up or loss by—
(a)
the individual, or

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Part 13 — Tax avoidance
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(b)
a firm in which the individual is a partner,

of a right arising from the trade to income (or any part of any income).

It does not matter if the right is disposed of, given up or lost as part of a larger
disposal, giving up or loss.
(3)
Event B is the disposal, giving up or loss of the individual’s interest in a firm
5
that carries on the trade (including the dissolution of the firm).
(4)
Event C 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 arising from the trade.
10
(5)
Event D is a change in the individual’s entitlement to any profits or losses
arising from the trade 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.
15
(6)
The changes covered by event D include cases where there is an agreement
under which the individual is entitled—
(a)
to a particular share of any profits or losses arising from the trade in a
period (including a nil share), and
(b)
to a different share of any such profits or losses in a succeeding period
20
(including a nil share).
(7)
In such cases the change in the individual’s entitlement is treated for the
purposes of section 797 as occurring at the beginning of the succeeding period.
800
Meaning of “film-related losses” etc
(1)
This section applies for the purposes of sections 797, 801 and 802.
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(2)
A loss is a “film-related loss” if the calculation of profits or losses that it results
from is made in accordance with any provision of Chapter 9 of Part 2 of ITTOIA
2005.
(3)
“The individual’s claimed film-related losses” means—
(a)
the total amount of film-related losses made by the individual in the
30
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—
(a)
amount A, or
35
(b)
if less, amount B.
(5)
Amount A is the total amount of income treated as received by the individual
under section 792 (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
trade.
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(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—

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(a)
in a tax year at a time during which the individual carries on the trade
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
5
Part 4.
(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.
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(10)
For the purpose of determining the individual’s claimed film-related losses—
(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
15
(c)
apply subsections (6) and (7) in relation to each of the trades and then
add the results together.
801
Meaning of “capital contribution”
(1)
This section applies for the purposes of section 797.
(2)
The individual’s capital contribution is the amount which the individual has
20
contributed to the trade as capital less so much of that amount (if any) as is
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
25
which the individual has contributed to the firm as capital less so much of that
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
contributed to the firm as capital so far as that share has been added to the
30
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).
(6)
An amount of capital is within this subsection if it is an amount which—
35
(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
individual.
40
(7)
But if a chargeable event occurs, anything treated for the purposes of section
797(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 797(5)(b).

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(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
5
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
10
as the receipt back or reimbursement of an amount.
(9)
This section needs to be read with any regulations made under section 802
(specified amounts to be excluded in calculating a partner’s capital
contribution for the purposes of section 797).
802
Exclusion of amounts in calculating capital contribution by a partner
15
(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
20
of section 797.
(3)
“Specified” means specified in the regulations.
(4)
The regulations may—
(a)
make provision having retrospective effect,
(b)
contain incidental, supplemental, consequential and transitional
25
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.
30
(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.
803
Prohibition against double counting
(1)
Subsections (2) and (3) apply for the purpose of calculating the amount of
income received under section 797 on a chargeable event in respect of the
35
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
40
the trade, the amount of income received as a result of section 797(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.

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(4)
In a case to which section 800(10) (cases in which firm is carrying on, or has
carried on, more than one trade) applies—
(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
5
trades occur at the same time, to find the total amount of income
received under section 797 at that time on those chargeable events—
(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
10
(iii)
reduce the total amount of income resulting from sub-
paragraph (ii) so far as necessary to ensure that no amount is
included more than once in that total.
Individuals in partnership claiming relief for licence-related trading losses
804
Charge to tax on income treated as received under section 805
15
(1)
Income tax is charged on income treated as received by an individual under
section 805.
(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
20
treated as receiving the income.
805
Partners claiming relief for licence-related trading losses
(1)
This section applies if—
(a)
an individual carries on a trade as a non-active partner during an early
tax year,
25
(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
claim”),
(c)
the loss derives to any extent from expenditure incurred in the trade in
exploiting a licence acquired in carrying on the trade, and
30
(d)
there is a relevant disposal of the licence.
(2)
For the purposes of this section and section 806 there is a relevant disposal of
the licence whenever the individual receives non-taxable consideration for—
(a)
a disposal of the licence, or
(b)
a disposal of a right to income under an agreement related to or
35
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.

The income is treated as arising otherwise than as profits of the trade.
(4)
For the purposes of this section and section 806 a chargeable event occurs
40
whenever—
(a)
there is a relevant disposal of the licence (if by that time the individual
has made a relevant claim), or

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(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 806 consideration is non-taxable
if—
(a)
(apart from section 804) it is not chargeable to income tax, and
5
(b)
its receipt is not an exit event for the purposes of section 797.
(6)
For the purposes of this section and section 806 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
10
for a relevant disposal of the licence, or
(c)
if a relevant disposal of the licence is part of a larger disposal.
806
Calculation of amount of income treated as received by the individual

The amount of income treated under section 805 as received by the individual
in the tax year is calculated by taking the following steps.
15
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
partner.
20
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.
Step 3

Deduct the total calculated at Step 2 from the total calculated at Step 1.
25

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

If the net licence-related loss is nil or a negative figure—
(a)
the income treated as received in the tax year is nil, and
(b)
ignore Steps 4 and 5.
Step 4
30

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
consideration received in previous tax years).
Step 5

Deduct from—
35
(a)
the net licence-related loss, or
(b)
if less, the total calculated at Step 4,

the total amount of all income treated under section 805 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.
40

(If the result is a negative figure, the income is nil.)