Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
409

814
Meaning of “disregarded transaction income”
(1)
Subsection (2) applies if a non-UK resident carries on (alone or in partnership)
a business through a broker in the United Kingdom.
(2)
Income is “disregarded transaction income”, subject to subsection (6), if—
(a)
it is transaction income, and
5
(b)
the independent broker conditions are met in relation to the transaction
in question.
(3)
Subsection (4) applies if a non-UK resident carries on (alone or in partnership)
a business through an investment manager in the United Kingdom.
(4)
Income is “disregarded transaction income”, subject to subsection (6), if—
10
(a)
it is transaction income, and
(b)
the independent investment manager conditions are met in relation to
the transaction in question.
(5)
In this Chapter “transaction income”, in relation to a transaction carried out
through a broker or investment manager in the United Kingdom on behalf of
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a non-UK resident, means income which arises to the non-UK resident from—
(a)
so much of the non-UK resident’s business carried on (alone or in
partnership) through the broker or investment manager as relates to
the transaction, or
(b)
property or rights which, as a result of the transaction, are used by, or
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held by or for, the broker or investment manager on behalf of the non-
UK resident.
(6)
Income is not disregarded transaction income if it is chargeable to income tax
in accordance with section 171(2) of FA 1993 (profits of the underwriting
business of a member of Lloyd’s).
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(7)
This section needs to be read with—
section 817 (the independent broker conditions),
sections 818 to 824 (the independent investment manager conditions),
section 827 (meaning of “investment manager” and “investment
transaction”), and
30
section 828 (transactions through brokers and investment managers).
Limit for non-UK resident companies
815
Limit on liability to income tax of non-UK resident companies
(1)
This section applies to income tax to which a non-UK resident company is
liable, otherwise than as a trustee.
35
(2)
The non-UK resident company’s liability to income tax for a tax year is limited
to the sum of amounts A and B.
(3)
Amount A is the sum of—
(a)
any amounts representing income tax deducted from the non-UK
resident company’s disregarded company income for the tax year,
40
(b)
any amounts representing income tax that are treated as deducted from
or paid in respect of that income, and
(c)
any tax credits in respect of that income.

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
410

(4)
Amount B is the amount that, apart from this section, would be the non-UK
resident company’s liability to income tax for the tax year if the non-UK
resident company’s disregarded company income for the tax year were left out
of account.
816
Meaning of “disregarded company income”
5
(1)
For the purposes of this Chapter income arising to a non-UK resident company
is “disregarded company income” if it is—
(a)
disregarded savings and investment income (see section 825),
(b)
disregarded annual payments (see section 826),
(c)
income arising from a transaction carried out on behalf of the non-UK
10
resident company in the course of the company’s trade through a
broker in the United Kingdom, in relation to which the independent
broker conditions are met,
(d)
income arising from an investment transaction carried out on behalf of
the non-UK resident company in the course of the company’s trade
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through an investment manager in the United Kingdom, in relation to
which the independent investment manager conditions are met, or
(e)
income of such other description as the Treasury may by regulations
designate for the purposes of this section.
(2)
This section needs to be read with—
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section 817 (the independent broker conditions),
sections 818 to 824 (the independent investment manager conditions),
section 827 (meaning of “investment manager” and “investment
transaction”), and
section 828 (transactions through brokers and investment managers).
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The independent broker conditions
817
The independent broker conditions
(1)
The independent broker conditions are met in relation to a transaction carried
out on behalf of a non-UK resident by a broker in the United Kingdom if—
(a)
conditions A to D are met, if this section applies for the purposes of
30
section 813, or
(b)
conditions A to C and E are met, if this section applies for the purposes
of section 816.
(2)
Condition A is that at the time of the transaction the broker is carrying on the
business of a broker.
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(3)
Condition B is that the transaction is carried out by the broker in the ordinary
course of that business.
(4)
Condition C is that the remuneration which the broker receives in respect of
the transaction for the provision of the services of a broker to the non-UK
resident is not less than is customary for that class of business.
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(5)
Condition D is that the broker does not fall for the purposes of section 126 of,
and Schedule 23 to, FA 1995 to be treated as a UK representative of the non-UK
resident in relation to any other income which is chargeable to income tax, or

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
411

amounts which are chargeable to capital gains tax, for the same tax year as the
transaction income.
(6)
Condition E is that the broker does not fall to be treated as a permanent
establishment of the non-UK resident company in relation to any other
transaction of any kind carried out in the same accounting period of the non-
5
UK resident company as the transaction in question.
The independent investment manager conditions
818
The independent investment manager conditions
(1)
The independent investment manager conditions are met in relation to an
investment transaction carried out on behalf of a non-UK resident by an
10
investment manager in the United Kingdom if—
(a)
conditions A to F are met, if this section applies for the purposes of
section 813, or
(b)
conditions A to E and G are met, if this section applies for the purposes
of section 816.
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(2)
Condition A is that at the time of the transaction the investment manager is
carrying on a business of providing investment management services.
(3)
Condition B is that the transaction is carried out in the ordinary course of that
business.
(4)
Condition C is that, when the investment manager acts on behalf of the non-
20
UK resident in relation to the transaction, the relationship between them,
having regard to its legal, financial and commercial characteristics, is a
relationship between persons carrying on independent businesses dealing
with each other at arm’s length.
(5)
Condition D is that the requirements of the 20% rule are met (see section 819).
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(6)
Condition E is that the remuneration which the investment manager receives
in respect of the transaction for the provision of investment management
services to the non-UK resident is not less than is customary for that class of
business.
(7)
Condition F is that the investment manager does not fall for the purposes of
30
section 126 of, and Schedule 23 to, FA 1995 to be treated as a UK representative
of the non-UK resident in relation to any other income which is chargeable to
income tax, or amounts which are chargeable to capital gains tax, for the same
tax year as the transaction income.
(8)
Condition G is that the investment manager does not fall to be treated as a
35
permanent establishment of the non-UK resident company in relation to any
other transaction of any kind carried out in the same accounting period of the
non-UK resident company as the transaction in question.
819
Investment managers: the 20% rule
(1)
The requirements of the 20% rule are met if conditions A and B are met.
40
(2)
Condition A is that in relation to a qualifying period it has been or is the
intention of the investment manager and the persons connected with the
investment manager that at least 80% of the non-UK resident’s relevant

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
412

disregarded income should consist of amounts to which none of them has a
beneficial entitlement.
(3)
Condition B is that, so far as there is a failure to fulfil that intention, that
failure—
(a)
is attributable (directly or indirectly) to matters outside the control of
5
the investment manager and persons connected with the investment
manager, and
(b)
does not result from a failure by any of them to take such steps as may
be reasonable for mitigating the effect of those matters in relation to the
fulfilment of that intention.
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(4)
This section needs to be read with—
section 820 (meaning of “qualifying period”),
section 821 (meaning of “relevant disregarded income”), and
section 822 (meaning of “beneficial entitlement”).
820
Meaning of “qualifying period”
15
(1)
This section applies for the purposes of this Chapter.
(2)
If section 819 applies for the purposes of section 813, a “qualifying period”
means—
(a)
the tax year in which the transaction income is chargeable to income
tax, or
20
(b)
a period of not more than 5 years comprising two or more tax years
including that one.
(3)
If section 819 applies for the purposes of section 816, a “qualifying period”
means—
(a)
the accounting period of the non-UK resident company in which the
25
transaction in question is carried out, or
(b)
a period of not more than 5 years comprising two or more complete
accounting periods including that one.
821
Meaning of “relevant disregarded income”
(1)
This section applies for the purposes of this Chapter.
30
(2)
If section 819 applies for the purposes of section 813, the “relevant disregarded
income” of the non-UK resident for the qualifying period is the total of the non-
UK resident’s income for the tax years comprised in the qualifying period
which derives from the transactions mentioned in subsection (4).
(3)
If section 819 applies for the purposes of section 816, the “relevant disregarded
35
income” of the non-UK resident company for the qualifying period is the total
of the non-UK resident company’s income for the accounting periods
comprised in the qualifying period which derives from the transactions
mentioned in subsection (4).
(4)
The transactions referred to in subsections (2) and (3) are investment
40
transactions—
(a)
carried out by the investment manager on the non-UK resident’s
behalf, and

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
413

(b)
in relation to which the independent investment manager conditions
are met, ignoring the requirements of the 20% rule.
822
Meaning of “beneficial entitlement”
(1)
This section applies for the purposes of this Chapter.
(2)
A person has a “beneficial entitlement” to relevant disregarded income if the
5
person has or may acquire a beneficial entitlement that is, or would be,
attributable to the relevant disregarded income as a result of having an interest
or other rights mentioned in subsection (3).
(3)
The interests and rights referred to in subsection (2) are—
(a)
an interest (whether or not an interest giving a right to an immediate
10
payment of a share in the profits or gains) in property in which the
whole or any part of the relevant disregarded income is represented, or
(b)
an interest in, or other rights in relation to, the non-UK resident.
823
Treatment of transactions where requirements of 20% rule not met
(1)
This section applies in the case of an investment transaction in relation to
15
which the independent investment manager conditions are met, except for the
requirements of the 20% rule.
(2)
This Chapter has effect as if the requirements of that rule were met in relation
to the transaction but only in relation to—
(a)
so much of the transaction income of the non-UK resident as falls
20
within subsection (3), if this section applies for the purposes of section
813, or
(b)
so much of the income of the non-UK resident company deriving from
the transaction as falls within subsection (3), if this section applies for
the purposes of section 816.
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(3)
Income falls within this subsection if it does not represent income—
(a)
which is relevant disregarded income of the non-UK resident, and
(b)
to which the investment manager or a person connected with the
investment manager has or has had any beneficial entitlement.
824
Application of 20% rule to collective investment schemes
30
(1)
This section applies if amounts arise or accrue to the non-UK resident as a
participant in a collective investment scheme.
(2)
It applies for the purposes of determining whether the requirements of the 20%
rule are met in relation to a transaction carried out for the purposes of the
scheme.
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(3)
In applying this section make the following assumptions—
(a)
that all the transactions carried out for the purposes of the scheme are
carried out on behalf of a company (“the assumed company”) which
is—
(i)
constituted for the purposes of the scheme, and
40
(ii)
non-UK resident, and
(b)
that the participants do not have any rights in respect of the amounts
arising or accruing in respect of those transactions, other than the rights

Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
414

which, if they held shares in the assumed company, would be their
rights as shareholders.
(4)
If the scheme is such that the assumed company would not be regarded for tax
purposes as carrying on a trade in the United Kingdom in relation to the
appropriate relevant period, the requirements of the 20% rule are treated as
5
met in relation to a transaction carried out for the purposes of the scheme.
(5)
If the scheme is such that the assumed company would be so regarded for tax
purposes, sections 819 to 823 have effect in relation to a transaction carried out
for the purposes of the scheme with the modifications in subsection (6).
(6)
The modifications are—
10
(a)
for references to the non-UK resident substitute references to the
assumed company, and
(b)
for references to the non-UK resident’s relevant disregarded income for
a qualifying period substitute references to the sum of the amounts that
would, for relevant periods comprised in the qualifying period, be
15
chargeable to tax on the assumed company as profits deriving from the
transactions—
(i)
carried out by the investment manager, and
(ii)
assumed to be carried out on behalf of the company.
(7)
In this section—
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“the appropriate relevant period” is—
(a)
the tax year in which the transaction income is chargeable to
income tax, if this section applies for the purposes of section
813, or
(b)
the accounting period in which the transaction is carried out, if
25
this section applies for the purposes of section 816,
“collective investment scheme” has the meaning given by section 235 of
FISMA 2000,
“participant”, in relation to a collective investment scheme, is construed in
accordance with that section, and
30
“relevant period” means—
(a)
a tax year, if this section applies for the purposes of section 813,
or
(b)
an accounting period, if this section applies for the purposes of
section 816.
35
Supplementary
825
Meaning of “disregarded savings and investment income”
(1)
For the purposes of this Chapter income is “disregarded savings and
investment income” if—
(a)
it is chargeable under Chapter 3 or 5 of Part 4 of ITTOIA 2005
40
(dividends etc from UK resident companies and stock dividends from
UK resident companies), or
(b)
it is within subsection (2) and is not relevant foreign income.
(2)
Income is within this subsection if it is chargeable under—
(a)
Chapter 2 of Part 4 of ITTOIA 2005 (interest),
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Income Tax Bill
Part 14 — Income tax liability: miscellaneous rules
Chapter 1 — Limits on liability to income tax of non-UK residents
415

(b)
Chapter 7 of that Part (purchased life annuity payments),
(c)
Chapter 8 of that Part (profits from deeply discounted securities),
(d)
Chapter 10 of that Part (distributions from unauthorised unit trusts), or
(e)
Chapter 11 of that Part (transactions in deposits).
826
Meaning of “disregarded annual payments”
5
For the purposes of this Chapter income is “disregarded annual payments” if
it is not relevant foreign income and is chargeable under—
(a)
section 579 of ITTOIA 2005, so far as it relates to annual payments
(royalties etc from intellectual property),
(b)
Chapter 4 of Part 5 of that Act, so far as it relates to annual payments
10
(certain telecommunication rights: non-trading income), or
(c)
Chapter 7 of Part 5 of that Act (annual payments not otherwise
charged).
827
Meaning of “investment manager” and “investment transaction”
(1)
In this Chapter “investment manager” means a person who provides
15
investment management services.
(2)
In this Chapter “investment transaction” means—
(a)
transactions in shares, stock, futures contracts, options contracts or
securities of any description not mentioned in this paragraph, but
excluding futures contracts or options contracts relating to land,
20
(b)
transactions consisting in the buying or selling of any foreign currency
or in the placing of money at interest, and
(c)
such other transactions as the Treasury may by regulations designate
for the purposes of this section.
(3)
For the purposes of subsection (2) a contract is not prevented from being a
25
futures contract or an options contract by the fact that a party is or may be
entitled to receive or liable to make, or entitled to receive and liable to make,
only a payment of a sum (as opposed to a transfer of assets other than money)
in full settlement of all obligations.
828
Transactions through brokers and investment managers
30
(1)
For the purposes of this Chapter a person is regarded as carrying out a
transaction on behalf of another if the person—
(a)
undertakes the transaction, whether on behalf of or to the account of the
other, or
(b)
gives instructions for it to be so carried out by another.
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(2)
In the case of a person who acts as a broker or investment manager as part only
of a business, this Chapter has effect as if that part were a separate business.