Finance Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
101

(a)
an individual carries on a trade as a member of an LLP at a
time in a tax year,
(b)
the individual does not devote a significant amount of time
to the trade in the relevant period for that year, and
(c)
the individual contributes an amount to the LLP as capital at
5
any time in that year,

that amount is to be excluded in calculating the individual’s
contribution to the LLP for the purposes of section 107 if the
contribution was made for a prohibited purpose (but see subsection
(4)).
10
(3)
For the purposes of this section a contribution is made for a
prohibited purpose if the main purpose, or one of the main purposes,
of making the contribution is the obtaining of a reduction in tax
liability by means of sideways relief or capital gains relief.
(4)
This section has no effect in relation to the application of any
15
restriction under section 104, 107 or 110 to any loss that derives
wholly from qualifying film expenditure.”
      (2)
The amendment made by sub-paragraph (1) has effect in relation to any
amount contributed to a firm or LLP as capital on or after 2nd March 2007
(but see sub-paragraph (4)).
20
      (3)
For this purpose—
(a)
an amount of money is not to be taken as contributed as capital to a
firm or LLP until the money is paid to the firm or LLP, and
(b)
a right or other asset is not to be taken as contributed as capital to a
firm or LLP until it is transferred to the firm or LLP.
25
      (4)
The amendment made by sub-paragraph (1) has no effect in relation to any
amount contributed by an individual on or after 2nd March 2007 if—
(a)
the amount is contributed pursuant to an obligation in a contract
made before that date, and
(b)
the obligation may not be varied or extinguished by the exercise of
30
any right conferred on the individual (whether or not under the
contract).
Provision corresponding to paragraphs 1 and 2 for tax year 2006-07
3     (1)
ICTA has effect, in relation to any loss made by an individual in a trade in
the tax year 2006-07 the basis period for which ends on or after 2nd March
35
2007, as if provision corresponding to section 103C of ITA 2007 were
included in Chapter 7 of Part 4 of ICTA.
      (2)
Sub-paragraphs (3) to (13) of paragraph 1 apply for the purposes of sub-
paragraph (1) above.
      (3)
ICTA has effect for the tax year 2006-07 as if provision corresponding to
40
section 113A of ITA 2007 were included in that Chapter.
      (4)
Sub-paragraphs (2) to (4) of paragraph 2 apply for the purposes of sub-
paragraph (3) above.
      (5)
The provisions which are treated by this paragraph as included in Chapter
7 of Part 4 of ICTA have effect as if—
45

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
102

(a)
any reference in section 103C of ITA 2007 to sideways relief were to
relief under section 380 or 381 of ICTA,
(b)
any reference in section 103C of ITA 2007 to capital gains relief in
relation to a loss were to the treatment of the loss as an allowable loss
by virtue of section 72 of FA 1991,
5
(c)
any reference in section 103C or 113A of ITA 2007 to any provision of
Chapter 3 of Part 4 of ITA 2007 were to the corresponding provision
of Chapter 7 of Part 4 of ICTA, and
(d)
any reference in section 113A of ITA 2007 to a contribution to a firm
or an LLP were to a contribution to a trade carried on by the firm or
10
LLP,

and references in paragraphs 1(3) to (13) and 2(2) to (4) to any of those
expressions are to be read accordingly.
Consequential amendments
4
ITA 2007 is amended as follows.
15
5
In section 32 (liability not dealt with in the calculation), for “section 112(5)”
substitute “section 103B(5)”.
6
In section 82(a) (exploitation of films), for “sections 115 and 116” substitute
“section 115”.
7     (1)
Section 102 (overview of Chapter 3 of Part 4) is amended as follows.
20
      (2)
In subsection (1)—
(a)
in paragraph (a), for “104 to 106 and section 114)” substitute “103A,
103C to 105, 113A and 114)”,
(b)
in paragraph (b), for “107 to 109 and section 114)” substitute “103C,
103D, 107 to 109, 113A and 114)”, and
25
(c)
in paragraph (c), for “in an early tax year (see sections 110 to 114)”
substitute “(see sections 103B to 103D and 110 to 114)”.
      (3)
In subsection (2), for “sections 115 and 116” substitute “section 115”.
8
After section 103 insert—
“103A
Meaning of “limited partner”
30
(1)
In this Chapter “limited partner” means an individual who carries on
a trade—
(a)
as a limited partner in a limited partnership registered under
the Limited Partnerships Act 1907,
(b)
as a partner in a firm who in substance acts as a limited
35
partner in relation to the trade (see subsection (2)), or
(c)
while the condition mentioned in subsection (3) is met in
relation to the individual.
(2)
An individual in substance acts as a limited partner in relation to a
trade if the individual—
40
(a)
is not entitled to take part in the management of the trade,
and
(b)
is entitled to have any liabilities (or those beyond a certain
limit) for debts or obligations incurred for the purposes of the
trade met or reimbursed by some other person.
45

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
103

(3)
The condition referred to in subsection (1)(c) is that—
(a)
the individual carries on the trade jointly with other persons,
(b)
under the law of a territory outside the United Kingdom, the
individual is not entitled to take part in the management of
the trade, and
5
(c)
under that law, the individual is not liable beyond a certain
limit for debts or obligations incurred for the purposes of the
trade.
(4)
In the case of an individual who is a limited partner as a result of
subsection (1)(c), references in this Chapter to the individual’s firm
10
are to be read as references to the relationship between the
individual and the other persons mentioned in subsection (3)(a).
103B
Meaning of “non-active partner” etc
(1)
For the purposes of this Chapter an individual carries on a trade as a
non-active partner during a tax year if the individual—
15
(a)
carries on the trade as a partner in a firm at a time during the
year,
(b)
does not carry on the trade as a limited partner at any time
during the year, and
(c)
does not devote a significant amount of time to the trade in
20
the relevant period for the year.
(2)
For the purposes of this Chapter an individual devotes a significant
amount of time to a trade in the relevant period for a tax year if, in
that period, the individual spends an average of at least 10 hours a
week personally engaged in activities carried on for the purposes of
25
the trade.
(3)
For this purpose “the relevant period” means the basis period for the
tax year (unless the basis period is shorter than 6 months).
(4)
If the basis period for the tax year is shorter than 6 months, “the
relevant period” means—
30
(a)
the period of 6 months beginning with the date on which the
individual first started to carry on the trade (if the basis
period begins with that date), or
(b)
the period of 6 months ending with the date on which the
individual permanently ceased to carry on the trade (if the
35
basis period ends with that date).
(5)
If—
(a)
any relief is given on the assumption that the individual
devoted or will devote a significant amount of time to the
trade in the relevant period for a tax year, but
40
(b)
the individual in fact failed or fails to do so,

the relief is withdrawn by the making of an assessment to income tax
under this section.”
9
After section 103C (as inserted by paragraph 1(1) above) insert—
“103D
Meaning of “qualifying film expenditure”
45
(1)
For the purposes of this Chapter expenditure is qualifying film
expenditure if—

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
104

(a)
it is deducted under a relevant film provision for the
purposes of the calculation required by section 849 of ITTOIA
2005 (calculation of firm’s profits or losses), or
(b)
it is incidental expenditure which (although not deducted
under a relevant film provision) is incurred in connection
5
with the production of a film, or the acquisition of the original
master version of a film, in relation to which expenditure is
so deducted.
(2)
Expenditure is incidental if it is on management, administration or
obtaining finance.
10
(3)
The extent to which expenditure is within subsection (1)(b) is
determined on a just and reasonable basis.
(4)
For the purposes of this Chapter the amount of any loss that derives
from qualifying film expenditure is determined on a just and
reasonable basis.
15
(5)
In this section—
“the acquisition of the original master version of a film” has the
same meaning as in Chapter 9 of Part 2 of ITTOIA 2005 (see
sections 130 and 132 of that Act),
“film” is to be read in accordance with paragraph 1 of Schedule
20
1 to the Films Act 1985, and
“a relevant film provision” means any one of sections 137 to 140
of ITTOIA 2005 (relief for certified master versions of films).”
10
In—
(a)
section 104(5) (restriction on reliefs for limited partners),
25
(b)
section 107(2) (restriction on reliefs for members of LLPs),
(c)
section 110(1)(a) (restriction on reliefs for non-active partners in early
tax years), and
(d)
section 115(1)(d) (restrictions on relief for firms exploiting films),

omit “(see section 112)”.
30
11
In—
(a)
section 105(11) (meaning of “contribution to the firm” for purposes of
section 104),
(b)
section 108(9) (meaning of “contribution to the LLP” for purposes of
section 107), and
35
(c)
section 111(12) (meaning of “contribution to the firm” for purposes of
section 110),

for the words from “any regulations” to “excluded” substitute “section 113A
and any regulations made under section 114 (exclusion of amounts”.
12
Omit section 106 (meaning of “limited partner”).
40
13
In section 112 (meaning of “non-active partner” and “early tax year” etc)—
(a)
omit subsections (1) to (5), and
(b)
the heading accordingly becomes “Meaning of “early tax year””.
14
Omit the italic-cross heading before section 114 (regulations: exclusion of
amounts in calculating contribution to the firm or LLP) and for the heading
45
of that section substitute “Power to exclude other amounts”.

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
105

15
In section 115 (restrictions on reliefs for firms exploiting films), for
subsection (4) substitute—
“(4)
The restrictions under this section do not apply to so much of the loss
(if any) as derives from qualifying film expenditure.”
16
Omit section 116 (exclusion from restrictions under section 115: certain film
5
expenditure).
17
In section 792 (partners claiming excess sideways or capital gains relief)—
(a)
in subsection (7), for “106” substitute “103A”, and
(b)
in subsection (8), for “106(3)(a)” substitute “103A(3)(a)”.
18
In section 809 (individuals in partnership claiming relief for licence-related
10
trading losses: other definitions)—
(a)
in subsection (1), for “112” substitute “103B”, and
(b)
in subsection (2), for “112(1)(b)” substitute “103B(1)(b)”.
19
In paragraph 148(3)(b) of Schedule 2 (transitionals and savings: tax
avoidance)—
15
(a)
for “106” substitute “103A”, and
(b)
for “112” substitute “103B”.
20
In Schedule 4 (index of defined expressions)—
(a)
in the definition of “limited partner”, for “106” substitute “103A”,
(b)
in the definition of “non-active partner”, for “112” substitute “103B”,
20
and
(c)
after the definition of “qualifying donation (in Chapter 2 of Part 8)”
insert—

“qualifying film expenditure (in
section 103D”.

Chapter 3 of Part 4)

25
21
The amendments made by paragraphs 5 to 20 are deemed always to have
had effect.
Schedule 5
Section 29

Avoidance involving financial arrangements
Amounts not forming part of a company’s income
30
1     (1)
ICTA is amended as follows.
      (2)
In section 347A(1) (annual payments: general rule), as it had effect before
ITA 2007, omit paragraph (b) together with the “and” before it (payment to
which section applies not income of any company for corporation tax
purposes).
35
      (3)
The amendment made by sub-paragraph (2) has effect in relation to
payments made on or after 6th December 2006 but before 6th April 2007.
      (4)
Omit section 347A (as amended by ITA 2007).

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
106

      (5)
The amendment made by sub-paragraph (4) has effect in relation to
payments made on or after 6th April 2007.
2     (1)
In section 660C of ICTA, omit subsection (4) (income which is income of
settlor alone for income tax purposes by virtue of section 624 or 629 of
ITTOIA 2005 not income of any company for corporation tax purposes).
5
      (2)
The amendment made by sub-paragraph (1) has effect in relation to
accounting periods ending on or after 6th March 2007.
      (3)
But income which arises in an accounting period beginning before that date
is to be chargeable to corporation tax as a result of that amendment only if it
arises on or after that date.
10
Structured finance arrangements
3     (1)
Section 774B of ICTA (disregard of intended effects of arrangement
involving disposals of assets) is amended as follows.
      (2)
For subsection (1) substitute—
“(1)
This section applies if an arrangement is a structured finance
15
arrangement in relation to a person (“the borrower”).
(1A)
If the arrangement would (disregarding this section) have had the
relevant effect (see subsections (2) and (3)), the arrangement is not to
have that effect.
(1B)
If the arrangement would (disregarding this section) not have had
20
that effect, the payments mentioned in section 774A(2)(d) are to be
treated for tax purposes as income of the borrower payable in respect
of the security (whether or not those payments are also the income of
anyone else for tax purposes).”
      (3)
In subsection (4)(a) (income tax relief for finance charge in respect of
25
advance), for the words from the beginning to “is a person” substitute “a
person in relation to whom this section applies is”.
      (4)
In subsection (5) (corporation tax relief for finance charge in respect of
advance), for the words from the beginning to “is a company” substitute “If
a person in relation to whom this section applies is”.
30
4
In section 774D of ICTA (disregard of intended effects of arrangement
involving change in relation to a partnership), after subsection (2) insert—
“(2A)
In determining whether the condition in subsection (1)(b) is met it is
to be assumed that amounts of income equal to the payments
mentioned in section 774C(2)(f) or (4)(e) were payable to the
35
borrower partnership before the time at which the relevant change in
relation to its membership involving the lender or a person
connected with the lender occurs.”
5
In section 774E of ICTA (exceptions), in subsection (7)(a) (meaning of
“relevant person” where section 774B applies), for the words from “a
40
person” to “of that section)” substitute “the borrower under the structured
finance arrangement, a person connected with that borrower or (if that
borrower is a partnership) a member of the partnership”.

Finance Bill
Schedule 5 — Avoidance involving financial arrangements
107

6     (1)
Section 774G of ICTA (minor definitions etc for purposes of sections 774A to
774D) is amended as follows.
      (2)
In paragraph (a) of subsection (3) (meaning of receiving asset)—
(a)
for “include the person’s” substitute “include—
(i)
the person’s”, and
5
(b)
after “it” insert “, and
(ii)
the discharge (in whole or in part) of any
liability of the person,”.
      (3)
In paragraph (c) of that subsection (meaning of payments in respect of asset),
for “include obtaining” substitute “include—
10
(i)
payments in respect of any other asset substituted for
it under the arrangement, and
(ii)
obtaining”.
      (4)
After subsection (5) insert—
“(5A)
In determining for the purposes of sections 774A to 774D whether an
15
amount is recorded as a financial liability in respect of the advance it
is to be assumed that the period of account in which the advance is
received ended immediately after the receipt of the advance.”
7     (1)
The amendments made by paragraphs 3 to 5 and 6(2) and (3) have effect in
relation to any arrangements whenever made.
20
      (2)
But, in relation to arrangements made before 6th March 2007, amounts are
as a result of any of those amendments—
(a)
to be charged to tax, or
(b)
to be brought into account in calculating any income for tax purposes
or deducted from any income for tax purposes,
25

only if the amounts arise on or after that date.
      (3)
In any case where, in relation to arrangements made before that date, a
person is treated as a result of any of those amendments as being a party to
any loan relationship—
(a)
a period of account is to be treated for the purposes of Chapter 2 of
30
Part 4 of FA 1996 as beginning on that date, and
(b)
the loan relationship is to be treated for those purposes as being
entered into by the person for a consideration equal to the notional
carrying value of the liability representing the relationship.
      (4)
For this purpose the notional carrying value is the amount that would have
35
been the carrying value of the liability in the accounts of the person if a
period of account had ended immediately before that date.
      (5)
“Carrying value” has the same meaning here as it has for the purposes of
paragraph 19A of Schedule 19 to FA 1996.
      (6)
The amendment made by paragraph 6(4) comes into force on the day on
40
which this Act is passed.
8     (1)
Section 263E of TCGA 1992 (structured finance arrangements) is amended as
follows.
      (2)
In subsection (2) (condition A: person making disposal of asset subsequently
acquires it), for the words from “subsequently” to the end substitute “(and
45