Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
94

by the worker in the worker’s personal capacity and not as income of
the partnership.
(7)
Where—
(a)
the worker is resident in the United Kingdom, and
(b)
the relevant services are provided in the United Kingdom,
5

the MSC is treated as having a place of business in the United
Kingdom, whether or not it in fact does so.
Supplementary provisions
61H
Relief in case of distributions by managed service company
(1)
A claim for relief may be made under this section where the MSC—
10
(a)
is a body corporate,
(b)
is treated as making a deemed employment payment in any
tax year, and
(c)
either in that tax year (whether before or after that payment
is treated as made), or in a subsequent tax year, makes a
15
distribution (a “relevant distribution”).
(2)
A claim for relief under this section must be made—
(a)
by the MSC by notice to an officer of Revenue and Customs,
and
(b)
within 5 years after 31st January following the tax year in
20
which the distribution is made.
(3)
If on a claim being made an officer of Revenue and Customs is
satisfied that relief should be given in order to avoid a double charge
to tax, the officer must direct the giving of such relief by way of
amending any assessment, by discharge or repayment of tax, or
25
otherwise, as appears to the officer appropriate.
(4)
Relief under this section is given by setting the amount of the
deemed employment payment against the relevant distribution so as
to reduce the distribution.
(5)
In the case of more than one relevant distribution, an officer of
30
Revenue and Customs must exercise the power conferred by this
section so as to secure that so far as practicable relief is given by
setting the amount of a deemed employment payment—
(a)
against relevant distributions of the same tax year before
those of other years,
35
(b)
against relevant distributions received by the worker before
those received by another person, and
(c)
against relevant distributions of earlier years before those of
later years.
(6)
Where the amount of a relevant distribution is reduced under this
40
section, the amount of any associated tax credit is reduced
accordingly.
61I
Meaning of “associate”
(1)
Subsections (2) to (4) apply for the purposes of this Chapter.
(2)
“Associate”, in relation to an individual, means—
45

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
95

(a)
a member of the individual’s family or household,
(b)
a relative of the individual,
(c)
a partner of the individual, or
(d)
the trustee of any settlement in relation to which the
individual, or a relative of the individual or member of the
5
individual’s family (living or dead), is or was a settlor.
(3)
“Associate”, in relation to a company, means a person connected
with the company.
(4)
“Associate”, in relation to a partnership, means any associate of a
member of the partnership.
10
(5)
If—
(a)
a managed service company (“the MSC”) is a partnership,
and
(b)
a person is an associate of another person by virtue only of
being a member of the partnership,
15

the person is to be treated, for the purposes of this Chapter as it
applies in relation to the MSC, as if the person were not an associate
of that other person.
(6)
In subsection (2), “relative” means ancestor, lineal descendant,
brother or sister.
20
(7)
For the purposes of subsection (2)—
(a)
a man and woman living together as husband and wife are
treated as if they were married to each other, and
(b)
two persons of the same sex living together as if they were
civil partners of each other are treated as if they were civil
25
partners of each other.
61J
Interpretation of Chapter
(1)
In this Chapter—
“associate” has the meaning given by section 61I,
“business” means any trade, profession or vocation,
30
“the client” has the meaning given by section 61D(4),
“employer’s national insurance contributions” means
secondary Class 1 or Class 1A national insurance
contributions,
“managed service company” has the meaning given by section
35
61B,
“national insurance contributions” means contributions under
Part 1 of SSCBA 1992 or Part 1 of SSCB(NI)A 1992,
“PAYE provisions” means the provisions of Part 11 or PAYE
regulations,
40
“the relevant services” has the meaning given by section 61D(4),
and
“the worker” has the meaning given by section 61D(4).
(2)
Nothing in section 995 of ITA 2007 (meaning of control) applies for
the purposes of this Chapter.”
45
5
In section 218(1) (exclusion of lower-paid employments from parts of

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
96

benefits code: calculation of earnings rate), in Step 1, at the end of paragraph
(d) insert “and
(e)
in the case of an employment within section 61G(2) (deemed
employment payment by managed service company), the
total amount of deemed employment payments for the year.”
5
6
After section 688 insert—
“688A
Managed service companies: recovery from other persons
(1)
PAYE regulations may make provision authorising the recovery
from a person within subsection (2) of any amount that an officer of
Revenue and Customs considers should have been deducted by a
10
managed service company (“the MSC”) from a payment of, or on
account of, PAYE income of an individual.
(2)
The persons are—
(a)
a director or other office-holder, or an associate, of the MSC,
(b)
an MSC provider,
15
(c)
a person who (directly or indirectly) has encouraged,
facilitated or otherwise been actively involved in the
provision by the MSC of the services of the individual, and
(d)
a director or other office-holder, or an associate, of a person
(other than an individual) who is within paragraph (b) or (c).
20
(3)
A person does not fall within subsection (2)(c) merely by providing
legal or accountancy advice in a professional capacity.
(4)
The supplementary provision that may be made by the regulations
includes provision as to the liability of one person within subsection
(2) to another such person.
25
(5)
In this section—
“associate” has the meaning given by section 61I,
“director” has the meaning given by section 67,
“managed service company” has the meaning given by section
61B, and
30
“MSC provider” means an MSC provider who is involved with
the MSC (within the meaning of section 61B).
(6)
Section 61C(4) (extended meaning of “associate”) applies for the
purposes of subsection (2)(d).
(7)
The Treasury may by order amend this section (but not this
35
subsection or subsection (8)).
(8)
The Treasury must not make an order under subsection (7) unless a
draft of it has been laid before and approved by a resolution of the
House of Commons.”
7
In section 717(4) (orders and regulations not subject to negative procedure),
40
insert at the end “or section 688A(7) (PAYE regulations: managed service
companies)”.

Finance Bill
Schedule 3 — Managed service companies
Part 2 — Calculation of profits of MSCs: deduction for deemed employment payments
97

8
In Part 2 of Schedule 1 (index of defined expressions), insert at the
appropriate places—

“associate (in Chapter 9 of Part 2)
section 61I (but see

section 61C(4))”

“business (in Chapter 9 of Part 2)
section 61J”

5

“the client (in Chapter 9 of Part 2)
section 61D(4)”

“employer’s national insurance
section 61J”

contributions (in Chapter 9 of

Part 2)

“managed service company (in
section 61B”

10

Chapter 9 of Part 2)

“national insurance contributions
section 61J”

(in Chapter 9 of Part 2)

“PAYE provisions (in Chapter 9 of
section 61J”

Part 2)

15

“the relevant services (in Chapter
section 61D(4)”

9 of Part 2)

“the worker (in Chapter 9 of Part
section 61D(4)”.

2)

Part 2
20
Calculation of profits of MSCs: deduction for deemed employment payments
Deduction for deemed employment payments for income tax purposes
9
In ITTOIA 2005, after section 164 insert—
“Managed service companies
164A
Deduction for deemed employment payments
25
(1)
This section applies for the purpose of calculating the profits of a
trade, profession or vocation carried on by a managed service
company (“the MSC”) which is treated as making a deemed
employment payment in connection with the trade, profession or
vocation.
30
(2)
A deduction is allowed for—
(a)
the amount of the deemed employment payment, and
(b)
the amount of any employer’s national insurance
contributions paid by the MSC in respect of it.
(3)
The deduction is allowed for the period of account in which the
35
deemed employment payment is treated as made.
(4)
The amount of the deduction allowed under subsection (2) is limited
to the amount that reduces the profits of the firm for the tax year to
nil.

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
98

(5)
No deduction in respect of—
(a)
the deemed employment payment, or
(b)
any employer’s national insurance contributions paid by the
MSC in respect of it,

may be made except in accordance with this section.
5
(6)
In this section “deemed employment payment”, “employer’s
national insurance contributions” and “managed service company”
have the same meaning as in Chapter 9 of Part 2 of ITEPA 2003.”
Deduction for deemed employment payments for corporation tax purposes
10    (1)
This paragraph applies for the purpose of calculating for corporation tax
10
purposes the profits of a business carried on by a managed service company
(“the MSC”) which is treated as making a deemed employment payment in
connection with the business.
      (2)
A deduction is allowed for—
(a)
the amount of the deemed employment payment, and
15
(b)
the amount of any employer’s national insurance contributions paid
by the MSC in respect of it.
      (3)
The deduction is allowed for the period of account in which the deemed
employment payment is treated as made.
      (4)
If the MSC is a partnership, the amount of the deduction allowed under sub-
20
paragraph (2) is limited to the amount that reduces the profits of the
partnership for the period of account to nil.
      (5)
No deduction in respect of—
(a)
the deemed employment payment, or
(b)
any employer’s national insurance contributions paid by the MSC in
25
respect of it,

may be made except in accordance with this paragraph.
      (6)
In this paragraph “business”, “deemed employment payment”, “employer’s
national insurance contributions” and “managed service company” have the
same meanings as in Chapter 9 of Part 2 of ITEPA 2003.
30
Schedule 4
Section 26

Restrictions on trade loss relief for partners
Limit on amount of sideways relief and capital gains relief available in any tax year
1     (1)
In ITA 2007, before section 104 (and the italic cross-heading before it)
insert—
35
“Limit on amount of sideways relief and capital gains relief
103C
Limit on reliefs in any tax year not to exceed cap for tax year
(1)
This section applies if an individual carries on one or more trades—
(a)
as a non-active partner in a firm during a tax year, or

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
99

(b)
as a limited partner in a firm at a time in that tax year,

and the individual makes a loss in any of those trades (an “affected
loss”) in that tax year.
(2)
There is a restriction on the amount of sideways relief and capital
gains relief which (after applying the restrictions under the other
5
provisions of this Chapter) may be given to the individual for any
affected loss (but see subsections (6) and (7)).
(3)
The restriction is that the total amount of the sideways relief and
capital gains relief given to the individual for all the affected losses
must not exceed the cap for that tax year.
10
(4)
The cap for any tax year is £25,000.
(5)
The Treasury may by order amend the sum for the time being
specified in subsection (4).
(6)
The restriction under this section does not apply to so much of any
affected loss as derives from qualifying film expenditure (see section
15
103D).
(7)
The restriction under this section does not affect the giving of
sideways relief for a loss made in a trade against the profits of that
trade.
(8)
In this section “trade” does not include a trade which consists of the
20
underwriting business of a member of Lloyd’s (within the meaning
of section 184 of FA 1993).”
      (2)
The amendment made by sub-paragraph (1) has effect in relation to any loss
made by an individual in a trade in the tax year 2007-08 or any subsequent
tax year.
25
      (3)
But, in the case of a loss made by an individual in a trade in a tax year the
basis period for which begins before 2nd March 2007 (a “straddling basis
period”), the amount of that loss for the purposes of section 103C of ITA 2007
is—
(a)
the amount of sideways relief and capital gains relief which (after
30
applying the restrictions under the other provisions of Chapter 3 of
Part 4 of that Act) may be given to the individual for that loss, less
(b)
the amount (if any) of the pre-announcement loss.
      (4)
“The pre-announcement loss” is determined as follows.
      (5)
Calculate the profits or losses of the straddling basis period, but without
35
regard to capital allowances and qualifying film expenditure (within the
meaning of section 103D of ITA 2007).
      (6)
If that calculation produces a loss and the individual has made a
contribution of an amount as capital to the firm or LLP in question—
(a)
on or before the start of the straddling basis period, or
40
(b)
after the start of that period but before 2nd March 2007,

apportion the loss produced by that calculation to the part of the straddling
basis period which begins with the relevant date and falls before 2nd March
2007 in proportion to the number of days in that part.

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
100

      (7)
Calculate so much of the loss of the straddling basis period as derives from
relevant pre-announcement capital expenditure.
      (8)
The pre-announcement loss is the sum of—
(a)
the amount of the loss apportioned under sub-paragraph (6) (if any),
and
5
(b)
so much of the loss of the straddling basis period (if any) as derives
from relevant pre-announcement capital expenditure.
      (9)
In sub-paragraph (6) “the relevant date” means—
(a)
in any case where a contribution was made on or before the start of
the straddling basis period, the start of that period, and
10
(b)
in any other case, the date on which the contribution was made or, if
more than one contribution was made, the date on which the first
contribution was made.
     (10)
For the purposes of this paragraph the amount of the loss of the straddling
basis period that derives from relevant pre-announcement capital
15
expenditure is determined on a just and reasonable basis.
     (11)
In this paragraph “relevant pre-announcement capital expenditure”
means—
(a)
any capital allowance in respect of expenditure paid before 2nd
March 2007, and
20
(b)
any capital allowance in respect of expenditure paid on or after that
date pursuant to an unconditional obligation in a contract made
before that date,

and for this purpose “an unconditional obligation” means an obligation
which may not be varied or extinguished by the exercise of any right
25
conferred on the firm or LLP in question (whether or not under the contract).
     (12)
For the purposes of this paragraph—
(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
30
firm or LLP until it is transferred to the firm or LLP.
     (13)
Section 62 of ITA 2007 (partners: losses of a tax year etc) applies for the
purposes of this paragraph as it applies for the purposes of Chapter 3 of Part
4 of that Act.
Disregard of contributions made for purpose of accessing sideways relief and capital gains relief
35
2     (1)
In ITA 2007, before section 114 insert—
“Exclusion of amounts in calculating contribution to the firm or LLP
113A
Exclusion of amounts contributed to access relief
(1)
An amount which an individual contributes to a firm as capital is to
be excluded in calculating the individual’s contribution to the firm
40
for the purposes of section 104 or 110 if the contribution was made
for a prohibited purpose (but see subsection (4)).
(2)
If—