Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 3 — Managed service companies
Part 2 — Calculation of profits of MSCs: deduction for deemed employment payments
100

(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)
The amount of the deduction allowed under subsection (2) is limited
5
to the amount that reduces the profits of the firm for the tax year to
nil.
(5)
No deduction in respect of—
(a)
the deemed employment payment, or
(b)
any employer’s national insurance contributions paid by the
10
MSC in respect of it,

may be made except in accordance with this section.
(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.”
15
Deduction for deemed employment payments for corporation tax purposes
10    (1)
This paragraph applies for the purpose of calculating for corporation tax
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.
20
      (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 deemed
25
employment payment is treated as made.
      (4)
If the MSC is a partnership, the amount of the deduction allowed under sub-
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—
30
(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 paragraph.
      (6)
In this paragraph “business”, “deemed employment payment”, “employer’s
35
national insurance contributions” and “managed service company” have the
same meanings as in Chapter 9 of Part 2 of ITEPA 2003.

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

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—
5
“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
(b)
as a limited partner in a firm at a time in that tax year,
10

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
provisions of this Chapter) may be given to the individual for any
15
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.
(4)
The cap for any tax year is £25,000.
20
(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
103D).
25
(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
underwriting business of a member of Lloyd’s (within the meaning
30
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.
      (3)
But, in the case of a loss made by an individual in a trade in a tax year the
35
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
applying the restrictions under the other provisions of Chapter 3 of
40
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.

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

      (4)
“The pre-announcement loss” is determined as follows.
      (5)
Calculate the profits or losses of the straddling basis period, but without
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
5
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
(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
10
2007 in proportion to the number of days in that part.
      (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),
15
and
(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
20
the straddling basis period, the start of that period, and
(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
25
basis period that derives from relevant pre-announcement capital
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
30
March 2007, and
(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
35
which may not be varied or extinguished by the exercise of any right
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
40
(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.
     (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.
45

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

Disregard of contributions made for purpose of accessing sideways relief and capital gains relief
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
5
be excluded in calculating the individual’s contribution to the firm
for the purposes of section 104 or 110 if the contribution was made
for a prohibited purpose (but see subsection (4)).
(2)
If—
(a)
an individual carries on a trade as a member of an LLP at a
10
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
any time in that year,
15

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)).
(3)
For the purposes of this section a contribution is made for a
20
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
restriction under section 104, 107 or 110 to any loss that derives
25
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)).
      (3)
For this purpose—
30
(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.
      (4)
The amendment made by sub-paragraph (1) has no effect in relation to any
35
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
any right conferred on the individual (whether or not under the
40
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

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

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
5
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—
10
(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,
15
(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
20
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.
25
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.
30
      (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
35
(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”
40
(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,

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
105

(b)
as a partner in a firm who in substance acts as a limited
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
5
trade if the individual—
(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
10
trade met or reimbursed by some other person.
(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
15
the trade, and
(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
20
subsection (1)(c), references in this Chapter to the individual’s firm
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
25
non-active partner during a tax year if the individual—
(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
30
(c)
does not devote a significant amount of time to the trade in
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
35
week personally engaged in activities carried on for the purposes of
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
40
relevant period” means—
(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
45
individual permanently ceased to carry on the trade (if the
basis period ends with that date).

Finance Bill
Schedule 4 — Restrictions on trade loss relief for partners
106

(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
(b)
the individual in fact failed or fails to do so,
5

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”
(1)
For the purposes of this Chapter expenditure is qualifying film
10
expenditure if—
(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
15
under a relevant film provision) is incurred in connection
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
20
obtaining finance.
(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
25
reasonable basis.
(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),
30
“film” is to be read in accordance with paragraph 1 of Schedule
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—
35
(a)
section 104(5) (restriction on reliefs for limited partners),
(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),
40

omit “(see section 112)”.
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
45
section 107), and