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Clause 1260: Section 1259: supplementary
3197. This clause sets out the treatment of losses and distributions in the calculation of the firm’s profits under clause 1259. It is based on section 114 of ICTA.
3198. The usual rule is that the profits of the firm are calculated as if the firm were a company. On that assumption it is possible that losses brought forward should be deducted before the (net) profits are allocated to the partners. Instead, subsection (1) makes clear that losses are not taken into account in the calculation of the firm’s profit or loss to be allocated to the partners.
3199. Capital allowances are given as a deduction in calculating profits. So there is no need for the rule in section 114(1)(b) and (2) that gives special treatment to capital allowances. The same applies to balancing charges, which are treated as business receipts. And the rule about charges (also in section 114(1)(b) of ICTA) is not needed because charges cannot be a deduction in calculating the profits of a trade.
3200. There is a closely related rule in section 116(5) of ICTA. It is that, for the purposes of that section, capital allowances and charges are taken into account. As there is no longer a partnership rule that allowances and charges are ignored, there is no need for section 116(5) of ICTA. So it is repealed by Schedule 1 to this Bill.
3201. Schedule 1 to the Bill introduces a new subsection (4) to section 849 of ITTOA to make clear similarly that losses brought forward are ignored in calculating the firm’s profits for income tax purposes.
3202. Subsection (2) is based on section 114(1)(a) of ICTA, which provides that “references to distributions shall not apply”. It is clear from the context that this rule applies to payments made by the firm. So there is no question of a payment of, say, interest being treated as a distribution by the firm under section 209 of ICTA and being disallowed in calculating the firm’s profit. See Schedule 1 and Change 85 in Annex 1.
Clause 1261: Accounting periods of firms
3203. This clause sets out how accounting periods of a firm are determined. It is based on section 114 of ICTA. The concept of an accounting period of a firm is used in clause 1259 for the calculation of the firm’s profit or loss.
3204. An accounting period of a firm begins when the rule in section 114(1) of ICTA first applies. That is, when a company first carries on the trade etc in partnership. That circumstance is set out in subsections (2)(b) and (3) of the clause.
3205. An accounting period of a firm ends when the rule in section 114(1) of ICTA no longer applies. That is, when the last company leaves a firm, or (if the company continues to carry on the trade etc) when the company is no longer in partnership. That circumstance is set out in subsections (2)(c) and (4) of the clause.
3206. An accounting period of a firm ends when there is a change in the persons carrying on the trade etc and the change is treated by 114(1)(c) of ICTA as the transfer of the trade etc to a different company. That is, when there is no “corporate continuity” between the members of the firm before and after the change. That circumstance is set out in subsections (2)(d) and (5) of the clause.
3207. The usual rules about an accounting period ending on a date to which the firm makes up accounts and about an accounting period ending on the expiration of 12 months apply without being specifically mentioned in this clause.
Clause 1262: Allocation of firm’s profits or losses between partners
3208. This clause is the link between the firm’s profit or loss and the amounts assessable on the partners. It is based on section 114 of ICTA. The corresponding rule for income tax is in section 850 of ITTOIA.
3209. The basic rule in this clause applies in most cases. But, if the basic rule produces a loss for a partner when the firm’s result is a profit, the allocation is adjusted under clause 1263. Similarly, if the basic rule produces a profit for a partner when the firm’s result is a loss, the allocation is adjusted under clause 1264.
3210. In a firm where some partners are liable to income tax and others liable to corporation tax, the rules requiring an adjusted allocation are not straightforward. In this Bill they are set out in two separate clauses. The Bill amends ITTOIA to set out the income tax rules in the same way (in new sections 850A and 850B of ITTOIA) - see Schedule 1.
Clause 1263: Profit-making period in which some partners have losses
3211. This clause sets out what happens if the calculation of a partner’s share of the firm’s profit or loss under clause 1262 produces a loss, even though the overall result for the firm is a profit. It is new. The corresponding rule for income tax was in section 850 of ITTOIA but is now in the new section 850A of ITTOIA.
3212. The clause is most likely to apply when one or more partners are entitled to a salary or interest on the firm’s capital. A partner’s “loss” determined under clause 1262 is, in effect, reallocated to the other partners, to reduce their shares of the profit. See Change 86 in Annex 1.
3213. Subsection (2) sets out the position for company A if it has a profit but any of the other partners has a loss determined under clause 1262. The rule is that company A’s profit is reduced so that the total of the shares of the profit-making partners is no more than the amount of the firm’s profits.
3214. If some of the members of the firm are UK resident and some are non-UK resident (see clause 1259), the measure of the firm’s profit may vary, depending on the residence of the partner “in relation to” which the firm’s profit is calculated. Similarly, if any of the partners is chargeable to income tax, that partner’s share is determined under ITTOIA and not under clause 1262.
3215. So subsection (2) refers to “the comparable amount” for a partner. This amount may be on a basis different from that appropriate for that partner under clause 1259 or the corresponding ITTOIA rule.
Clause 1264: Loss-making period in which some partners have profits
3216. This clause sets out what happens if the calculation of a partner’s share of the firm’s profit or loss under clause 1262 produces a profit, even though the overall result for the firm is a loss. It is new. The corresponding rule for income tax was in section 850 of ITTOIA but is now in the new section 850B of ITTOIA.
3217. The clause is the mirror-image of clause 1263. It is most likely to apply when one or more partners are entitled to a salary or interest on the firm’s capital. A partner’s “profit” determined under clause 1262 is, in effect, reallocated to the other partners, to reduce their shares of the loss. See Change 86 in Annex 1.
3218. Subsection (2) sets out the position for company A if it has a loss but any of the other partners has a profit determined under clause 1262. The rule is that company A’s loss is reduced so that the total of the shares of the loss-making partners is no more than the amount of the firm’s losses.
3219. If some of the members of the firm are UK resident and some are non-UK resident (see clause 1259), the measure of the firm’s loss may vary, depending on the residence of the partner “in relation to” which the firm’s loss is calculated. Similarly, if any of the partners is chargeable to income tax, that partner’s share is determined under ITTOIA and not under clause 1262.
3220. So subsection (2) refers to “the comparable amount” for a partner. This amount may be on a basis different from that appropriate for that partner under clause 1259 or the corresponding ITTOIA rule.
Clause 1265: Apportionment of profit share between partner’s accounting periods
3221. This clause allocates a partner’s share of the firm’s profit or loss to accounting periods of the partner. It is based on section 114 of ICTA.
Clause 1266: Resident partners and double taxation agreements
3222. This clause ensures that a UK resident company partner’s share of the income of a foreign firm remains liable to United Kingdom corporation tax even though the income of the firm as a whole is exempt from United Kingdom corporation tax in accordance with a double taxation agreement. It is based on section 115 of ICTA. The corresponding rule for income tax is in section 858 of ITTOIA.
3223. The business profits article of the United Kingdom/Jersey double taxation arrangement exempts the profits of a Jersey firm from United Kingdom tax. In the case of Padmore v CIR (1989), 62 TC 352 CA 1, the Court of Appeal decided that the exemption extended to the share of the profits arising to a United Kingdom resident individual. The rules in section 115(5) to (5B) of ICTA were enacted to remove the exemption.
3224. Subsection (1) sets out the type of company and firm with which the clause is concerned. It goes on to identify the sort of exemption from tax that was considered in the Padmore case.
3225. For United Kingdom tax purposes, if it is necessary to consider where a firm is resident, the question is likely to be decided by the place where the firm’s business is controlled and managed. But it is possible that, under foreign law, a firm may be considered to be resident elsewhere, for example, by reference to where the firm was established. So the clause uses both the “control and management” test and the “resides” test.
3226. Subsection (2) makes it clear that the clause does no more than remove any exemption under a double taxation arrangement. It does not deny other reliefs, such as tax credit relief. See Change 87 in Annex 1.
3227. Subsection (3) deals with United Kingdom tax credits, which may be relevant to the calculation of a company’s “shadow ACT” (see SI 1999/358, made under section 32 of FA 1998). A double taxation arrangement may give a non-UK resident “person” an entitlement to payment of a tax credit on a distribution by a United Kingdom company. This subsection makes it clear that, where that “person” is a firm, only a UK resident partner has the entitlement.
3228. Section 115(5A) of ICTA applies also to capital gains. That part of the rule is not rewritten in this Bill. It is moved to TCGA by an amendment to section 59 of TCGA (see Part 2 of Schedule 1 to the Bill).
Clause 1267: Various rules for trades and property businesses
3229. This clause clarifies the position of firms that are affected by the rules in Chapter 14 of Part 3 or clause 262 of the Bill. It is based on paragraph 13 of Schedule 22 to FA 2002 (as applied to property businesses by section 21B of ICTA). The corresponding rule for income tax is in section 860 of ITTOIA.
3230. The clause differs from its income tax equivalent because a positive adjustment on a change of basis is dealt with differently for income tax and corporation tax. For income tax, such an adjustment is the subject of a separate charge, in section 228 or 330 of ITTOIA. For corporation tax, the adjustment is treated as a trade or property business receipt and so is charged to tax under clause 35 or 209.
3231. This clause explicitly applies to property businesses. In ITTOIA the position is different because the extension to non-trade businesses in section 847 of ITTOIA does not apply to section 860. But section 860 of ITTOIA does apply to property businesses as a result of section 272(1) of ITTOIA, because the restriction in section 272(2) does not exclude rules outside Part 2 such as those in Chapter 7 of Part 3 of ITTOIA. Schedule 1 to the Bill amends section 860 of ITTOIA to clarify the income tax position, with a minor related amendment to section 847 of ITTOIA.
Clause 1268: Election for spreading under Chapter 14 of Part 3
3232. This clause sets out two rules for firms that make an election under clause 186. It is based on section 114 of ICTA and paragraphs 9 and 13 of Schedule 22 to FA 2002. The corresponding rules for income tax are in section 860 of ITTOIA.
3233. Subsection (1) ensures that the adjustment charge is not “rolled up” under clause 186 just because a company leaves or joins the firm.
3234. Subsection (2) is the rule about making an election under clause 186. The “date on which the new basis was adopted” is defined in clause 1269.
Clause 1269: Interpretation of clauses 1267 and 1268
3235. This clause explains expressions used in the two preceding clauses. It is based on paragraph 13 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 860(6) of ITTOIA.
Clause 1270: Special provisions about farming and property income
3236. This clause clarifies the position of firms that carry on a farming trade or property business. It is based on sections 15, 53 and 70A of ICTA. The corresponding rule for income tax is in section 859 of ITTOIA.
3237. In section 53(2) of ICTA there is a rule that all farming carried on in the United Kingdom by a company is a single trade. The section refers to a “particular company or partnership”.
3238. In section 15 of ICTA there is a similar rule that all property income activity carried on by a person forms a single property business. Paragraph 1(3) of Schedule A refers to a “particular person or partnership”. Section 70A(4) of ICTA, which deals with overseas property businesses, refers to a “particular company or partnership”.
3239. Subsection (1) is the rule that all farming carried on by a firm is a single trade. The subsection also makes it clear that the firm’s single farming trade does not include any farming trade carried on by a company separately from the firm.
3240. Subsections (2) and (3) are the corresponding rules for UK property businesses and overseas property businesses.
Clause 1271: Sale of patent rights: effect of partnership changes
3241. This clause sets out what happens when there is a sale of patent rights by a trader and there is change in the membership of any firm that carries on the trade. It is based on section 558 of CAA. The corresponding rule for income tax is in section 861 of ITTOIA.
3242. The rules for intellectual property are split:
- the rules that give capital allowances are in CAA;
- the rules that charge capital receipts from the sale of patent rights are in Chapter 3 of Part 9; and
- the special rules that apply to firms are set out in this clause and clause 1272.
3243. If a trader receives a sum from the sale of patent rights in the ordinary course of the trade the sum is a trade receipt. In that case, it is not a “capital sum” and clause 913(1)(a) of this Bill ensures that the special rules do not apply.
3244. If a trader receives a capital sum from the sale of patent rights, the sum is excluded from the calculation of the trade profits by the general rule that excludes capital receipts. Instead, the sum is separately charged to corporation tax under Chapter 3 of Part 9 of this Bill. The profit on the sale is charged to tax over six years. But the seller may elect to have the sum charged in the year in which the proceeds of sale are received. Or the charge may be spread in accordance with clause 916 or 917 of this Bill.
3245. In the case of a taxpayer liable to corporation tax, Part 8 of this Bill sets out rules for the taxation of gains and losses on companies’ intangible fixed assets. Those rules take priority over any other tax rules (see clause 906(1)). So the Part 8 rules generally apply instead of the rule in this clause. But Chapter 16 of Part 8 ensures that the Part 8 rules apply only to assets created or acquired on or after 1 April 2002.
3246. Subsection (1) sets out the conditions for the clause to apply. In particular, there has to be:
- a charge (to income tax or corporation tax) on the proceeds from the sale of patent rights; and
- a change in the persons carrying on the trade during periods in which tax is chargeable.
3247. Subsection (4) determines the amount to be charged as income of each company in the period of change. That amount is in two parts:
- for the period up to the change, a time-apportioned part of the amount that would otherwise have been charged for the whole period; and
- for the period after the change, the company’s share of the amount still to be charged after the change, apportioned to the period on a time basis.
3248. Subsection (5) sets out the general assumption that all the current partners step into the shoes of the persons who were partners at the time of the original sale. The amount charged in each accounting period is arrived at by spreading the remaining charge evenly over the rest of the period for which tax would otherwise have been charged.
3249. One of the consequences of the current partners stepping into the shoes of the original partners is that an amount originally charged to income tax may become charged to corporation tax, and vice versa. This consequence was not explicitly acknowledged in ITTOIA. So Part 2 of Schedule 1 to this Bill amends sections 861 and 862 of ITTOIA to clarify how the rule works for income tax. See Change 89 in Annex 1.
Clause 1272: Sale of patent rights: effect of later cessation of trade
3250. This clause sets out what happens when there has been a sale of patent rights to which the previous clause applied and the last corporate partner leaves the firm. It is based on section 525 of ICTA. The corresponding rule for income tax is in section 862 of ITTOIA. See also paragraph 3245 of this commentary about the effect of Part 8 of this Bill and Change 89 in Annex 1.
3251. Subsection (2) sets out how the “rolled-up” charge is split between the current partners on cessation of the trade. As in section 525(4) of ICTA, the charge is made on the persons who are partners immediately before the cessation. Otherwise, the charge would be allocated by reference to the profit-sharing arrangements in the whole of the final accounting period. Schedule 1 to this Bill amends section 862 of ITTOIA to clarify how the rule works for income tax.
Clause 1273: Limited liability partnerships
3252. This clause contains the rules that treat limited liability partnerships (“LLPs”) in the same way for tax purposes as ordinary partnerships (“firms” in this Bill). It is based on section 118ZA of ICTA. The corresponding rule for income tax is in section 863 of ITTOIA.
3253. Subsection (1)(a) ascribes the activities of the LLP to its members. Subsection (1) does not refer to an LLP carrying on a profession. See Change 2 in Annex 1.
Part 18: Unremittable income
Overview
3254. This Part provides relief from corporation tax if income arising in a territory outside the United Kingdom cannot be remitted to the United Kingdom. It also provides for withdrawal of relief if such income ceases to be unremittable. And it explains how unremittable income is to be valued if relief is not in fact claimed. The Part is based on section 584 of ICTA. The corresponding rules for income tax are in Chapter 4 of Part 8 of ITTOIA.
3255. This Part applies to “income arising in a territory outside the United Kingdom”. In the source legislation for this Bill, income arising outside the United Kingdom is charged to corporation tax mainly under Schedule D Case V (section 18 of ICTA). But some foreign income is charged under Schedule D Case VI (in circumstances that that Case is applied by a provision other than section 18 of ICTA), or under a non-schedular provision, if the provision covers income arising outside the United Kingdom.
3256. Profits made by the foreign branch of a United Kingdom trade are charged in Part 3. Such profits are not income arising in a territory outside the United Kingdom and this Part does not apply. (But Chapter 12 of Part 3 (deductions from profits: unremittable amounts) provides an equivalent relief in relation to a United Kingdom trade.)
3257. The paragraph headed “unremittable income that arose in an accounting period ending before 1 April 2009” in Part 21 of Schedule 2 to this Bill (transitionals and savings), the equivalent for corporation tax purposes of paragraph 153(1) and (2) of Schedule 2 to ITTOIA, ensures that this Part applies for an accounting period ending on or after 1 April 2009 even though the income in question arose in an accounting period ending before that date.
3258. This Part does not rewrite the appeal jurisdiction rules in section 584(9) of ICTA. See Change 98 in Annex 1. (But sub-paragraph (7) of the paragraph headed “tribunal reform” in Part 21 of Schedule 2 to this Bill, the equivalent for corporation tax purposes of paragraph 153(3) and (4) of Schedule 2 to ITTOIA, preserves the effect of section 584(9) of ICTA in the circumstances set out in the first-mentioned paragraph if the appeal involves income that arose in an accounting period ending before 1 April 2009.)
Clause 1274: Unremittable income: introduction
3259. This clause defines unremittable income and sets out the circumstances in which this Part applies. It is based on section 584(1) of ICTA. The corresponding rule for income tax is in section 841 of ITTOIA.
3260. The source legislation refers to “foreign currency”. This means a currency other than the currency of the territory in question. Since the local currency must be obtainable, it is superfluous to add that currency not obtainable is ‘foreign’.
3261. Condition A for unremittable income refers to the impossibility of obtaining currency in the territory in question and makes explicit that this means currency that could be transferred to the United Kingdom (whether the currency of that or another territory). See Change 90 in Annex 1.
3262. The requirement in the source legislation, that the inability to transfer the income to the United Kingdom is not due to any want of reasonable endeavours on the part of the claimant, is omitted. See again Change 90 in Annex 1.
Clause 1275: Claim for relief for unremittable income
3263. This clause deals with claims for relief and sets out how the relief applies. It is based on section 584(1), (2),(5) and (6) of ICTA. The corresponding rule for income tax is in section 842 of ITTOIA.
3264. The effect of subsection (1) is that the unremittable income is omitted from the company’s taxable income for the accounting period in which it arises.
3265. Subsection (4) defines an Export Credits Guarantee Department payment (“ECGD payment”). The statutory references in the source legislation have been updated. As section 13(1) of the Export and Investment Guarantees Act 1991 delegates the functions of the Secretary of State under section 2 of that Act to the Export Credits Guarantee Department, the clause refers to the role of that Department (rather than the Secretary of State) in administering this scheme.
Clause 1276: Withdrawal of relief
3266. This clause brings together the consequences both of unremittable income becoming remittable and of a payment being made by the Export Credits Guarantee Department. It is based on section 584(2A) and (5) of ICTA. The corresponding rule for income tax is in section 843 of ITTOIA.
3267. Subsections (3) and (5) set out when, and at what value, income ceasing to be unremittable is treated as arising. Income so treated as arising is charged under the provision appropriate to the income type (or types) that would have applied to the income when it arose but for the relief.
3268. Subsection (4) provides that, when an ECGD payment is made, income is treated as arising at that time to the extent of the payment. This reflects the intention of the legislation as originally drafted. Amendments made by FA 1996 obscured the point. See Change 91 in Annex 1. Subsection (5) deals with the value of that income.
3269. Subsection (6) prevents a double charge under this clause. For example, if relief has already been withdrawn because an ECGD payment has been received, there is no further charge - to the extent of that payment - if the income itself subsequently becomes remittable.
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