Finance Act 2004

Individuals in partnership: exit charge U.K.

126 Losses derived from exploiting licence: introductory U.K.

(1) Section 127 (charge to income tax) applies in relation to an individual who carries on or has carried on a trade in partnership if—

(a) there is a disposal on or after 10 February 2004 of—

(i) any licence acquired in carrying on the trade; or

(ii) any rights to income under any agreement that is related to or contains such a licence;

(b) the individual receives any non-taxable consideration for the disposal (“relevant consideration”); and

(c) he has made a claim under section 380 or 381 of the Taxes Act 1988 in respect of a licence-related loss sustained in the trade in a qualifying year (“a relevant claim”).

(2) A “licence-related loss” means a loss that derives to any extent from expenditure incurred in the trade in exploiting the licence.

(3) In relation to an individual who carried on the trade at any time before 26 March 2004, the reference in subsection (2) to expenditure does not include expenditure incurred before 10 February 2004.

(4) A “qualifying year” means a year of assessment at any time during which the individual carried on the trade in partnership which is also—

(a) the year of assessment in which the trade is first carried on by him or any of the next three years of assessment; and

(b) a year of assessment in which he did not devote a significant amount of time to the trade (within the meaning given by section 130).

(5) The reference in subsection (1)(b) to “non-taxable” consideration is to consideration—

(a) that (apart from section 127) is not chargeable to income tax; and

(b) whose receipt is not an exit event for the purposes of section 119;

and it is immaterial for the purposes of subsection (1)(b) whether the non-taxable consideration is the only consideration received by the individual for the disposal.

(6) For the purposes of this section and sections 127 to 129, an agreement is related to a licence if they are entered into in pursuance of the same arrangement (regardless of the date on which either is entered into).

(7) For the purposes of this section and sections 127 to 129 an agreement, or part of an agreement, that imposes an obligation to do a thing (rather than merely conferring authority to do it) is not for that reason to be regarded as not being a licence; and references to “exploiting” a licence shall be construed accordingly.

127 Charge to income tax U.K.

(1) A chargeable event occurs whenever, on or after 10 February 2004, an individual who carries on or has carried on a trade in partnership—

(a) receives relevant consideration, if by the time he has received it he has (at any time) made a relevant claim; or

(b) makes a relevant claim, if by the time he has made it he has received relevant consideration.

(2) Where, as respects an individual, one or more chargeable events occurs in a year of assessment in relation to a licence (“the licence in question”)[F1 —

(a) the individual shall be treated as receiving in that year of assessment an amount of income equal to so much of the total consideration as does not exceed the chargeable amount;

(b) that income (which shall not be treated as profits of the trade) shall be chargeable to income tax for that year of assessment; and

(c) the individual shall be liable for any tax so chargeable.]

(3) The “total consideration” means the total amount or value of the relevant consideration that by the end of that year of assessment has been received by the individual (whether or not in that year of assessment).

(4) To find the chargeable amount—

(a) take so much of the total consideration as does not exceed the net-licence related loss; and

(b) reduce the amount found under paragraph (a) (but not below nil) by the amount of any relevant consideration that by reason of this section has been treated as annual profits or gains of previous years of assessment.

(5) The net licence-related loss is the amount, computed as at the end of the year of assessment in which the chargeable event occurs, by which A exceeds B, where—

• A is the total of the individual’s claimed licence-related losses for qualifying years; and

• B is the total of his licence-related profits for any years of assessment.

(6) In subsections (3) and (4), the references to relevant consideration are to relevant consideration received on or after 10 February 2004 and relating to the licence in question (and where relevant consideration is received for a disposal of rights to income under any agreement related to or containing a licence, the consideration shall be regarded for the purposes of this section as relating to the licence).

(7) In this section “relevant consideration”, “relevant claim” and “qualifying year” have the meanings given by section 126.

Textual Amendments

F1 S. 127(2)(a)-(c) substituted for s. 127(2)(a)(b) and words (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5), s. 883(1), Sch. 1 para. 642 (with Sch. 2)

128 Definitions for purposes of section 127 U.K.

(1) This section applies for the purposes of section 127(5).

(2) The individual’s “claimed licence-related loss”for a qualifying year is so much of the loss (if any) sustained by him in the trade in that year as derives from expenditure incurred in the trade in exploiting the licence in question and is loss—

(a) in respect of which he has claimed relief under section 380 or 381 of the Taxes Act 1988; or

(b) that he has claimed as an allowable loss under section 72 of the Finance Act 1991 (c. 31).

(3) For the purposes of subsection (2) the part of a loss that falls within that subsection shall be determined on such basis as is just and reasonable.

(4) In relation to an individual who carried on the trade at any time before 26 March 2004, the reference in subsection (2) to expenditure does not include expenditure incurred before 10 February 2004.

(5) As espects any year of assessment, the individual’s “licence-related profit”is such part of his profit (if any) from the trade for that year of assessment as derives from income arising from any agreement that is related to or contains the licence in question.

(6) The part of a profit that derives from such income shall be determined on such basis as is just and reasonable.

129 Disposals to which section 126 applies U.K.

(1) The reference in section 126(1)(a) to a disposal of such a licence or rights as are there mentioned includes, in particular—

(a) the revocation of the licence;

(b) the disposal, giving up or loss by the individual, or by a partnership of which he is a member, of any right under the licence;

(c) any disposal, giving up or loss by the individual, or by a partnership of which he is a member, of any right to any income (or any part of any income) under an agreement that is related to or contains the licence (“a licence-related agreement”);

(d) any default in the payment of income to which the individual, or a partnership of which he is a member, has a right under a licence-related agreement;

(e) a change in the individual’s entitlement to any profits deriving to any extent from such income, such that his share of the profits is reduced or extinguished;

(f) a change in the individual’s entitlement to any losses deriving to any extent from expenditure incurred in exploiting the licence, such that he becomes entitled to a share, or a greater share, of the losses without becoming entitled to a corresponding share of profits;

(g) the disposal, giving up or loss of the individual’s interest in a partnership that has the licence or a right to income under a licence-related agreement, including the dissolution of the partnership.

(2) It is immaterial for the purposes of section 126(1)(a) and subsection (1)(b) and (c) whether the licence or right is disposed of alone or as part of a larger disposal (and the references here to disposal of a right include giving up or loss).

(3) If there is an agreement under which the individual is entitled—

(a) to a particular share of any profits or losses arising in a period, and

(b) to a different share of any profits or losses arising in a succeeding period (“the later period”),

his entitlement to the profits or losses arising in the later period shall be treated for the purposes of subsection (1)(e) and (f) as changing at the beginning of the later period; and in paragraphs (a) and (b) of this subsection a “share” of profits or losses includes a nil share.

130 “A significant amount of time” U.K.

(1) For the purposes of section 126(4)(b) the individual shall be treated as having “devoted a significant amount of time to the trade” in a given year of assessment if, for the whole of the relevant period, he spent an average of at least ten hours a week personally engaged in activities carried on for the purposes of the trade.

(2) “The relevant period” means the basis period for the year of assessment in question, except that—

(a) if the basis period is less than six months and begins with the date when the individual first carried on the trade, “the relevant period” means six months beginning with that date; and

(b) if the basis period is less than six months and ends with the date when the individual ceased to carry on the trade, “the relevant period” means six months ending with that date.

(3) In this section “basis period” means (subject to subsection (4)) the basis period given by [F2 Chapter 15 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 as applied by section 853 of that Act.]

(4) The basis period for a year of assessment to which [F3 section 199(1)] of that Act applies is to be taken for the purposes of this section to be the period beginning with the date when the individual first carried on the trade and ending with the end of the year of assessment.

Textual Amendments

F2 Words in s. 130(3) substituted (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5), s. 883(1), Sch. 1 para. 643(2) (with Sch. 2)

F3 Words in s. 130(4) substituted (6.4.2005) by Income Tax (Trading and Other Income) Act 2005 (c. 5), s. 883(1), Sch. 1 para. 643(3) (with Sch. 2)