Annex 1: Minor changes in the law made by the Act: Change 145: Partnerships: resident partners and double taxation agreements: section 858
This change enacts the Inland Revenue practice of giving a narrow interpretation to the word “affect” in section 112(4) of ICTA.
The business profits article of the United Kingdom/Jersey double taxation agreement exempts the profits of a Jersey firm from United Kingdom tax. In the case of Padmore v CIR (1989), 62 TC 352 CA(21), the Court of Appeal decided that the exemption covered the share of the profits arising to a United Kingdom resident partner. The rules in section 112(4) and (5) of ICTA were enacted in 1987 to remove the exemption.
It was intended, in the case of income tax, that the 1987 legislation should do no more than remove the exemption claimed in the Padmore case. The words used in section 112(4) of ICTA are “shall not affect any liability to tax”. On the face of it, these words could deny the partner any relief, including tax credit relief, under a double taxation treaty.
Section 858(2) of this Act makes it clear that it is only the partner’s chargeability to tax that is preserved, overriding any provision to the contrary in a double taxation treaty. No other effect of the treaty is overridden.
This change is in principle in taxpayers' favour but is expected to have no practical effect as it is in line with current practice.