Annex 1: Minor Changes in the Law Change 87: Partnerships: resident partners and double taxation agreements: section 1266 and Schedule 1
This gives statutory effect to the HMRC practice of giving a narrow interpretation to the word “affect” in section 115(5A) of ICTA.
It brings the income tax and corporation tax codes back into line.
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(10), 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 115(5) to (5B) of ICTA were enacted in 1987 to remove the exemption.
It was intended that the 1987 legislation should do no more than remove the exemption claimed in the Padmore case. The words used in section 115(5A) of ICTA are “do not affect any liability to corporation tax”. On the face of it, these words could deny the partner any relief, including tax credit relief, under a double taxation treaty.
Subsection (2) of section 1266 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.
The amendment of section 59 of TCGA in of Schedule 1 to this Act makes a similar clarification in relation to relief under double taxation arrangements for capital gains tax and for corporation tax on chargeable gains.
This change is in principle in taxpayers’ favour but is expected to have no practical effect as it is in line with generally accepted practice.