ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 121: Limit on liability to income tax of non‑UK resident companies: substitution of references to income for references to chargeable profits in paragraph 4(3) and (5) of Schedule 26 to FA 2003: sections 821 and 823
This change substitutes references to a non‑UK resident company’s income in sections 821(3) and 823(2)(b) for the references to its chargeable profits in paragraph 4(3) and (5) of Schedule 26 to FA 2003. Paragraph 4 sets out the 20% rule applicable to investment managers.
The term “chargeable profits” is not defined for the purposes of Schedule 26 to FA 2003. Section 11(2) of ICTA defines the chargeable profits of a non‑UK resident company as being the profits attributable to the company’s permanent establishment in the United Kingdom and provides that such profits are chargeable to corporation tax. That definition, therefore, has no application in relation to the liability of a non‑UK resident company to income tax in respect of income deriving from transactions carried out on behalf of the company by an investment manager who meets the independent investment manager conditions.
The basis on which the legislation in FA 2003 was prepared was that it was not to affect the law under FA 1995, except so far as required to adopt the concept of permanent establishment in place of branch or agency in relation to non‑UK resident companies.
It is clear from the reference in the definition of “relevant excluded income” in section 127(5) of FA 1995 to “such of the profits and gains of the non‑resident…as…for the purposes of section 128 below would fall (apart from the requirements of subsection (4) above) to be treated as excluded income” that the defined term in that Act is limited to income and does not include gains. This has been reflected in sections 821(2) and 823(2)(a).
The references to “the aggregate of such of the chargeable profits of the company” in paragraph 4(3) of Schedule 26 to FA 2003 and to “so much of the chargeable profits of the non‑resident company” in paragraph 4(5) of that Schedule are, therefore, in practice read as referring to income only.
Accordingly, section 821(3) refers to “the total of the non‑UK resident company’s income for the accounting periods” which derives from the relevant investment transactions, and section 823(2)(b) refers to “so much of the income of the non‑UK resident company” deriving from the transaction.