Commentary on Sections Overview Overview Section 821: Meaning of “relevant disregarded income”
2424.This section defines the term “relevant disregarded income”. It is based on section 127(5) of FA 1995 and paragraph 4(3) of Schedule 26 to FA 2003.
2425.In subsection (2), a reference to “the total of the non‑UK resident’s income” has been substituted for the reference in section 127(5) of FA 1995 to “the aggregate of such of the profits and gains of the non‑resident”. As section 127(5)(b) of FA 1995 requires that this aggregate falls to be treated (apart from the 20% rule) as excluded income, the reference to “such of the profits and gains” is limited by the source legislation to so much of the profits and gains as is income. The substitution makes this clear.
2426.In subsection (3), a reference to “the total of the non‑UK resident company’s income” has been substituted for the reference in paragraph 4(3) of Schedule 26 to FA 2003 to “the aggregate of such of the chargeable profits of the company”. See Change 121 in Annex 1.
2427.The separate definitions in subsections (2) and (3) preserve the difference between the respective source provisions and ensure that those subsections remain in line with those provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.
2428.In subsection (4) it is made clear that the transactions referred to are investment transactions. That only investment transactions are referred to in section 127(5) of FA 1995 is clear as the profits or gains there mentioned must be excluded income. But paragraph 4(3) of Schedule 26 to FA 2003 refers only to transactions. That paragraph does not, however, cover any wider class of transactions than section 127(5) of FA 1995.
2429.In subsection (4)(b), the words:
“in relation to which the independent investment manager conditions are met, ignoring the requirements of the 20% rule”
are substituted both for the words in section 127(5)(b) of FA 1995:
“for the purposes of section 128 below would fall (apart from the requirements of subsection (4) above) to be treated as excluded income for any of those chargeable periods”
and for the words in paragraph 4(3) of Schedule 26 to FA 2003:
“in relation to which the manager does not (apart from the requirements of the 20% rule) fall to be treated as a permanent establishment of the company.”
2430.The substituted words do not change the law relating to the limit on the liability of a non-UK resident other than a company in section 811. Only income deriving from investment transactions is measured for the purposes of the 20% rule in section 127(4) of FA 1995. Income arising from any other type of transaction is irrelevant.
2431.Income is only “relevant excluded income” under section 127(5) of FA 1995 if it derives from investment transactions carried out by the manager while acting on the non-resident’s behalf (see section 127(5)(a) where the word “transactions” refers back to “investment transactions” in section 127(1)(c)). Under section 127(5)(b) of FA 1995, it also has to be treated as “excluded income” under section 128(3) of that Act. The only way that income arising from so much of a business as relates to investment transactions can be “excluded income” is if the conditions in section 127(3) of FA 1995 (the investment manager conditions) are met.
2432.In relation to the limit on the liability of a non-UK resident company in section 815, this substitution avoids the need for the reader to refer to section 148 of and Schedule 26 to FA 2003 in order to determine whether the investment manager is a permanent establishment. The substituted words do not change the law. If the independent investment manager conditions are met, or would be if the 20% rule were met, the investment manager cannot be a permanent establishment of the company in relation to the transaction.