Annex 1: Minor Changes in the Law Change 85: Distributions and partnerships: Schedule 1
This change makes it clear that section 114(1)(a) of ICTA does not apply to payments received by companies carrying on a business in partnership.
Section 114(1) of ICTA requires that the profits of a trade etc carried on in partnership should be calculated as if the trade etc were carried on by a company (the “deemed company” in section 1261). In calculating those profits, section 114(1)(a) provides that “references to distributions shall not apply”.
It is clear from the context that this rule applies to payments made by the firm. So there is no question of a payment of, say, interest being treated as a distribution by the firm under section 209 of ICTA and being disallowed in calculating the firm’s profit.
There is a theoretical possibility that the rule in section 114(1)(a) of ICTA also applies to payments to the firm. In that case, the rule in section 208 of ICTA (which removes distributions by a United Kingdom resident company from the charge to corporation tax) would not apply and the distributions received would be a receipt of the firm’s trade etc.
This is not how the rule is interpreted in practice. So section 1260(2) deals only with payments by the firm. But there is an indication in the Real Estate Investment Trust rules that section 114(1)(a) of ICTA does apply to payments to a firm: section 121(4) of FA 2006 provides that section 114(1)(a) of ICTA “does not disapply subsection (1)”. That subsection charges some distributions to tax as if they were receipts of a property business. HMRC’s view is that section 121(4) of FA 2006 is unnecessary because section 114(1)(a) of ICTA does not in any case affect section 121(1) of FA 2006.
Schedule 1 to this Act repeals section 121(4) of FA 2006.
Treating section 114(1)(a) of ICTA as applying to payments received by a firm would increase the tax liabilities of its partners. So the removal of the possibility of that treatment reduces those liabilities.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.