Commentary on Sections Overview Section 854: Carrying on by partner of notional business
3189.This section gives the rules for determining when a partner starts or ceases to carry on a notional business. It is based on sections 111 and 112 of ICTA.
3190.Subsection (1) introduces the “notional business” carried on by each partner in the firm. The notional business consists of the partner’s share of the untaxed income of the firm that is not trade profits.
3191.Subsection (2) deals with the start of the notional business.
3192.The general rule in section 111(8) of ICTA is that a partner’s income from the notional business (in ICTA, “the second deemed trade or profession”) is assessed using the same basis periods as those for the notional trade (in ICTA, “the deemed trade or profession”) carried on by the partner. But this rule applies only if section 111(2) and (3) of ICTA apply in relation to the profits of an actual trade (see section 111(7) of ICTA). So, if a firm is formed to receive non-trading income, the general rule does not apply and the non-trading income is assessed on the usual tax year basis.
3193.A problem may arise if the members of an existing firm start trading for the first time. A strict interpretation of section 111(8)(b) of ICTA seems to require that the basis periods for each partner’s notional business are determined to be the same as those for the notional trade, not only for the year in which trading starts but also for all the years since the firm was formed. Subsection (2)(b) of this section makes it clear that the partner’s “notional business” does not start until the firm starts to trade. See Change 144 in Annex 1.
3194.Subsection (3) makes it clear that the notional business continues even though particular sources of untaxed income may start and cease.
3195.The date on which a partner starts to carry on a notional business is determined by the date on which the partner joins a firm, or (if later) the date on which the firm starts the actual trade. It does not matter when the firm starts to receive untaxed income. Nor does it matter whether in a particular year there is income from the notional business. The basis periods for a partner’s notional business may be determined before the firm starts to receive untaxed income. And, once the basis periods are established for the partner, they change only if the accounting date of the actual trade changes.
3196.Subsection (4) deals with the date on which a partner ceases to carry on a notional business. This happens when the partner leaves the firm or (if earlier) when the firm ceases to carry on the actual trade.
3197.Subsection (5) is the equivalent for partners of the general rule for individuals in section 17 of this Act.
3198.Section 112(1B) of ICTA operates by treating a partner who changes tax residence as ceasing to be a partner. That triggers a cessation of the second deemed trade or profession in accordance with section 111(8)(d) of ICTA. This subsection says directly that a continuing partner who becomes, or ceases to be, resident in the United Kingdom is treated as ceasing to carry on one notional business and starting another.