Income Tax (Trading and Other Income) Act 2005

Firms with trading and other source income U.K.

854 Carrying on by partner of notional business U.K.

(1) For each tax year in which a firm—

(a) carries on a trade, and

(b) has untaxed income or relievable losses from other sources,

each partner's share of the firm's untaxed income or relievable losses other than trading profits or losses is treated, for the purposes of Chapter 15 of Part 2, as profits or losses of a trade carried on by the partner alone (the “notional business”).

(2) A partner starts to carry on a notional business at the later of—

(a) when becoming a partner in the firm, and

(b) when the firm starts to carry on a trade.

(3) A notional business continues even if either or both of the following occur—

(a) separate sources of income that comprise the business start and cease, and

(b) no income arises during a particular tax year.

This is subject to subsections (4) and (5).

(4) A partner permanently ceases to carry on a notional business at the earlier of—

(a) when the partner ceases to be a partner in the firm, and

(b) when the firm permanently ceases to carry on a trade.

[F1 (5) If there is a change of residence, the partner is treated as permanently ceasing to carry on one notional business when that change of residence occurs and starting to carry on another immediately afterwards.]

[F2 (5A) Subsections (1A) and (1B) of section 17 apply for the purposes of subsection (5).]

(6) In this section “untaxed income” means any income that is not—

(a) income from which income tax has been deducted,

(b) income from or on which income tax is treated as having been deducted or paid, F3 ...

(c) dividends or other distributions of a company chargeable under Chapter 3 of Part 4.

[F4 (d) income chargeable under Chapter 5 of Part 4 (stock dividends from UK resident companies), or

(e) income chargeable under Chapter 6 of Part 4 (release of loan to participator in closed company).]

Textual Amendments

F1 S. 854(5) substituted (with effect in accordance with Sch. 45 para. 153(2) of the amending Act) by Finance Act 2013 (c. 29), Sch. 45 para. 80(2)

F2 S. 854(5A) inserted (with effect in accordance with Sch. 45 para. 153(2) of the amending Act) by Finance Act 2013 (c. 29), Sch. 45 para. 80(3)

F3 Word in s. 854(6)(b) omitted (with effect in accordance with Sch. 1 para. 73 of the amending Act) by virtue of Finance Act 2016 (c. 24), Sch. 1 para. 26(a)

F4 S. 854(6)(d)(e) inserted (with effect in accordance with Sch. 1 para. 73 of the amending Act) by Finance Act 2016 (c. 24), Sch. 1 para. 26(b)

855 Basis periods for partners' notional businesses U.K.

(1) The general rule is that the basis period for a partner's notional business is the same as the basis period for a partner's notional trade, but subject to the exceptions in subsections (2) and (3).

(2) If the partner carries on the actual trade alone before the firm starts to carry it on the partner is treated as starting to carry on the notional business when the partnership is set up.

(3) If the partner carries on the actual trade alone after the firm permanently ceases to carry it on the partner is treated as permanently ceasing to carry on the notional business when the firm permanently ceases to carry on the actual trade.

[F5 855A Notional business: indirect partners U.K.

(1) This section applies in relation to the notional business of a partner in a firm if—

(a) the firm consists of a partnership which is a partner or indirect partner in another partnership (“the underlying partnership”),

(b) the members of the underlying partnership carry on a trade (“the underlying trade”),

(c) the firm's untaxed income or relievable losses referred to in section 854(1)(b) arise by virtue of untaxed income or relievable losses (“the underlying profits or losses”) arising to members of the underlying partnership—

(i) from sources other than the carrying on of a trade, and

(ii) otherwise than by virtue of the underlying partnership's membership of a partnership.

(2) Section 854 (carrying on by partner of notional business) has effect as if—

(a) for subsection (2) there were substituted—

“(2) The partner starts to carry on the notional business at the later of—

(a) when the partner becomes an indirect partner in the underlying partnership, and

(b) when the underlying partnership starts to carry on the underlying trade.”;

(b) for subsection (4) there were substituted—

“(4) The partner permanently ceases to carry on the notional business at the earlier of—

(a) when the partner ceases to be an indirect partner in the underlying partnership, and

(b) when the underlying partnership permanently ceases to carry on the underlying trade.”

(3) Section 855 has effect as if for subsections (2) and (3) there were substituted—

“(2) If the partner carries on the actual trade (whether alone or in partnership) before the firm starts to carry it on, the partner starts to carry on the notional business when the firm starts to carry on the actual trade.

(3) If the partner carries on the actual trade (whether alone or in partnership) after the firm permanently ceases to carry it on, the partner permanently ceases to carry on the notional business when the firm permanently ceases to carry on the actual trade.”

(4) In this section “untaxed income” has the same meaning as in section 854.]

Textual Amendments

F5 S. 855A inserted (with effect in accordance with Sch. 6 para. 5(5) of the amending Act) by Finance Act 2018 (c. 3), Sch. 6 para. 5(4)

856 Overlap profits from partners' notional businesses U.K.

(1) This section applies if—

(a) the basis period for a partner's notional business for a tax year is given by—

(i) section 215 (change of accounting date in third tax year), or

(ii) section 216(3) (change of accounting date in later tax year),

(b) a deduction is to be made for overlap profit under section 220 in calculating the profits of the notional business of the tax year, and

(c) the amount to be deducted exceeds the amount which would otherwise be the amount of the profits of the notional business of the tax year.

(2) This section also applies if—

(a) the basis period for a partner's notional business for a tax year is given by section 202 (final tax year),

(b) a deduction is to be made for overlap profit under section 205 in calculating the profits of the notional business of the tax year, and

(c) the amount to be deducted exceeds the amount which would otherwise be the amount of the profits of the notional business of the tax year.

(3) The amount of the excess is to be deducted in calculating the partner's income for the tax year.