Overview
2368.This Chapter brings together the provisions of FA 2003 limiting the liability to income tax of non‑UK resident companies (liable otherwise than as trustees) and those of FA 1995 limiting such liability of all other non‑UK residents (including companies liable as trustees).
2369.This Chapter is based on:
section 128 of FA 1995 which limits the liability to income tax of non‑UK residents, except the liability of non‑UK resident companies liable otherwise than as trustees;
section 127 of FA 1995 so far as it supplements section 128 of that Act;
section 151 of FA 2003 which limits the liability to income tax of non‑UK resident companies liable otherwise than as trustees; and
Schedule 26 to FA 2003 so far as it supplements section 151(2)(c) of that Act.
2370.So far as they respectively supplement section 128 of FA 1995 and section 151(2)(c) of FA 2003, section 127 of FA 1995 and Schedule 26 to FA 2003 are in many respects substantially the same. Those provisions have, as far as possible, been combined in this Chapter.
2371.Section 127 of FA 1995 continues in force for the purpose of supplementing section 126 of that Act (UK representatives of non-residents) and Schedule 26 to FA 2003 continues in force for the purpose of supplementing section 148(3) of that Act (meaning of “permanent establishment”).
Section 810: Overview of Chapter
2372.This section identifies the categories of non‑UK residents to which this Chapter applies and provides signposts to the sections applicable to each category. It is new.
Section 811: Limit on liability to income tax of non‑UK residents
2373.This section relates to the liability to income tax for a tax year of non‑UK residents other than companies and of non‑UK resident companies liable as trustees. It is based on section 128(1), (2), (4) and (12) of FA 1995.
2374.This section does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non‑UK resident would otherwise be liable.
2375.The combined effect of subsections (4) and (5) is that the non‑UK resident is not liable to income tax in respect of disregarded income (see section 813), except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.
2376.Subsection (5)(a) is drafted in terms of the non‑UK resident’s disregarded income being left out of account, rather than in terms of its being deducted from total income as provided in section 128(1)(a)(i) of FA 1995.
2377.Subsection (5)(b) provides that personal reliefs are to be left out of account. A non‑UK resident may be entitled to such reliefs under section 278(2)(a) of ICTA, under section 56 or 460 of this Act or by virtue of a double taxation agreement. See the overview commentary on Part 3 for the interrelation of section 278(2)(a) of ICTA and sections 56 and 460 of this Act.
2378.All the reliefs to which section 278 of ICTA and sections 56 and 460 of this Act apply are listed in subsection (6).
Section 812: Case where limit not to apply
2379.This section provides that the liability of non‑UK resident trustees to income tax is not limited, if a beneficiary of the trust has a residence connection with the United Kingdom. It is based on section 128(5) and (6) of FA 1995.
Section 813: Meaning of “disregarded income”
2380.This section sets out the various descriptions of income which are defined as “disregarded income”. It is based on section 128(2) and (3) of FA 1995.
2381.Subsection (2) provides that income is not disregarded income if the non‑UK resident has a UK representative in relation to the income. This is the case if, for example, the non‑UK resident has income within the description of disregarded savings and investment income in section 825 which is brought into account in computing the profits of a manufacturing business carried on by the non‑UK resident through a branch in the United Kingdom.
2382.The definition of “disregarded pension income” in subsection (3) is based on section 128(3)(cc), (cca) and (cd) of FA 1995. Section 128(3)(cd) of FA 1995 relates to income which arises from a source in the United Kingdom and is chargeable to tax under Part 9 of ITEPA because section 609, 610 or 611 of that Act applies to it.
2383.Each of sections 609, 610 and 611 of ITEPA states that the section applies to an annuity which arises from a source outside the United Kingdom only if it is paid to a person resident in the United Kingdom. The definition of disregarded pension income omits the reference to the income arising from a source in the United Kingdom, on the basis that the wording of those sections of ITEPA makes it unnecessary.
Section 814: Meaning of “disregarded transaction income”
2384.This section defines “disregarded transaction income”. It is based on sections 127(1) and (15) and 128(3)(d) of FA 1995.
2385.Subsections (1) and (2) relate to income arising from a business carried on through a broker in the United Kingdom and introduce the conditions, referred to as “the independent broker conditions”, which must be met if the income is to be disregarded transaction income.
2386.Subsections (3) and (4) relate to income arising from a business carried on through an investment manager in the United Kingdom and introduce the conditions, referred to as “the independent investment manager conditions”, which must be met if the income is to be disregarded transaction income.
2387.The independent broker conditions in section 817 and the independent investment manager conditions in sections 818 to 824 replace for the purposes of subsections (2) and (4) the indirect references in section 128(3)(d) of FA 1995, through section 127(1)(b) and (c) of that Act, to section 127(2) and (3) of that Act.
2388.The words “without being chargeable as mentioned in paragraphs (a) to (ce) above” in section 128(3)(d) of FA 1995 have been omitted in subsections (2) and (4) on the basis that they are unnecessary.
2389.Subsection (5) defines the term “transaction income”. This definition includes the provisions of section 127(15)(b) of FA 1995 which explain what is meant by income arising from so much of a business as relates to transactions carried out through a branch or agency on behalf of a non‑UK resident.
Section 815: Limit on liability to income tax of non‑UK resident companies
2390.This section relates to the liability to income tax for a tax year of a non‑UK resident company which is liable otherwise than as a trustee. It is based on section 151(1), (3) and (4) of FA 2003.
2391.This section does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non‑UK resident company would otherwise be liable.
2392.The combined effect of subsections (3) and (4) is that the non‑UK resident company is not liable to income tax in respect of disregarded company income except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.
2393.Subsection (4) is drafted in terms of the non‑UK resident company’s disregarded company income being left out of account, rather than in terms of its being deducted from total income as provided in section 151(1)(a)(i) of FA 2003.
2394.Section 151(1)(a)(ii) of FA 2003, which disregards reliefs to which a company is entitled under section 788 of ICTA, has been omitted. It is not appropriate to companies. See Change 120 in Annex 1.
Section 816: Meaning of “disregarded company income”
2395.This section sets out the various descriptions of income which are defined as “disregarded company income”. It is based on section 151(2) of FA 2003 and paragraphs 1(1) and (2), 2(1) and 3(1) of Schedule 26 to that Act.
2396.The term “disregarded company income” mirrors the term “disregarded income” defined in section 813 for the purposes of section 811. Section 151(2) of FA 2003 sets out the “income to which this section applies”, but does not make use of a defined term.
2397.Subsection (1)(c) relates to income arising from transactions carried out through a broker in the United Kingdom and introduces the conditions, referred to as “the independent broker conditions”, which must be met if the income is to be disregarded company income.
2398.Subsection (1)(d) relates to income arising from investment transactions carried out through an investment manager in the United Kingdom and introduces the conditions, referred to as “the independent investment manager conditions”, which must be met if the income is to be disregarded company income.
2399.Subsection (1)(c) and (d) are based on section 151(2)(c) of FA 2003, which refers to a transaction carried out through a broker or investment manager in the United Kingdom “acting as an agent of independent status in the ordinary course of his business”. Schedule 26 to that Act then sets out the conditions which must be met if the broker or investment manager is to be treated as so acting.
2400.This structure has been simplified so that subsection (1)(c) and (d) refer directly to the independent broker conditions in section 817 and the independent investment manager conditions in sections 818 to 824.
2401.The effect of the words “in the course of that company’s trade” in paragraph 1(1) of Schedule 26 to FA 2003 has been preserved by including the equivalent words in subsection (1)(c) and (d).
Section 817: The independent broker conditions
2402.This section sets out the independent broker conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by a broker in the United Kingdom for the purposes of sections 813 and 816. It is based on the provisions of sections 127(1) and (2) and 128(3) of FA 1995 and section 151(2) of and paragraph 2(1) and (2) of Schedule 26 to FA 2003.
2403.Three of the conditions, in section 127(2)(a) to (c) of FA 1995 and paragraph 2(2)(a) to (c) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to C, in subsections (2) to (4), which apply to all non‑UK residents, including non‑UK resident companies.
2404.The final condition in section 127(2)(d) of FA 1995 is not substantively the same as the final condition in paragraph 2(2)(d) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.
2405.Condition D in subsection (5), based on the condition in section 127(2)(d) of FA 1995, applies for the purposes of section 813.
2406.Condition E in subsection (6), based on the condition in paragraph 2(2)(d) of Schedule 26 to FA 2003, applies for the purposes of section 816.
2407.In subsection (5), the words “amounts which are chargeable to capital gains tax” reflect the words “other amounts” in section 127(2)(d) of FA 1995. Those other amounts are the “amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non‑residents)” mentioned in section 126(2)(c) of FA 1995.
2408.In subsection (5), a reference to “transaction income” has been substituted for the reference in section 127(2)(d) of FA 1995 to “taxable sums”. The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent broker conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(2)(d) of FA 1995, the non‑UK resident will not, under section 126(2) of that Act, have the broker as the non‑UK resident’s UK representative in relation to such chargeable gains.
2409.In subsection (6), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to broking transactions.
Section 818: The independent investment manager conditions
2410.This section sets out the independent investment manager conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by an investment manager in the United Kingdom for the purposes of sections 813 and 816. It is based on the provisions of sections 127(1) and (3) and 128(3) of FA 1995 and section 151(2) of and paragraphs 3(1) and (2) and 7(2) of Schedule 26 to FA 2003.
2411.Five of the conditions, in section 127(3)(a) to (e) of FA 1995 and paragraph 3(2)(a) to (e) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to E, in subsections (2) to (6), which apply to all non‑UK residents, including non‑UK resident companies.
2412.The final condition in section 127(3)(f) of FA 1995 is not substantively the same as the final condition in paragraph 3(2)(f) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.
2413.Condition F in subsection (7), based on the condition in section 127(3)(f) of FA 1995, applies for the purposes of section 813.
2414.Condition G in subsection (8), based on the condition in paragraph 3(2)(f) of Schedule 26 to FA 2003, applies for the purposes of section 816.
2415.In subsection (7), the words “amounts which are chargeable to capital gains tax” reflect the words “other amounts” in section 127(3)(f) of FA 1995. Those other amounts are the “amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non‑residents)” mentioned in section 126(2)(c) of FA 1995.
2416.In subsection (7), a reference to “transaction income” has been substituted for the reference in section 127(3)(f) of FA 1995 to “taxable sums”. The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent investment manager conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(3)(f) in FA 1995, the non‑UK resident will not under section 126(2) of that Act have the investment manager as the non‑UK resident’s UK representative in relation to such chargeable gains.
2417.In subsection (8), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to investment transactions.
Section 819: Investment managers: the 20% rule
2418.This section sets out the “20% rule” for investment managers. It is based on section 127(4) of FA 1995 and paragraph 4(1) of Schedule 26 to FA 2003 which are substantively the same.
2419.The 20% rule has two requirements. The first requirement is that the investment manager and connected persons must intend that any interest that they may have in the non‑UK resident’s “relevant disregarded income” will not exceed 20% of that income. The second requirement applies if that intention is not fulfilled. The 20% rule will continue to be met if the only reason why it is not fulfilled is because of matters outside the control of the investment manager or connected persons despite their having taken reasonable steps to mitigate the effect of those matters.
Section 820: Meaning of “qualifying period”
2420.This section defines the term “qualifying period”. It is based on section 127(7) of FA 1995 and paragraph 4(2) of Schedule 26 to FA 2003.
2421.Subsection (2), based on section 127(7) of FA 1995, makes use of the term “transaction income”, defined in section 814(5), in substitution for the term “taxable sums” in the source legislation. “Taxable sums” includes not only income but also chargeable gains, but in this context a reference to chargeable gains is otiose and has been omitted.
2422.Subsection (3), based on paragraph 4(2) of Schedule 26 to FA 2003, makes explicit that the accounting period referred to is that of the non‑UK resident company.
2423.The separate definitions in subsections (2) and (3) preserve the difference between their 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.
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.
Section 822: Meaning of “beneficial entitlement”
2433.This section defines the term “beneficial entitlement”. It is based on section 127(6) of FA 1995 and paragraph 4(4) of Schedule 26 to FA 2003, which are substantively the same.
Section 823: Treatment of transactions where requirements of 20% rule not met
2434.This section provides that, if the 20% rule is not met but all the other independent investment manager conditions are met, only the income in relation to which the 20% rule is not met is not relevant disregarded income. It is based on section 127(8) of FA 1995 and paragraph 4(5) of Schedule 26 to FA 2003.
2435.So far as that section and that paragraph differ in approach, the difference is preserved by subsection (2) so that those provisions remain in line with their source provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.
2436.A reference to “transaction income”, which is defined in section 814(5), has been substituted in subsection (2)(a) for the reference to “taxable sums” in section 127(8) of FA 1995. The term “taxable sums”, as defined in section 127(3) of that Act read with sections 127(1) and 126(2)(c) of that Act, includes amounts chargeable to capital gains tax under section 10 of TCGA. But, in relation to section 127(8) of FA 1995 as it has effect for the purposes of determining whether income is excluded income within section 128(3)(d) of that Act, reference to chargeable gains is unnecessary.
2437.In subsection (2)(b), a reference to “the income of the non‑UK resident company” has been substituted for the reference in paragraph 4(5) of Schedule 26 to FA 2003 to “the chargeable profits of the non‑resident company”. See Change 121 in Annex 1.
Section 824: Application of 20% rule to collective investment schemes
2438.This section modifies the 20% rule where the non‑UK resident is a participant in a collective investment scheme. It is based on section 127(9), (10) and (11) of FA 1995 and paragraph 5 of Schedule 26 to FA 2003, which are substantively the same.
2439.This section applies at the level of the scheme itself, treating it as if it were a non‑UK resident company, see subsection (3).
2440.Subsection (4) applies to a scheme which, if it was assumed to be a non‑UK resident company, would not be regarded as carrying on a trade in the United Kingdom. The 20% rule is treated as satisfied in relation to such a scheme.
2441.Subsection (5) applies to a scheme which, if it was assumed to be a non‑UK resident company, would be regarded as carrying on a trade in the United Kingdom. The 20% rule applies to such a scheme with the modifications in subsection (6).
2442.The definition of “the appropriate relevant period” in subsection (7) links into the meaning of “qualifying period” given by section 820. The reference to the term “transaction income” in paragraph (a) of that definition follows from the reference to that term in section 820(2)(a). See the commentary on section 820(2).
Section 825: Meaning of “disregarded savings and investment income”
2443.This section defines the term “disregarded savings and investment income” which is principally used in sections 813 and 816. It is based on the corresponding parts of paragraph (a) of section 128(3) of FA 1995 and of paragraph (a) of section 151(2) of FA 2003 and on paragraph (aa) of each of those subsections, all of which are substantively the same.
2444.Income chargeable under Chapter 5 of Part 4 of ITTOIA (stock dividends from UK resident companies) has been included in subsection (1)(a) as an additional description of disregarded income. See Change 122 in Annex 1.
Section 826: Meaning of “disregarded annual payments”
2445.This section defines the term “disregarded annual payments” which is principally used in sections 813 and 816. It is based on the corresponding parts of section 128(3)(a) of FA 1995 and section 151(2)(a) of FA 2003 other than those on which section 825 is based.
Section 827: Meaning of “investment manager” and “investment transaction”
2446.This section defines the terms “investment manager” and “investment transactions” which underlie the independent investment manager conditions. It is based on section 127(12) and (13) of FA 1995 and paragraph 3(1), (3) and (4) of Schedule 26 to FA 2003.
2447.Subsection (1) is based on the definition of an “investment manager” in paragraph 3(1) of Schedule 26 to FA 2003 rather than the slightly different, but substantively the same, definition of “the manager” in section 127(3)(a) of FA 1995.
2448.The definition of “transaction” in subsections (2) and (3) is based on section 127(12) and (13) of FA 1995 and paragraph 3(3) and (4) of Schedule 26 to FA 2003, which are identical.
2449.Section 1014 containing general provision for the making of regulations applies for the purposes of subsection (2)(c).
2450.Regulations (SI 2003/2172 and SI 2003/2173) have been made in identical terms under the source legislation, section 127(12)(c) of FA 1995 and paragraph 3(3)(c) of Schedule 26 to FA 2003, designating as investment transactions swap contracts settled in cash or foreign currency (other than contracts relating to land, insurance or capital redemption business).
Section 828: Transactions through brokers and investment managers
2451.This section explains when a person is to be regarded as carrying out a transaction on behalf of another and makes provision for a person part only of whose business is as a broker or investment manager. It is based on section 127(14) and (15) of FA 1995 and paragraph 7(1) and (4) of Schedule 26 to FA 2003.
2452.There is a slight difference between the wording of section 127(14) of FA 1995 which refers to:
“a person who…provides investment management services”
and that of paragraph 7(4) of Schedule 26 to FA 2003 which refers to:
“a person who…provides investment services.”
2453.The words in paragraph 7(4) of Schedule 26 to FA 2003 are not capable, in practice, of having any different meaning from those in section 127(14) of FA 1995 and subsection (2) accordingly applies for all purposes of this Chapter.
