UK: British Tax Review: Double Tax Relief—Sections 57–59

Last Updated: 10 December 2008
Article by James Hannam

This article was first published in the British Tax Review.

The three sections on double tax relief in the Finance Act 2008 (FA 2008) implement running repairs to anti-avoidance rules. All three sections have to be seen in the context of developments in tax structuring over the last 20 years or so. Whether they are successful in combating the schemes at which they are aimed is not a question that can be answered immediately. However, because section 58 uses HMRC's ''nuclear option'' of fully retrospective legislation, it may have a deterrent effect beyond the specific structures it purports to close down.

Section 57

On July 14, 2006, Evans-Lombe J. handed down his judgment in the case Legal & General Assurance Society Ltd v Revenue and Customs Commissioners.1 He upheld the decision of the Special Commissioners which was partly in favour of the taxpayer. Legal & General carried on pensions business in the United Kingdom and through a permanent establishment in France (among other places). It contended that it was entitled to set off credit for the French tax paid by its permanent establishment against the UK corporation tax which was payable on the total profits from its pension business. In other words, it could set French tax off against the tax on profits from UK activities. HMRC countered that foreign tax could only be set off against corporation tax paid on that part of the profits of pensions business that were subject to the foreign tax.

Legal & General won on this point (although not on two others). The judge felt that each party's interpretation of the double tax treaty could be supported, but that the taxpayer had the better case. This was partly because HMRC were asking the double tax treaty to do some of the work in restricting the availability of credit for foreign tax that section 797 of the Income and Corporation Taxes Act 1988 (ICTA 1988) appeared to be doing. The judge also thought that HMRC's reading required that the words ''any income or chargeable gain'' should be interpreted differently in section 797(1) from their meaning in section 793(1).2

Even before the decision went against them, the Government had already inserted section 798A(2) into ICTA 1988 as part of the double tax relief reforms included in the Finance Act 2005. The new section made explicit that credit for foreign tax is only available against UK corporation tax that is specifically charged on the foreign profits in question. For some reason, however, no similar provision was included in section 798 ICTA 1988 which does the same job with respect to income tax as section 798A ICTA 1988 does for corporation tax. Section 57 FA 2008 corrects this oversight by inserting subsection (1A) in section 798 ICTA 1988. The new subsection uses very similar language to section 798A(2) ICTA 1988 to achieve the same restriction for credit for foreign tax against income tax.

Section 58 and section 59

Section 58 FA 2008 uses a sledgehammer approach to tighten up another aspect of the double tax relief anti-avoidance rules. In thewell known case Padmore v IRC,3 theCourt of Appeal, affirming the High Court's decision, found that the taxpayer was exempt from tax on his foreign income from a Jersey-based partnership. This was because the UK-Jersey double tax treaty exempted a Jersey resident enterprise from UK tax, except for business carried on through a permanent establishment in the United Kingdom. In the context of the treaty, ''enterprise'' was held to include a partnership, which was consequently exempt from UK tax. Even before the case was decided, the Government had changed the law (now in section 858 of the Income Tax (Trading and Other Income)Act 2005 (ITTOIA 2005)) to make clear that, whatever the double tax treaty might say, a UK-resident partner's income from a foreign partnership was subject to UK tax. Controversially, this provision was made retrospective, excepting only appeals already in train at the time the change was announced.

Schemes have now come to HMRC's attention that attempt to circumvent section 858 ITTOIA 2005 by using a trust structure. The partners in the foreign partnership are trustees of trusts of which UK taxpayers are the beneficiaries. Thus, it is claimed that section 858 ITTOIA 2005, which refers to the partners only, should not apply to the beneficiaries of the trust. If the scheme works, the situation prior to Padmore would prevail and the income of the partnership should be exempt from UK income tax. The new section 858(4) ITTOIA 2005 states that the partners of a foreign partnership are deemed to include anyone entitled to a share of its income, which would include beneficiaries of a trust the trustees of which were themselves partners. Other amendments apply the same rule to corporation tax and capital gains tax.

What makes section 58 FA 2008 unusual is that the Government has again opted to make its effect retrospective. The debate in the Public Bill Committee on the relevant clause of the Finance Bill saw the Minister, Jane Kennedy, struggling slightly when asked why a retrospective provision was required. She explained:

''As I understand it, a number of people are proposing to use the scheme and some tax advisers will recommend the use of it unless we act to make it clear that the scheme does not work.''4

While this justifies introducing anti-avoidance legislation it does not explain why it has to be retrospective. Pressed further, she said, ''I hope I get this right. It is because HMRC has not consistently made the case throughout the time period that the scheme does not work,. . .''.5 This reply raises some interesting possibilities. Could it mean that HMRC made concessions that they later came to regret and that the only way out of the hole they had dug for themselves was to use retrospective legislation? And is HMRC's previous lack of consistency the reason that a number of people are now proposing to use the scheme? Professional bodies were less than impressed that retrospective legislation was being used. During the debate we heard that the Chartered Institute of Taxation thought it was ''extreme and unjustified''; the Law Society believed it was ''wrong in principle''; and the Institute of Chartered Accountants in England and Wales warned, ''it sends out a very damaging signal about the stability of the UK tax system''. The Minister could only promise to check the representations she had received.6

Whatever the justification of the extreme measure in section 58 FA 2008, HMRC would probably not be displeased if it is regarded as a warning shot across the bows of taxpayers who are thinking of using particularly aggressive planning schemes and of the practitioners who devise them.

Section 59 FA 2008 is not retrospective. It is intended to ensure that other schemes, not using partnerships, cannot succeed in exploiting the language of double tax treaties to exempt UK residents from UK tax. A new section 815AZA ICTA 1988 is introduced to state that the permanent establishment article in a double tax treaty is not to be read as preventing the income of a UK resident from being chargeable to tax. It is not clear if HMRC are aware of any schemes that will be closed down by this section, or whether it is being introduced as a precautionary measure.


1 Including capital gains relief. ITA 2007, s.74A(10) defines capital gains relief for the purpose of this section. The definition of sideways relief is in ITA 2007, s.60(4).

2 Discussed in the note below, ''Non-active partners—section 61''.

3 See HM Treasury, Finance Bill 2008, Explanatory Notes, note on cl.57 and Sched.21, available at: explanatorynotes.pdf (accessedAugust 20, 2008).

4 By FA 2008, Sched.21, paras 6(1) and 6(2), ITA 2007 s.74A, and related provisions apply to a loss for 2007–08, or a subsequent tax year, unless that loss is made for a tax year the basis period for which ended before March 12, 2008. Paragraph 6(3) deals with the case where the accounting period straddles March 12, 2008 by having a special rule for pre-announcement loss. Paragraphs 6(4) to (10) provide the steps for calculating the pre-announcement loss for an individual's basis period that straddlesMarch 12, 2008.

5 FA 2007, s.26 and Sched.4 notedA. Shipwright, ''Restrictions on trade loss relief for partners—section 26 and Schedule 4 [2007] BTR 454.

6 Not partners by definition and so outside the section. Some of the schemes marketed relied on close collaboration between a number of sole traders so raising the issue of partnership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.