Session 2012 - 13
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Finance (No. 2) Bill


Finance (No. 2) Bill
Schedule 3 — Limit on income tax reliefs

158

 

(h)   

relief under Chapter 1 of Part 8 (interest payments);

(i)   

relief under section 555 of ITEPA 2003 (deduction for

liabilities relating to former employment);

(j)   

relief under section 446 of ITTOIA 2005 (strips of government

securities: relief for losses);

5

(k)   

relief under section 454(4) of ITTOIA 2005 (listed securities

held since 26 March 2003: relief for losses: persons other than

trustees).

(7)   

The deductions falling within this subsection are—

(a)   

deductions for amounts of relief so far as attributable to

10

allowances under Part 3A of CAA 2001 (business premises

renovation allowances);

(b)   

deductions for amounts of relief under a provision

mentioned in subsection (6)(a) to (e) so far as made from

profits of the trade or business to which the relief in question

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relates;

(c)   

deductions for amounts of relief under the provision

mentioned in subsection (6)(a) or (b) so far as attributable to

a deduction allowed under section 205 or 220 of ITTOIA 2005

(deduction for overlap profit in final tax year or on change of

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accounting date);

(d)   

deductions for amounts of relief under the provision

mentioned in subsection (6)(g)—

(i)   

where the shares in question fall within section

131(2)(a) (qualifying shares to which EIS relief is

25

attributable), or

(ii)   

where SEIS relief is attributable to the shares in

question as determined in accordance with Part 5A

(seed enterprise investment scheme).

(8)   

The taxpayer’s “adjusted total income” for the tax year is calculated

30

as follows.

   

Step 1

   

Take the amount of the taxpayer’s total income for the tax year.

   

Step 2

   

Add back the amounts of any deductions allowed under Part 12 of

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ITEPA 2003 (payroll giving) in calculating the taxpayer’s income

which is charged to tax for the tax year.

   

Step 3

   

If the taxpayer is given relief in accordance with section 192 of FA

2004 (pension schemes: relief at source) in respect of any contribution

40

paid in the tax year under a pension scheme, deduct the gross

amount of the contribution.

   

The “gross” amount of a contribution is the amount of the

contribution before deduction of tax under section 192(1) of FA 2004.

   

Step 4

45

   

If the taxpayer is entitled to a deduction for relief under section

193(4) or 194(1) of FA 2004 (pension schemes: excess relief under net

payment arrangements or relief on making a claim) for the tax year,

deduct the amount of the excess or contribution (as the case may be).

 
 

Finance (No. 2) Bill
Schedule 3 — Limit on income tax reliefs

159

 

   

The result is the taxpayer’s adjusted total income for the tax year.”

Consequential amendments

2     (1)  

ITA 2007 is amended as follows.

      (2)  

In section 23 (calculation of income tax liability) at step 2 for “section 25”

substitute “sections 24A and 25”.

5

      (3)  

In the following provisions (which explain how certain reliefs work) for

“section 25(4) and (5)” substitute “sections 24A and 25(4) and (5)”—

(a)   

section 65(1),

(b)   

section 73,

(c)   

section 121(1),

10

(d)   

section 129(1), and

(e)   

section 133(1).

      (4)  

In section 148 (share loss relief: disposal of shares forming part of mixed

holding) in subsection (3)(b) before sub-paragraph (i) insert—

“(ai)   

shares to which SEIS relief is attributable (as

15

determined in accordance with Part 5A),”.

Commencement and transitional provision

3          

The amendments made by paragraphs 1 and 2 above have effect for the tax

year 2013-14 and subsequent tax years.

4     (1)  

Sub-paragraph (2) applies to a claim which relates to the tax year 2013-14 or

20

a subsequent tax year by virtue of paragraph 2 of Schedule 1B to TMA 1970

where the earlier year is a tax year before the tax year 2013-14.

      (2)  

The amount of the claim is to be determined as if the amendments made by

paragraphs 1 and 2 above also have effect for tax years before the tax year

2013-14.

25

      (3)  

For this purpose, section 24A(6) of ITA 2007 (as inserted by paragraph 1

above) is treated as having effect for tax years before the tax year 2013-14 as

if—

(a)   

in paragraphs (a), (b), (f) and (g) the references to relief were limited

to relief in respect of a loss made in the tax year 2013-14 or a

30

subsequent tax year, and

(b)   

all the other paragraphs were omitted.

5          

In section 24A(6)(d) of ITA 2007 (as inserted by paragraph 1 above) the

reference to relief does not include relief in respect of a loss made in the tax

year 2012-13.

35

 
 

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

160

 

Schedule 4

Section 17

 

Cash basis for small businesses

Part 1

Main provisions

Introductory

5

1          

Part 2 of ITTOIA 2005 (trading income) is amended as follows.

Eligibility to calculate profits on cash basis

2          

Chapter 3 (trade profits: basic rules) is amended as follows.

3          

In section 25(3) (exception to requirement to use generally accepted

accounting practice), for “section 160 (barristers and advocates in early years

10

of practice)” substitute “section 25A (cash basis for small businesses)”.

4          

After section 25 insert—

“25A    

Cash basis for small businesses

(1)   

A person who is or has been carrying on a trade may elect for the

profits of the trade to be calculated on the cash basis (instead of in

15

accordance with generally accepted accounting practice).

(2)   

References in this Part to calculating the profits of a trade on the cash

basis are references to doing so in accordance with this section.

(3)   

Chapter 3A contains provision about—

(a)   

when a person may make an election under this section, and

20

(b)   

the effect of such an election.

(4)   

Where an election under this section has effect in relation to a trade,

sections 27, 28 and 30 do not apply in relation to the calculation of the

profits of the trade.”

5          

After Chapter 3 insert—

25

“Chapter 3A

Trade profits: cash basis

Eligibility

31A     

Conditions to be met for profits to be calculated on cash basis

(1)   

A person may make an election under section 25A for a tax year if

30

conditions A to C are met.

(2)   

Condition A is that the aggregate of the cash basis receipts of each

trade, profession or vocation carried on by the person during that tax

year does not exceed any relevant maximum applicable for that tax

year (see section 31B).

35

 
 

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

161

 

(3)   

Condition B is that, in a case where the person is either an individual

who controls a firm or a firm controlled by an individual—

(a)   

the aggregate of the cash basis receipts of each trade,

profession or vocation carried on by the individual or the

firm during that tax year does not exceed any relevant

5

maximum applicable for that tax year, and

(b)   

the firm or the individual (as the case may be) has also made

an election under section 25A for that tax year.

(4)   

Condition C is that the person is not an excluded person in relation

to the tax year (see section 31C).

10

(5)   

For the purposes of this section, the “cash basis receipts” of a trade,

profession or vocation, in relation to a tax year, are any receipts

that—

(a)   

are received during the basis period for the tax year, and

(b)   

would be brought into account in calculating the profits of

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the trade, profession or vocation for that tax year on the cash

basis.

31B     

Relevant maximum

(1)   

For the purposes of section 31A there is a “relevant maximum”

applicable for a tax year in relation to a trade, profession or vocation

20

carried on by a person if any of conditions A to C is met.

(2)   

Condition A is that an election under section 25A did not have effect

in relation to the trade, profession or vocation for the previous tax

year.

(3)   

Condition B is that the aggregate of the cash basis receipts of each

25

trade, profession or vocation carried on by the person during the

previous tax year is greater than an amount equal to twice the VAT

threshold for that previous tax year.

(4)   

Condition C is that, in a case where the person is either an individual

who controls a firm or a firm controlled by an individual, the

30

aggregate of the cash basis receipts of each trade, profession or

vocation carried on by the individual or the firm during the previous

tax year is greater than an amount equal to twice the VAT threshold

for that previous tax year.

(5)   

If there is a relevant maximum applicable for a tax year, the amount

35

of the relevant maximum is—

(a)   

the VAT threshold, or

(b)   

in the case where the person is an individual who is a

universal credit claimant in the tax year, an amount equal to

twice the VAT threshold.

40

(6)   

For the purposes of this section, where the basis period for a tax year

is less than 12 months, the VAT threshold is proportionately

reduced.

(7)   

In this section—

“universal credit claimant”, in relation to a tax year, means a

45

person who is entitled to universal credit under the relevant

legislation for an assessment period (within the meaning of

 
 

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

162

 

the relevant legislation) that falls within the basis period for

the tax year,

“the relevant legislation” means—

(a)   

Part 1 of the Welfare Reform Act 2012, or

(b)   

any provision made for Northern Ireland which

5

corresponds to that Part of that Act, and

“the VAT threshold”, in relation to a tax year, means the amount

specified at the end of that tax year in paragraph 1(1)(a) of

Schedule 1 to VATA 1994.

(8)   

The Treasury may by order amend this section.

10

(9)   

A statutory instrument containing an order under subsection (8) that

restricts the circumstances in which an election may be made under

section 25A may not be made unless a draft of the instrument

containing the order has been laid before, and approved by a

resolution of, the House of Commons.

15

31C     

Excluded persons

(1)   

A person is an excluded person in relation to a tax year if the person

meets any of conditions A to H.

(2)   

Condition A is that—

(a)   

the person is a firm, and

20

(b)   

one or more of the persons who have been partners in the

firm at any time during the basis period for the tax year was

not an individual at that time.

(3)   

Condition B is that the person was a limited liability partnership at

any time during the basis period for the tax year.

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(4)   

Condition C is that the person is an individual who has been a

Lloyd’s underwriter at any time during the basis period for the tax

year.

(5)   

Condition D is that the person has made an election under Chapter 8

(trade profits: herd basis rules) that has effect in relation to the tax

30

year.

(6)   

Condition E is that the person has made a claim under section 221

(claim for averaging of fluctuating profits) in relation to the tax year.

(7)   

Condition F is that, at any time within the period of 7 years ending

immediately before the basis period for the tax year, the person

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obtained an allowance under Part 3A of CAA 2001 (business

premises renovation allowances).

(8)   

Condition G is that the person has carried on a mineral extraction

trade at any time during the basis period for the tax year.

   

In this subsection “mineral extraction trade” has the same meaning

40

as in Part 5 of CAA 2001 (see section 394(2) of that Act).

(9)   

Condition H is that—

(a)   

at any time before the beginning of the basis period for the tax

year the person obtained an allowance under Part 6 of CAA

2001 (research and development allowances) in respect of

45

qualifying expenditure incurred by the person, and

 
 

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

163

 

(b)   

the person owns an asset representing the expenditure.

   

In this subsection “qualifying expenditure” has the same meaning as

in Part 6 of CAA 2001.

(10)   

The Treasury may by order amend this section.

(11)   

A statutory instrument containing an order under subsection (10)

5

that restricts the circumstances in which an election may be made

under section 25A may not be made unless a draft of the instrument

containing the order has been laid before, and approved by a

resolution of, the House of Commons.

Elections under section 25A

10

31D     

Effect of election under section 25A

(1)   

An election made by a person under section 25A has effect—

(a)   

for the tax year for which it is made, and

(b)   

for every subsequent tax year.

   

This is subject to subsections (2) and (3).

15

(2)   

An election made by a person under section 25A ceases to have effect

if any of conditions A to C in section 31A is not met for a subsequent

tax year.

(3)   

An election made by a person under section 25A ceases to have effect

if—

20

(a)   

there is a change of circumstances relating to any trade,

profession or vocation carried on by the person which makes

it more appropriate for its profits for a subsequent tax year to

be calculated in accordance with generally accepted

accounting practice, and

25

(b)   

the person elects to calculate those profits in that way.

(4)   

Neither subsection (2) nor subsection (3) prevents the person making

an election under section 25A for any subsequent tax year.

(5)   

An election that—

(a)   

is made by a person under section 25A, and

30

(b)   

has effect for a tax year,

   

has effect in relation to every trade, profession or vocation carried on

by the person during the tax year.

(6)   

For provision prohibiting a person who has made an election under

section 25A from claiming any capital allowances (other than in

35

respect of expenditure incurred on the provision of a car), see section

1(4) of CAA 2001.

Calculation of profits on cash basis

31E     

Calculation of profits on cash basis

(1)   

This section applies to professions and vocations as it applies to

40

trades.

(2)   

To determine the profits of a trade for a tax year on the cash basis—

 
 

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

164

 

   

Step 1

   

Calculate the total amount of receipts of the trade received

during the basis period for the tax year.

   

Step 2

   

Deduct from that amount the total amount of expenses of the

5

trade paid during the basis period for the tax year.

(3)   

Subsection (2) is subject to any adjustment required or authorised by

law in calculating profits for income tax purposes.

Overview of rest of Part 2

31F     

Overview of rest of Part 2 as it applies to cash basis

10

(1)   

For provision about the application of Chapters 4 to 6 (rules about

deductions and receipts) in relation to the cash basis, see sections

32A, 56A and 95A.

(2)   

For provision about the application of Chapter 11 (trade profits:

other specific trades) in relation to the cash basis, see section 148K.

15

(3)   

The following Chapters apply only where profits are calculated on

the cash basis—

Chapter 6A (trade profits: amounts not reflecting commercial

transactions),

Chapter 17A (cash basis: adjustments for capital allowances).

20

(4)   

The following Chapters do not apply in relation to the cash basis—

Chapter 8 (trade profits: herd basis rules),

Chapter 9 (trade profits: sound recordings),

Chapter 10 (trade profits: certain telecommunication rights),

Chapter 10A (leases of plant or machinery: special rules for long

25

funding leases),

Chapter 11A (trade profits: changes in trading stock),

Chapter 13 (deductions from profits: unremittable amounts),

Chapter 14 (disposal and acquisition of know-how),

Chapter 16 (averaging profits of farmers and creative artists),

30

Chapter 16ZA (compensation for compulsory slaughter of

animal),

Chapter 16A (oil activities).”

Rules restricting deductions

6          

Chapter 4 (trade profits: rules restricting deductions) is amended as follows.

35

7          

After section 32 insert—

“Cash basis accounting

32A     

Application of Chapter to the cash basis

(1)   

The following sections do not apply in calculating the profits of a

trade on the cash basis—

40

section 33 (capital expenditure),

 
 

 
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Revised 28 March 2013