Finance (No. 2) Bill

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
15
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
20
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
35
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
15
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.
25
(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
35
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),