Finance (No. 2) Bill

Session 2012 - 13
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Other Bills before Parliament

Finance (No. 2) Bill

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
165

section 35 (bad and doubtful debts),
sections 36 and 37 (unpaid remuneration),
section 43 (employee benefit contributions: profits calculated
before end of 9 month period),
sections 48 to 50B (car hire).
5
(2)
For rules restricting deductions that apply only where profits are
calculated on the cash basis, see the following—
section 33A (cash basis: capital expenditure),
section 51A (cash basis: interest payments on loans).”
8
After section 33 insert—
10
“33A
Cash basis: capital expenditure
(1)
In calculating the profits of a trade on the cash basis, no deduction is
allowed for items of a capital nature, other than expenditure that—
(a)
if it were not allowable as a deduction in calculating the
profits of the trade, would be qualifying expenditure within
15
the meaning of Part 2 of CAA 2001 (plant and machinery
allowances), and
(b)
is not expenditure incurred on the provision of a car.
(2)
In this section “car” has the same meaning as in Part 2 of CAA 2001
(see section 268A of that Act).”
20
9
In section 38 (restriction of deductions in respect of employee benefit
contributions), after subsection (2) insert—
“(2A)
In calculating for income tax purposes the profits of a trade on the
cash basis, this section has effect as if—
(a)
in subsection (1), the words “or to be made” were omitted,
25
and
(b)
in subsection (2), the words “or within 9 months from the end
of it” were omitted (in both places).”
10
Before section 52 (and after the heading “Interest payments”) insert—
“51A
Cash basis: interest payments on loans
30
(1)
In calculating the profits of a trade on the cash basis, no deduction is
allowed for the interest paid on a loan.
(2)
This is subject to section 57B.”
11    (1)
Section 55A (expenditure on integral features) is amended as follows.
      (2)
The existing provision becomes subsection (1).
35
      (3)
After that subsection insert—
“(2)
But section 33A(3) of CAA 2001 does not apply in calculating the
profits of a trade on the cash basis.”
Rules allowing deductions
12
Chapter 5 (trade profits: rules allowing deductions) is amended as follows.
40

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
166

13
After section 56 insert—
“Cash basis accounting
56A
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—
5
sections 60 to 67 (tenants under taxed leases),
section 68 (replacement and alteration of trade tools).
(2)
For rules allowing deductions that apply only where profits are
calculated on the cash basis, see the following—
section 57B (cash basis: interest payments on loans).
10
(3)
In calculating the profits of a trade on the cash basis, any reference in
this Chapter to the incurring of expenses is to be read as a reference
to the paying of expenses.”
14
After section 57A insert—
“Cash basis: interest payments
15
57B
Cash basis: interest payments on loans
(1)
This section applies if a person carrying on a trade in a period pays
any interest on a loan during the period and—
(a)
a deduction for the interest would not otherwise be allowable
in calculating the profits of the trade because of section 51A,
20
or
(b)
in the absence of section 51A, a deduction for the interest
would not otherwise be allowable in calculating the profits of
the trade because (and only because) it was not an expense
incurred wholly and exclusively for the purposes of the
25
trade.
(2)
In calculating the profits of the trade on the cash basis, a deduction is
allowed for the interest.
(3)
But the maximum amount that may be deducted by virtue of this
section or section 58 (incidental costs of obtaining finance) in
30
calculating the profits of a trade for any period is £500.
(4)
The Treasury may by order amend the figure for the time being
specified in subsection (3).
(5)
A statutory instrument containing an order under this section that
amends that figure so as to substitute a lower figure may not be made
35
unless a draft of the instrument has been laid before, and approved
by a resolution of, the House of Commons.”
15
In section 58 (incidental costs of obtaining finance), in subsection (5), after
“with” insert “—
(a)
section 57B(3) (which imposes a limit on the total amount that
40
may be deducted by virtue of this section or section 57B), and
(b)
”.

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
167

16
In section 72 (payroll deduction schemes: contributions to agents’ expenses),
after subsection (2) insert—
“(2A)
In calculating the profits of the employer’s trade on the cash basis,
subsection (2) has effect as if paragraph (b) were omitted.”
17
In section 94A (costs of setting up SAYE option scheme or CSOP scheme),
5
after subsection (4) insert—
“(5)
But subsection (4) does not apply in calculating the profits of a trade
on the cash basis.”
Receipts
18
Chapter 6 (trade profits: receipts) is amended as follows.
10
19
After section 95 insert—
“Cash basis accounting
95A
Application of Chapter to the cash basis

For rules about receipts that apply only for the purpose of calculating
profits on the cash basis, see the following—
15
section 96A (cash basis: capital receipts),
section 97A (cash basis: value of trading stock on cessation of
trade),
section 97B (cash basis: value of work in progress on cessation
of profession or vocation).”
20
20
After section 96 insert—
“96A
Cash basis: capital receipts
(1)
This section applies if—
(a)
the whole or part of any expenditure incurred in acquiring,
creating or improving an asset has been brought into account
25
in calculating the profits of a trade of a person on the cash
basis, or
(b)
the whole or part of any such expenditure would have been
so brought into account if an election under section 25A had
had effect in relation to the trade at the time the expenditure
30
was paid.
(2)
The following amounts are to be brought into account as a receipt in
calculating the profits of the trade on the cash basis—
(a)
any proceeds arising from the disposal of the asset or any
part of it;
35
(b)
any proceeds arising from the grant of any right in respect of,
or any interest in, the asset;
(c)
any amount of damages, proceeds of insurance or other
compensation received in respect of the asset.
(3)
In a case where only part of the expenditure incurred in acquiring,
40
creating or improving an asset has been, or would have been,
brought into account as mentioned in subsection (1), the amount

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
168

brought into account under subsection (2) is proportionately
reduced.
(4)
If—
(a)
at any time the person ceases to use the asset or any part of it
for the purposes of the trade, but
5
(b)
the person does not dispose of the asset (or that part) at that
time,

the person is to be regarded for the purposes of this section as
disposing of the asset (or that part) at that time for an amount equal
to the market value amount.
10
(5)
If at any time there is a material increase in the person’s non-business
use of the asset or any part of it, the person is to be regarded for the
purposes of this section as disposing of the asset (or that part) at that
time for an amount equal to the relevant proportion of the market
value amount.
15
(6)
For the purposes of subsection (5)—
(a)
there is an increase in a person’s non-business use of an asset
(or part of an asset) if—
(i)
the proportion of the person’s use of the asset (or that
part) that is for the purposes of the trade decreases,
20
and
(ii)
the proportion of the person’s use of the asset (or that
part) that is for other purposes (the “non-business
use”) increases;
(b)
“the relevant proportion” is the difference between—
25
(i)
the proportion of the person’s use of the asset (or part
of the asset) that is non-business use, and
(ii)
the proportion of the person’s use of the asset (or that
part) that was non-business use before the increase
mentioned in subsection (5).
30
(7)
In this section “the market value amount” means the amount that
would be regarded as normal and reasonable—
(a)
in the market conditions then prevailing, and
(b)
between persons dealing with each other at arm’s length in
the open market.”
35
21
After section 97 insert—
“Cash basis: value of stock and work in progress on cessation
97A
Cash basis: value of trading stock on cessation of trade
(1)
This section applies if—
(a)
a person permanently ceases to carry on a trade in a tax year,
40
and
(b)
an election under section 25A (cash basis for small
businesses) has effect in relation to the trade for the tax year.
(2)
The value of any trading stock belonging to the trade at the time of
the cessation is brought into account as a receipt in calculating the
45
profits of the trade for the tax year.

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
169

(3)
The value is to be determined on a basis that is just and reasonable in
all the circumstances.
(4)
If there is a change in the persons carrying on a trade, subsection (2)
does not apply in relation to the trade so long as a person carrying on
the trade immediately before the change continues to carry it on after
5
the change.
(5)
In this section “trading stock” has the same meaning as in Chapter 12
(see section 174).
(6)
This section does not apply to professions or vocations.
97B
Cash basis: value of work in progress on cessation of profession or
10
vocation
(1)
This section applies if—
(a)
a person permanently ceases to carry on a profession or
vocation in a tax year, and
(b)
an election under section 25A (cash basis for small
15
businesses) has effect in relation to the profession or vocation
for the tax year.
(2)
The value of any work in progress at the time of the cessation is
brought into account as a receipt in calculating the profits of the
profession or vocation for the tax year.
20
(3)
The value is to be determined on a basis that is just and reasonable in
all the circumstances.
(4)
If there is a change in the persons carrying on a profession,
subsection (2) does not apply in relation to the profession so long as
a person carrying on the profession immediately before the change
25
continues to carry it on after the change.
(5)
In this section “work in progress” has the same meaning as in
Chapter 12 (see section 183).”
22    (1)
Section 105 (industrial development grants) is amended as follows.
      (2)
In subsection (2), at the end of paragraph (a) insert “(but see subsection
30
(2A))”.
      (3)
After that subsection insert—
“(2A)
Subsection (2)(a) is to be disregarded in calculating the profits of a
trade on the cash basis.”

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
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Amounts not reflecting commercial transactions
23
After Chapter 6 insert—
“Chapter 6A
Trade profits: amounts not reflecting commercial transactions
106A
Professions and vocations
5

The provisions of this Chapter apply to professions and vocations as
they apply to trades.
106B
Application of Chapter

This Chapter applies in calculating the profits of a person’s trade for
a period on the cash basis.
10
106C
Amounts not reflecting commercial transactions
(1)
This section applies if—
(a)
the person does anything in relation to the trade (“the
relevant act”),
(b)
there is a difference between—
15
(i)
the amount (if any) that, as a result of the relevant act,
would (apart from this section) be brought into
account in calculating the profits of the trade for the
period, and
(ii)
the amount (if any) that would have been so brought
20
into account had the relevant act consisted of a
transaction between the person and another person
dealing with each other at arm’s length in the open
market (“the arm’s length amount”), and
(c)
the profits of the trade for the period are less than they would
25
have been if the arm’s length amount had been so brought
into account.
(2)
The amount to be brought into account in calculating the profits of
the trade for the period is an amount that is just and reasonable in all
the circumstances.
30
106D
Capital receipts

Section 106C does not apply in relation to the relevant act if
subsection (4) or (5) of section 96A (cash basis: capital receipts)
applies in relation to that act.
106E
Gifts to charities etc
35

Section 106C does not apply in relation to the relevant act if any of
the provisions of Chapter 7 (trade profits: gifts to charities etc)
applies in relation to that act.”

Finance (No. 2) Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions
171

Herd basis rules
24
In Chapter 8 (trade profits: herd basis rules), after section 111 insert—
“111A
Herd basis rules not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”
5
Sound recordings
25
In Chapter 9 (trade profits: sound recordings), after section 130 insert—
“130A
Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”
10
Telecommunication rights
26
In Chapter 10 (trade profits: certain telecommunication rights), before
section 145 insert—
“144A
Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
15
on the cash basis.”
Long funding leases
27
In Chapter 10A (leases of plant or machinery: special rules for long funding
leases), before section 148A (and the italic heading preceding it) insert—
“Application of Chapter
20
148ZA
Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”
Specific trades
28
In Chapter 11 (trade profits: other specific trades), before section 149 (and the
25
italic heading preceding it) insert—
“Cash basis accounting
148K
Application of Chapter to the cash basis

The following sections do not apply in calculating the profits of a
trade, profession or vocation on the cash basis—
30
sections 149 to 154A (dealers in securities etc),
section 157 (relief in respect of mineral royalties),
section 158 (lease premiums etc: reduction of receipts),
section 159 (ministers of religion),
section 161 (mineral exploration and access),
35