Finance (No. 2) Bill (HC Bill 154)

(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) 5A statutory instrument containing an order under subsection (10)
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.

10Elections under section 25A

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.

15This is subject to subsections (2) and (3).

(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
20if—

(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
25accounting practice, and

(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) 30is made by a person under section 25A, and

(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
35section 25A from claiming any capital allowances (other than in
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) 40This section applies to professions and vocations as it applies to
trades.

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

(none) Step 1

(none) Calculate the total amount of receipts of the trade received
during the basis period for the tax year.

(none) Step 2

(none) 5Deduct from that amount the total amount of expenses of the
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 10Overview of rest of Part 2 as it applies to cash basis

(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:
15other specific trades) in relation to the cash basis, see section 148K.

(3) The following Chapters apply only where profits are calculated on
the cash basis—

• Chapter 6A (trade profits: amounts not reflecting commercial
  transactions),

• 20Chapter 17A (cash basis: adjustments for capital allowances).

(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),

• 25Chapter 10A (leases of plant or machinery: special rules for long
  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),

• 30Chapter 16 (averaging profits of farmers and creative artists),

• Chapter 16ZA (compensation for compulsory slaughter of
  animal),

• Chapter 16A (oil activities).”

Rules restricting deductions

6 35Chapter 4 (trade profits: rules restricting deductions) is amended as follows.

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
40trade on the cash basis—

• section 33 (capital expenditure),

Finance (No. 2) BillPage 162

• 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),

• 5sections 48 to 50B (car hire).

(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 10After section 33 insert—

“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
15profits of the trade, would be qualifying expenditure within
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
20(see section 268A of that Act).”

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) 25in subsection (1), the words “or to be made” were omitted,
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 30Cash basis: interest payments on loans

(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) 35The existing provision becomes subsection (1).

(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 40Chapter 5 (trade profits: rules allowing deductions) is amended as follows.

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
5trade on the cash basis—

• 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—

• 10section 57B (cash basis: interest payments on loans).

(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—

15“Cash basis: interest payments

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
20in calculating the profits of the trade because of section 51A,
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
25incurred wholly and exclusively for the purposes of the
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
30section or section 58 (incidental costs of obtaining finance) in
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
35amends that figure so as to substitute a lower figure may not be made
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) 40section 57B(3) (which imposes a limit on the total amount that
may be deducted by virtue of this section or section 57B), and

(b)”.

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 5In section 94A (costs of setting up SAYE option scheme or CSOP scheme),
after subsection (4) insert—

“(5) But subsection (4) does not apply in calculating the profits of a trade
on the cash basis.”

Receipts

18 10Chapter 6 (trade profits: receipts) is amended as follows.

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
15profits on the cash basis, see the following—

• 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
  20of profession or vocation).”

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,
25creating or improving an asset has been brought into account
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
30had effect in relation to the trade at the time the expenditure
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
35part of it;

(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) 40In a case where only part of the expenditure incurred in acquiring,
creating or improving an asset has been, or would have been,
brought into account as mentioned in subsection (1), the amount

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
5for the purposes of the trade, but

(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
10to the market value amount.

(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
15value amount.

(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
20part) that is for the purposes of the trade decreases,
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) 25“the relevant proportion” is the difference between—

(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
30mentioned in subsection (5).

(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
35the open market.”

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) 40a person permanently ceases to carry on a trade in a tax year,
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
45the cessation is brought into account as a receipt in calculating the
profits of the trade for the tax year.

(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
5the trade immediately before the change continues to carry it on after
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 10Cash basis: value of work in progress on cessation of profession or
vocation

(1) This section applies if—

(a) a person permanently ceases to carry on a profession or
vocation in a tax year, and

(b) 15an election under section 25A (cash basis for small
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
20profession or vocation for the tax year.

(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
25a person carrying on the profession immediately before the change
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) 30In subsection (2), at the end of paragraph (a) insert “(but see subsection
(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.”

Amounts not reflecting commercial transactions

23 After Chapter 6 insert—

“CHAPTER 6A Trade profits: amounts not reflecting commercial transactions

106A Professions and vocations

5The 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.

106C 10Amounts 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—

(i) 15the 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
20into 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
25have 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.

106D 30Capital 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

35Section 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.”

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
5on the cash basis.”

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
10on the cash basis.”

Telecommunication rights

26 In Chapter 10 (trade profits: certain telecommunication rights), before
section 145 insert—

“144A Chapter not to apply where cash basis used

15Nothing in this Chapter applies in calculating the profits of a trade
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—

20“Application of Chapter

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 25In Chapter 11 (trade profits: other specific trades), before section 149 (and the
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
30trade, profession or vocation on the cash basis—

• 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),

• 35section 161 (mineral exploration and access),

Finance (No. 2) BillPage 169

• section 162 (payments by persons liable to pool betting duty),

• sections 163 and 164 (intermediaries treated as making
  employment payments),

• section 164A (managed service companies),

• 5sections 165 to 168 (waste disposal),

• sections 169 to 172ZE (cemeteries and crematoria).”

Changes in trading stock

29 In Chapter 11A (trade profits: changes in trading stock), after section 172A
insert—

“172AA 10 Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”

Unremittable amounts

30 In Chapter 13 (deductions from profits: unremittable amounts), after section
15188 insert—

“188A Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”

Disposal and acquisition of know-how

31 20In Chapter 14 (disposal and acquisition of know-how), before section 192
insert—

“191A Chapter not to apply where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”

25Averaging profits of farmers and creative artists

32 In Chapter 16 (averaging profits of farmers and creative artists), after section
221 insert—

“221A Claim not available where cash basis used

Nothing in this Chapter applies in calculating the profits of a trade
30on the cash basis.”

Compensation for compulsory slaughter of animal

33 In Chapter 16ZA (compensation for compulsory slaughter of animal), after
section 225ZA insert—

“225ZAA Chapter not to apply where cash basis used

35Nothing in this Chapter applies in calculating the profits of a trade
on the cash basis.”