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

Oil activities

34 In Chapter 16A (oil activities), before section 225A (and the italic heading
preceding it) insert—

“Application of Chapter

225ZH 5 Chapter not to apply where cash basis used

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

Adjustment income

35 Chapter 17 (adjustment income) is amended as follows.

36 10After section 227 insert—

“227A Application of Chapter where cash basis used

(1) This Chapter applies if—

(a) an election under section 25A (cash basis for small
businesses) has effect in relation to a trade for a tax year but
15no such election has effect in relation to the trade for the
following tax year, or

(b) no such election has effect in relation to a trade for a tax year
but such an election has effect in relation to the trade for the
following tax year.

(2) 20But this Chapter does not apply to income which is charged in
accordance with section 832.”

37 After section 239 insert—

“Spreading of adjustment income on leaving cash basis

239A Spreading on leaving cash basis

(1) 25This section applies if—

(a) an election under section 25A (cash basis for small
businesses) has effect in relation to a trade for a tax year, and

(b) no such election has effect in relation to the trade for the
following tax year.

(2) 30Any adjustment income is spread over 6 tax years as follows.

(3) In each of the 6 tax years beginning with that in which the whole
amount of the adjustment income would otherwise be chargeable to
tax, an amount equal to one-sixth of the amount of the adjustment
income is treated as arising and is charged to tax.

(4) 35This section is subject to any election under section 239B (election to
accelerate charge).

239B Election to accelerate charge under section 239A

(1) A person who under section 239A is liable to tax for a tax year on an
amount of adjustment income may elect for an additional amount to
be treated as arising in the tax year.

(2) 5The election must be made on or before the first anniversary of the
normal self-assessment filing date for the tax year.

(3) The election must specify the amount to be treated as income arising
in the tax year (which may be any amount of the adjustment income
not previously charged to tax).

(4) 10If an election is made, section 239A applies in relation to any
subsequent tax year as if the amount of adjustment income (as
reduced by any previous application of this section) were reduced by
the amount given by the following formula—

20Adjustments for capital allowances

38 After Chapter 17 insert—

“CHAPTER 17A Cash basis: adjustments for capital allowances

Introduction

240A Professions and vocations

25The provisions of this Chapter apply to professions and vocations as
they apply to trades.

Adjustments on entering cash basis

240B “Entering the cash basis”

For the purposes of this Chapter a person carrying on a trade enters
30the cash basis for a tax year if—

(a) an election under section 25A has effect in relation to the
trade for the tax year, and

(b) immediately before the beginning of the basis period for the
tax year, such an election does not have effect in relation to
35the trade.

240C Unrelieved qualifying expenditure

(1) This section applies if—

(a) a person carrying on a trade enters the cash basis for a tax
year (“the current tax year”), and

(b) at the end of the basis period for the previous tax year, the
person has unrelieved qualifying expenditure to carry
5forward from the chargeable period ending with that basis
period.

(2) But this section does not apply if section 240D (assets not fully paid
for) applies.

(3) In calculating the profits of the trade for the current tax year, a
10deduction is allowed for the relevant portion of the expenditure.

(4) The “relevant portion” of the expenditure means the amount of the
expenditure for which a deduction would be allowed in calculating
the profits of the trade on the cash basis for a period if the
expenditure was paid during that period.

(5) 15The relevant portion of the expenditure is to be determined on such
basis as is just and reasonable in all the circumstances.

(6) Section 59(1) and (2) of CAA 2001 (unrelieved qualifying
expenditure) has effect for the purposes of this section.

240D Assets not fully paid for

(1) 20This section applies if—

(a) a person carrying on a trade enters the cash basis for a tax
year,

(b) at any time before the beginning of the basis period for that
tax year the person has obtained capital allowances in respect
25of expenditure on the provision of plant or machinery (“the
relevant expenditure”), and

(c) not all of the relevant expenditure has actually been paid by
the person.

(2) If the amount of the relevant expenditure that the person has actually
30paid exceeds the amount of capital allowances given in respect of the
relevant expenditure, the difference is to be deducted in calculating
the profits of the trade for the tax year.

(3) If the amount of the relevant expenditure that the person has actually
paid is less than the amount of capital allowances given in respect of
35the relevant expenditure, the difference is to be treated as a receipt in
calculating the profits of the trade for the tax year.

(4) The amount of any capital allowance obtained in respect of
expenditure on the provision of any plant or machinery is to be
determined on such basis as is just and reasonable in all the
40circumstances.

(5) If the amount of capital allowances given in respect of the relevant
expenditure has been reduced under section 205 or 207 of CAA 2001
(reduction where asset provided or used only partly for qualifying
activity), the amount of the relevant expenditure that the person has
45actually paid is to be proportionately reduced for the purposes of this
section.

(6) This section does not apply where the relevant expenditure was
incurred on the provision of a car.

In this subsection “car” has the same meaning as in Part 2 of CAA
2001 (see section 268A of that Act).

5In this subsection “car” has the same meaning as in Part 2 of CAA
2001 (see section 268A of that Act).

Successions where predecessor and successor are connected persons

240E Effect of election where predecessor and successor are connected
persons

(1) 10This section applies if—

(a) a person carrying on a trade enters the cash basis for a tax
year,

(b) the person is the successor for the purposes of section 266 of
CAA 2001, and

(c) 15as a result of an election under section 267 of that Act,
relevant plant or machinery is treated as sold by the
predecessor to the successor at any time during the basis
period for the tax year.

(2) The provisions of this Chapter have effect in relation to the successor
20as if everything done to or by the predecessor had been done to or by
the successor.

(3) Any expenditure actually incurred by the successor on acquiring the
relevant plant or machinery is to be ignored for the purposes of
calculating the profits of the trade for the tax year.

(4) 25In this section “the predecessor” and “relevant plant or machinery”
have the same meaning as in section 267 of CAA 2001.”

Post-cessation receipts

39 (1) Chapter 18 (post-cessation receipts) is amended as follows.

(2) In section 246 (basic meaning of “post-cessation receipt”), after subsection (2)
30insert—

“(2A) If, immediately before a person permanently ceases to carry on a
trade, an election under section 25A (cash basis for small businesses)
has effect in relation to the trade, a sum is to be treated as a post-
cessation receipt only if it would have been brought into account in
35calculating the profits of the trade on the cash basis had it been
received at that time.”

(3) In section 254 (allowable deductions), after subsection (2) insert—

“(2A) If, immediately before the person permanently ceases to carry on the
trade, an election under section 25A (cash basis for small businesses)
40has effect in relation to the trade, assume for the purposes of
subsection (2) that such an election has effect in relation to the trade.”

Rent-a-room relief

40 In Chapter 1 of Part 7 of ITTOIA 2005 (rent-a-room relief), in section 786

(meaning of “rent-a-room receipts”), after subsection (4) insert—

“(5) Subsections (6) and (7) apply if—

(a) the receipts would otherwise be brought into account in
calculating the profits of a trade, and

(b) 5an election under section 25A (cash basis for small
businesses) has effect in relation to the trade.

(6) Any amounts brought into account under section 96A (capital
receipts) as a receipt in calculating the profits of the trade are to be
treated as receipts within paragraph (a) of subsection (1) above.

(7) 10The reference in subsection (1)(b) to receipts that accrue to an
individual during the income period for those receipts is to be read
as a reference to receipts that are received by the individual during
that period.”

Qualifying care relief

41 15Chapter 2 of Part 7 of ITTOIA 2005 (qualifying care relief) is amended as
follows.

42 In section 805 (meaning of “qualifying care receipts”), after subsection (3)
insert—

“(4) Subsections (5) and (6) apply if—

(a) 20the receipts would otherwise be brought into account in
calculating the profits of a trade, and

(b) an election under section 25A (cash basis for small
businesses) has effect in relation to the trade.

(5) Any amounts brought into account under section 96A (capital
25receipts) as a receipt in calculating the profits of the trade are to be
treated as receipts within paragraph (a) of subsection (1) above.

(6) The reference in subsection (1)(b) to receipts that accrue to an
individual during the income period for those receipts is to be read
as a reference to receipts that are received by the individual during
30that period.”

43 In section 820 (periods of account not ending on 5th April)—

(a) the existing provision becomes subsection (1), and

(b) after that subsection insert—

“(2) Where an election under section 25A (cash basis for small
35businesses) has effect in relation to the trade, any reference in
this section or sections 821 to 823 to the period of account in
which receipts accrue is to be read as a reference to the period
of account in which receipts are received.”

Part 2 Consequential amendments

TMA 1970

44 In section 42 of TMA 1970 (procedure for making claims etc), in subsection
5(7)(e), after “sections” insert “25A,”.

TCGA 1992

45 After section 47 of TCGA 1992 insert—

“Cash basis accounting

47A Exemption for disposals by persons using cash basis

(1) 10No chargeable gain shall accrue on the disposal of, or of an interest
in, an asset if conditions A to D are met in relation to the asset.

(2) Condition A is that the asset is—

(a) tangible movable property, and

(b) a wasting asset.

(3) 15Condition B is that, at any time during the period of ownership of the
person making the disposal, the asset has been used for the purposes
of a trade, profession or vocation carried on by the person.

(4) Condition C is that an election under section 25A of ITTOIA 2005
(cash basis for small businesses) has effect in relation to the trade,
20profession or vocation at the time of the disposal.

(5) Condition D is that—

(a) any expenditure attributable to the asset or interest under
paragraph (a) or (b) of section 38(1) has been brought into
account in calculating the profits of the trade, profession or
25vocation on the cash basis, or

(b) any of that expenditure would have been so brought into
account if an election under section 25A of ITTOIA 2005 had
had effect in relation to the trade, profession or vocation at
the time the expenditure was paid.

(6) 30Subsection (7) applies in the case of the disposal of, or of an interest
in, an asset which, in the period of ownership of the person making
the disposal—

(a) has been used partly for the purposes of the trade, profession
or vocation and partly for other purposes, or

(b) 35has been used for the purposes of the trade, profession or
vocation for part of that period.

(7) In such a case—

(a) the consideration for the disposal, and any expenditure
attributable to the asset or interest by virtue of section 38(1)(a)
40and (b), shall be apportioned by reference to the extent to
which that expenditure was, or (as the case may be) would

have been, brought into account as mentioned in subsection
(5) above,

(b) the computation of the gain shall be made separately in
relation to the apportioned parts of the expenditure and
5consideration, and

(c) subsection (1) above shall apply to any gain accruing by
reference to the computation in relation to the part of the
consideration apportioned to use for the purposes of the
trade, profession or vocation.

47B 10Disposals made by persons after leaving cash basis

(1) This section applies where—

(a) a person disposes of, or of an interest in, an asset that has
been used for the purposes of a trade, profession or vocation
carried on by the person, and

(b) 15conditions A and B are met in relation to the trade, profession
or vocation.

(2) Condition A is that—

(a) any expenditure attributable to the asset or interest under
paragraph (a) or (b) of section 38(1) was incurred at a time
20when an election under section 25A of ITTOIA 2005 (cash
basis for small businesses) had effect in relation to the trade,
profession or vocation, and

(b) that expenditure (“the relevant expenditure”) has been
brought into account in calculating the profits of the trade,
25profession or vocation on the cash basis.

(3) Condition B is that no such election has effect in relation to the trade,
profession or vocation at the time of the disposal.

(4) Section 39 (exclusion of expenditure by reference to tax on income)
does not apply in relation to the relevant expenditure.

(5) 30Section 41 (restriction of losses by reference to capital allowances and
renewals allowances) has effect as if—

(a) the election mentioned in subsection (2)(a) above had not had
effect at the time the relevant expenditure was incurred, and

(b) the reference in subsection (7) to qualifying expenditure
35included a reference to expenditure which, if that election
had not had effect at that time, would have been qualifying
expenditure.

(6) Section 45 (exemption for certain wasting assets) and section 47
(wasting assets qualifying for capital allowances) have effect as if the
40election mentioned in subsection (2)(a) above had not had effect at
the time the relevant expenditure was incurred.

Accordingly, any reference in those sections to expenditure
qualifying for capital allowances is to be read as a reference to
expenditure that would, in the absence of the election, have qualified
45for such allowances.

Accordingly, any reference in those sections to expenditure
qualifying for capital allowances is to be read as a reference to
expenditure that would, in the absence of the election, have qualified
for such allowances.”

CAA 2001

46 In section 1 of CAA 2001 (capital allowances), after subsection (3) insert—

“(4) But a person is not entitled to any allowance or liable to any charge
under this Act in calculating the profits of a trade, profession or
5vocation of the person in relation to which an election under section
25A of ITTOIA 2005 (cash basis for small businesses) has effect, other
than an allowance in respect of expenditure incurred on the
provision of a car (or a charge in connection with such an allowance).

(5) In subsection (4) “car” has the same meaning as in Part 2 (see section
10268A).”

47 In section 59 of CAA 2001 (unrelieved qualifying expenditure), after
subsection (3) insert—

“(4) If a person carrying on a trade, profession or vocation enters the cash
basis for a tax year, no amount may be carried forward as unrelieved
15qualifying expenditure from the chargeable period ending with the
basis period for the previous tax year.

(5) But subsection (4) does not apply to unrelieved qualifying
expenditure incurred on the provision of a car.

(6) Where a person has unrelieved qualifying expenditure to carry
20forward from a chargeable period that is not expenditure allocated to
a single asset pool, the amount of unrelieved qualifying expenditure
incurred on the provision of a car is to be determined on such basis
as is just and reasonable in all the circumstances.

(7) Section 240B of ITTOIA 2005 (meaning of “entering the cash basis”)
25applies for the purposes of this section as it applies for the purposes
of Chapter 17A of Part 2 of that Act.”

48 In Chapter 5 of Part 2 of CAA 2001 (plant and machinery allowances and
charges), after section 66 insert—

“Application of Chapter to person leaving cash basis

66A 30Persons leaving cash basis

(1) This section applies if—

(a) a person carrying on a trade, profession or vocation leaves
the cash basis in a chargeable period, and

(b) the person has at any time incurred expenditure which, if an
35election under section 25A of ITTOIA 2005 (cash basis for
small businesses) had not had effect at that time, would have
been qualifying expenditure.

(2) In this section—

(a) the “relieved portion” of the expenditure is the amount of
40that expenditure for which—

(i) a deduction was allowed in calculating the profits of
the trade, profession or vocation, or

(ii) a deduction would have been so allowed if the
expenditure had been incurred wholly and

exclusively for the purposes of the trade, profession
or vocation;

(b) the “unrelieved portion” of the expenditure is any remaining
amount of the expenditure.

(3) 5For the purposes of determining any entitlement of the person to an
annual investment allowance or a first-year allowance, the person is
to be treated as incurring the unrelieved portion of the expenditure
in the chargeable period.

(4) For the purposes of determining the person’s available qualifying
10expenditure in a pool for the chargeable period (see section 58)—

(a) the whole of the expenditure must be allocated to the
appropriate pool (or pools) in that chargeable period, and

(b) the available qualifying expenditure in a pool to which the
expenditure (or some of it) is allocated is reduced by the
15relieved portion of that expenditure.

(5) For the purposes of determining any disposal receipts (see section
60), the expenditure incurred by the person is to be regarded as
qualifying expenditure.

(6) For the purposes of this section a person carrying on a trade,
20profession or vocation leaves the cash basis in a chargeable period
if—

(a) immediately before the beginning of the chargeable period
an election under section 25A had effect in relation to the
trade, profession or vocation, and

(b) 25such an election does not have effect in relation to the trade,
profession or vocation for the chargeable period.”

ITTOIA 2005

49 In section 31 of ITTOIA 2005 (relationship between rules prohibiting and
allowing deductions), in subsection (2), omit the “or” at the end of paragraph
30(b) and after paragraph (c) insert “or

(d) Chapter 17A,”.

50 In section 56 of ITTOIA 2005 (rules allowing deductions: professions and
vocations), after “marks)” insert “and section 97A (cash basis: value of
trading stock on cessation of trade)”.

51 35Omit section 160 of ITTOIA 2005 (cash basis of calculation for barristers and
advocates in early years of practice).

52 (1) Chapter 17 of Part 2 of ITTOIA 2005 (adjustment income) is amended as
follows.

(2) In section 229(2)(a), for “sections 237 to 239” substitute “sections 237 to
40239B”.

(3) Omit sections 238 and 239 (spreading of adjustment income: barristers and
advocates).

53 In Part 2 of Schedule 4 to ITTOIA 2005 (index of defined expressions), at the

appropriate place insert—

5ITA 2007

54 (1) In Part 4 of ITA 2007 (loss relief), Chapter 2 (trade losses) is amended as
follows.

(2) In section 64 (deduction of losses from general income), in subsection (8),
after paragraph (ba) insert—

“(bb) 10section 74E (restriction on the relief and early trade losses
relief where cash basis applies),”.

(3) In section 72 (relief for individuals for losses in first 4 years of trade), in
subsection (5), after paragraph (ba) insert—

“(bb) section 74E (restriction on the relief and trade loss relief
15where cash basis applies),”.

(4) After section 74D insert—

“Restriction on sideways relief and capital gains relief where cash basis applies

74E No relief where cash basis used to calculate losses

(1) This section applies if—

(a) 20a person makes a loss in any trade in a tax year, and

(b) an election under section 25A of ITTOIA 2005 (cash basis for
small businesses) has effect in relation to the trade for that tax
year.

(2) No sideways relief or capital gains relief may be given to the person
25for the loss.

(3) For the purposes of this section—

(a) capital gains relief is, in relation to a loss, the treatment of a
loss as an allowable loss by virtue of section 261B of TCGA
1992 (use of trading loss as a CGT loss), and

(b) 30capital gains relief is given for a loss when it is so treated.”

55 (1) Chapter 1 of Part 8 of ITA 2007 (relief for interest payments) is amended as
follows.

(2) In section 383(5), after paragraph (a) insert—

“(aa) section 384B (restriction on relief where cash basis applies),”.

(3) 35After section 384A insert—

“384B Restriction on relief where cash basis applies

(1) Relief is not to be given under this Chapter for a tax year for interest
paid by a person on a relevant loan if the partnership to which the