Finance (No. 2) Bill (HL Bill 156)

(7) The useful life of an asset ends when it could no longer be of use to
any person for any purpose as an asset of a business.

(8) “Intangible asset” means anything that is capable of being an
intangible asset within the meaning of FRS 105 and, in particular,
5includes—

(a) an internally-generated intangible asset, and

(b) intellectual property.

(9) An intangible asset is “non-qualifying” unless, by virtue of having a
fixed maximum duration, it must cease to exist before the end of 20
10years beginning with the date on which the item of a capital nature
is incurred.

(10) An intangible asset is “non-qualifying” if it consists of a right,
whether conditional or not, to obtain an intangible asset without a
fixed maximum duration by virtue of which that asset must,
15assuming the right is exercised at the last possible time, cease to exist
before the end of 20 years beginning with the date on which the item
of a capital nature is incurred.

(11) Where—

(a) the trader has an intangible asset, and

(b) 20the trader grants a licence or any other right in respect of that
asset to another person,

any intangible asset that consists of a licence or other right granted to
the trader in respect of the intangible asset mentioned in paragraph
(a) is “non-qualifying”.

(12) 25A “financial asset” means any right under or in connection with—

(a) a financial instrument, or

(b) an arrangement that is capable of producing a return that is
economically equivalent to a return produced under any
financial instrument.

(13) 30A reference to acquisition, provision, alteration or disposal includes
potential acquisition, provision, alteration or (as the case may be)
disposal.

(14) In this section—

• “arrangement” includes any agreement, understanding,
  35scheme, transaction or series of transactions (whether or not
  legally enforceable);

• “building” includes any fixed structure;

• “car” has the same meaning as in Part 2 of CAA 2001 (see section
  268A of that Act);

• 40“financial instrument” has the same meaning as in FRS 105;

• “FRS 105” means Financial Reporting Standard 105 (the
  Financial Reporting Standard applicable to the Micro-entities
  Regime), issued by the Financial Reporting Council in July
  2015;

• 45“intellectual property” means—

  (a)

  any patent, trade mark, registered design, copyright
  or design right, plant breeders’ rights or rights under
  section 7 of the Plant Varieties Act 1997,

  Finance (No. 2) BillPage 201

  (b)

  any right under the law of a country or territory
  outside the United Kingdom corresponding or
  similar to a right within paragraph (a),

  (c)

  any information or technique not protected by a right
  5within paragraph (a) or (b) but having industrial,
  commercial or other economic value, or

  (d)

  any licence or other right in respect of anything
  within paragraph (a), (b) or (c);

• “provision” includes creation, construction or acquisition;

• 10“the trader” means the person carrying on the trade.””

3 In section 95A (application of Chapter 6 of Part 2 (trade profits: receipts) to
the cash basis)—

(a) the existing text becomes subsection (1),

(b) in that subsection, omit the entry relating to section 96A, and

(c) 15after that subsection insert—

“(2) Section 96A makes provision about capital receipts in certain
cases where the profits of a trade are calculated on the cash
basis or have previously been calculated on the cash basis
(and see also section 96B).””

4 (1) 20Section 96A (cash basis: capital receipts) is amended as follows.

(2) For the heading substitute “Capital receipts under, or after leaving, cash
basis”.

(3) For subsections (1) to (3) substitute—

“(1) This section applies in relation to a trade carried on by a person in
25two cases—

(a) Case 1 (see subsections (2) to (3A)), and

(b) Case 2 (see subsections (3B) to (3E)).

(2) Case 1 is a case in which conditions A and B are met.

(3) Condition A is that the person receives disposal proceeds or a capital
30refund in relation to an asset at a time when an election under section
25A (cash basis for trades) has effect in relation to the trade.

(3A) Condition B is that—

(a) an amount of capital expenditure (see subsection (3H))
relating to the asset has been brought into account in
35calculating the profits of the trade on the cash basis, or

(b) an amount of capital expenditure relating to the asset
which—

(i) has been incurred (or treated as incurred) by the
person before the tax year for which the person last
40entered the cash basis, and

(ii) is cash basis deductible in relation to that tax year (see
section 96B(4)),

has been brought into account in calculating the profits of the
trade for a tax year for which no election under section 25A
45had effect in relation to the trade.

The reference in this paragraph to expenditure brought into
account includes a reference to expenditure brought into
account under CAA 2001 (see section 96B(5)).

(3B) Case 2 is a case in which—

(a) 5condition C is met, and

(b) condition D or E is met.

(3C) Condition C is that disposal proceeds or a capital refund arise to the
person in relation to an asset at a time—

(a) when no election under section 25A has effect in relation to
10the trade, and

(b) which is after a time when such an election had had effect in
relation to the trade.

(3D) Condition D is that an amount of capital expenditure relating to the
asset—

(a) 15has been paid at a time when an election under section 25A
had effect in relation to the trade,

(b) has been brought into account in calculating the profits of the
trade on the cash basis, and

(c) on the assumption that an election under section 25A had not
20had effect at the time the expenditure was paid, would not
have been qualifying expenditure.

(3E) Condition E is that an amount of capital expenditure relating to the
asset has been brought into account in calculating the profits of the
trade for a tax year—

(a) 25for which no election under section 25A had effect in relation
to the trade, and

(b) which is before the tax year for which the person last entered
the cash basis.

The reference in this subsection to expenditure brought into account
30does not include a reference to expenditure brought into account
under CAA 2001 (see section 96B(5)).

(3F) “Disposal proceeds” means—

(a) any proceeds arising from the disposal of an asset or any part
of it,

(b) 35any proceeds arising from the grant of any right in respect of,
or any interest in, the asset, or

(c) any amount of damages, proceeds of insurance or other
compensation received in respect of the asset.

See also subsections (4) and (5) for circumstances in which a person
40is to be regarded as disposing of an asset.

(3G) “Capital refund” means an amount that is (in substance) a refund of
capital expenditure relating to an asset.

(3H) “Capital expenditure” means expenditure of a capital nature
incurred, or treated as incurred, on or in connection with—

(a) 45the provision, alteration or disposal of an asset, or

(b) the potential provision, alteration or disposal of an asset.

(3I) The disposal proceeds or capital refund mentioned in condition A or
(as the case may be) condition C are to be brought into account as a
receipt in calculating the profits of the trade.

(3J) In a case where only part of the total capital expenditure incurred, or
5treated as incurred, by the person in relation to the asset has been
brought into account in calculating the profits of the trade (whether
or not on the cash basis), the amount brought into account under
subsection (3I) is proportionately reduced.

(3K) Subsection (3I) does not apply if the whole of the amount which
10would otherwise be brought into account under that subsection—

(a) has already been brought into account as a receipt in
calculating the profits of the trade under this section,

(b) is brought into account as a receipt in calculating the profits
of the trade under any other provision of this Part (except
15section 240D(3) (assets not fully paid for)), or

(c) is brought into account under any Part of CAA 2001 as a
disposal value.

(3L) If part of the amount which would otherwise be brought into account
under subsection (3I) has already been or is brought into account as
20mentioned in subsection (3K), subsection (3I) applies in relation to
the remainder of that amount.””

(4) Omit subsection (7).

5 After section 96A insert—

“96B Section 96A: supplementary provision

(1) 25This section has effect for the purposes of section 96A.

(2) Any question as to whether or to what extent expenditure is brought
into account in calculating the profits of a trade is to be determined
on such basis as is just and reasonable in all the circumstances.

(3) A person carrying on a trade “enters the cash basis” for a tax year if—

(a) 30an election under section 25A has effect in relation to the
trade for the tax year, and

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

(4) Expenditure is “cash basis deductible” in relation to a tax year if, on
35the assumption that the expenditure was paid in that tax year, a
deduction would be allowed in respect of the expenditure in
calculating the profits of the trade on the cash basis for that tax year.

(5) Expenditure is “brought into account under CAA 2001” in
calculating the profits of a trade if and to the extent that—

(a) 40 a capital allowance made under Part 2, 5, 6, 7 or 8 of that Act
in respect of the expenditure is treated as an expense in
calculating those profits (see, for example, section 247 of that
Act), or

(b) qualifying expenditure (within the meaning of Part 2, 7 or 8
of CAA 2001) is allocated to a pool for the trade and is set-off
against different disposal receipts.

(6) An amount of qualifying expenditure is “set-off against different
5disposal receipts” if—

(a) the amount would have been unrelieved qualifying
expenditure carried forward in the pool for the trade, but

(b) the amount is not so carried forward because (and only
because) one or more disposal values in respect of one or
10more assets, other than the asset in respect of which the
qualifying expenditure was incurred (or treated as incurred),
have at any time been brought into account in that pool.

(7) For the purposes of subsection (6), an amount of qualifying
expenditure incurred (or treated as incurred) by a person is not to be
15regarded as not carried forward because the person enters the cash
basis.

(8) In this section and in section 96A—

• “disposal value” means—

  (a)

  in section 96A(3K)(c)—

  (i)

  20a disposal value for the purposes of Part 2, 4A,
  5, 6, 7 8 or 10 of CAA 2001 (for example, in
  relation to Part 2 of that Act, see (in particular)
  section 61 of that Act), or

  (ii)

  proceeds from a balancing event for the
  25purposes of Part 3 or 3A of that Act (see
  sections 316 and 360O of that Act), and

  (b)

  in subsection (6), a disposal value for the purposes
  of—

  (i)

  Part 2 of that Act (see, in particular, section 61
  30of that Act),

  (ii)

  Part 7 of that Act (see section 462 of that Act),
  or

  (iii)

  Part 8 of that Act (see sections 476 and 477 of
  that Act);

• 35“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;

• 40“pool” means—

  (a)

  the main pool or a class pool to which qualifying
  expenditure is allocated under Part 2 of CAA 2001
  (see section 54 of that Act),

  (b)

  a pool to which qualifying expenditure is allocated
  45under Part 7 of that Act (see section 456 of that Act), or

  (c)

  a pool to which qualifying expenditure is allocated
  under Part 8 of that Act (see section 470 of that Act);

• “provision” includes creation, construction or acquisition;

• “qualifying expenditure” means—

  Finance (No. 2) BillPage 205

  (a)

  qualifying expenditure within the meaning of Part 2
  of CAA 2001 (see section 11(4) of that Act for the
  general rule),

  (b)

  qualifying expenditure within the meaning of Part 5
  5of that Act (see section 395 of that Act),

  (c)

  qualifying expenditure within the meaning of Part 6
  of that Act (see section 439 of that Act),

  (d)

  qualifying expenditure within the meaning of Part 7
  of that Act (see section 454 of that Act), or

  (e)

  10qualifying trade expenditure within the meaning of
  Part 8 of that Act (see section 468 of that Act);

• “unrelieved qualifying expenditure” means unrelieved
  qualifying expenditure for the purposes of—

  (a)

  Part 2 of CAA 2001 (see section 59(1) and (2) of that
  15Act),

  (b)

  Part 7 of that Act (see section 461 of that Act), or

  (c)

  Part 8 of that Act (see section 475 of that Act).””

6 In section 106D (capital receipts), for “(cash basis: capital receipts)”
substitute “(capital receipts under, or after leaving, cash basis)”.

7 (1) 20Section 240C (unrelieved qualifying expenditure) is amended as follows.

(2) For the heading substitute “Unrelieved qualifying expenditure: Parts 2, 7
and 8 of CAA 2001”.

(3) In subsection (1)(b), after “unrelieved qualifying expenditure” insert
“relating to the trade”.

(4) 25In subsection (3), for “the relevant portion of the expenditure” substitute
“any cash basis deductible amount of the expenditure”.

(5) For subsection (4) substitute—

“(4) A “cash basis deductible amount” of the expenditure means any
amount of the expenditure for which a deduction would be allowed
30in calculating the profits of the trade on the cash basis on the
assumption that the expenditure was paid in the current tax year.””

(6) In subsection (5), for “The relevant portion” substitute “Any cash basis
deductible amount”.

(7) After subsection (5) insert—

“(5A) 35For the purposes of subsection (1)(b), in determining the unrelieved
qualifying expenditure the person has to carry forward, disregard
sections 59(4), 461A(1) and 475A(1) of CAA 2001 (which provide that
an amount is not to be carried forward as unrelieved qualifying
expenditure when a person enters the cash basis).””

(8) 40For subsection (6) substitute—

“(6) In this section “unrelieved qualifying expenditure” means
unrelieved qualifying expenditure for the purposes of—

(a) Part 2 of CAA 2001 (see section 59(1) and (2) of that Act),

(b) Part 7 of that Act (see section 461 of that Act), or

(c) 45Part 8 of that Act (see section 475 of that Act).””

8 After section 240C insert—

“240CA Unrelieved qualifying expenditure: Part 5 of CAA 2001

(1) This section applies if a person carrying on a mineral extraction trade
enters the cash basis for a tax year (“the current tax year”).

(2) 5But this section does not apply if section 240D applies.

(3) In calculating the profits of the trade for the current tax year, a
deduction is allowed for any amount of expenditure—

(a) which would, apart from section 419A(1) of CAA 2001, have
been unrelieved qualifying expenditure for the current tax
10year, and

(b) for which a deduction would be allowed in calculating the
profits of the trade on the cash basis on the assumption that
the expenditure was paid in the current tax year.

(4) In this section—

• 15“mineral extraction trade” has the meaning given in section 394
  of CAA 2001;

• “unrelieved qualifying expenditure” means unrelieved
  qualifying expenditure for the purposes of Part 5 of CAA
  2001 (see section 419 of that Act).””

9 (1) 20Section 240D (assets not fully paid for) is amended as follows.

(2) In subsection (1)(b), for “obtained” to the end substitute “incurred relevant
expenditure, and”.

(3) After subsection (1) insert—

“(1A) “Relevant expenditure” means expenditure—

(a) 25for which a deduction would be allowed in calculating the
profits of the trade on the cash basis on the assumption that
the expenditure was paid in the tax year, and

(b) in respect of which the person has obtained capital
allowances under Part 2, 5, 6, 7 or 8 of CAA 2001.””

(4) 30In subsection (4), for “The amount of any capital allowance obtained in
respect of expenditure on the provision of any plant or machinery”
substitute “Any question as to whether or to what extent expenditure is
relevant expenditure, or as to whether or to what extent any capital
allowance obtained is in respect of relevant expenditure,”.

(5) 35In subsection (5), after “given” insert “under Part 2 of CAA 2001”.

(6) Omit subsection (6).

10 In section 786(6) (meaning of “rent-a-room receipts”), for “(capital receipts)”
substitute “(capital receipts under, or after leaving, cash basis)”.

11 In section 805(5) (meaning of “qualifying care receipts”), for “(capital
40receipts)” substitute “(capital receipts under, or after leaving, cash basis)”.

Part 2 Property businesses: amendments of ITTOIA 2005

12 ITTOIA 2005 is amended as follows.

13 In Chapter 3 of Part 3 (profits of property businesses: basic rules), after
5section 271 insert—

““Basis of calculation of profits

271A Basis of calculation of profits: GAAP required

(1) The profits of a property business for a tax year must be calculated in
accordance with GAAP if condition A, B, C, D or E is met.

(2) 10Condition A is that the business is carried on at any time in the tax
year by—

(a) a company,

(b) a limited liability partnership,

(c) a corporate firm, or

(d) 15the trustees of a trust.

(3) For the purposes of subsection (2) a firm is a “corporate firm” if a
partner in the firm is not an individual.

(4) Condition B is that the cash basis receipts for the tax year exceed
£150,000.

(5) 20In subsection (4) “the cash basis receipts for the tax year” means the
total of the amounts that would be brought into account as receipts
in calculating the profits of the property business for the tax year on
the cash basis (see section 271D).

(6) If the property business is carried on for only part of the tax year, the
25sum given in subsection (4) is proportionately reduced.

(7) Condition C is that—

(a) the property business is carried on by an individual (“P”),

(b) a share of joint property income is brought into account in
calculating the profits of the business for the tax year,

(c) 30a share of that joint property income is brought into account
in calculating the profits for the tax year of a property
business carried on by another individual (“Q’s property
business”), and

(d) the profits of Q’s property business for the tax year are
35calculated in accordance with GAAP.

(8) In subsection (7) “joint property income” means income to which P
and Q are treated for income tax purposes as beneficially entitled in
equal shares by virtue of section 836 of ITA 2007.

(9) Condition D is that—

(a) 40an allowance under Part 3A of CAA 2001 (business premises
renovation allowances) is made at any time in calculating the
profits of the property business, and

(b) if the profits of the business were to be calculated in
accordance with GAAP for the tax year, there would be a day
in the tax year on which the occurrence of a balancing event
(within the meaning of that Part) would give rise to a
5balancing adjustment for the tax year (see section 360M of
that Act).

(10) Condition E is that an election under this subsection made by the
person who is or has been carrying on the property business has
effect in relation to the business for the tax year.

(11) 10An election under subsection (10) must be made on or before the first
anniversary of the normal self-assessment filing date for the tax year
for which the election is made.

(12) The Treasury may by regulations—

(a) amend subsection (2);

(b) 15amend subsection (4) so as to substitute another sum for the
sum for the time being specified in that subsection.

(13) A statutory instrument containing regulations under subsection (12)
may not be made unless a draft of the instrument has been laid
before, and approved by a resolution of, the House of Commons.

(14) 20Subsection (13) does not apply if the regulations omit one or more
paragraphs of subsection (2) and make no other provision.

271B Calculation of profits in accordance with GAAP

(1) In this Part, references to calculating the profits of a property
business in accordance with GAAP are to calculating the profits in
25accordance with generally accepted accounting practice, subject to
any adjustment required or authorised by law in calculating profits
for income tax purposes.

(2) A requirement under this Part to calculate profits in accordance with
GAAP does not—

(a) 30require a person to comply with the requirements of the
Companies Act 2006 or subordinate legislation made under
that Act except as to the basis of calculation, or

(b) impose any requirements as to audit or disclosure.

(3) See section 272 (application of trading income rules: GAAP) which
35applies only where profits are calculated in accordance with GAAP.

271C Basis of calculation of profits: cash basis required

The profits of a property business for a tax year must be calculated
on the cash basis if none of conditions A, B, C, D or E in section 271A
is met.

271D 40Calculation of profits on the cash basis

(1) In this Part, references to calculating the profits of a property
business on the cash basis are to calculating the profits in accordance
with subsections (2) and (3).

(2) In calculating the profits, receipts of the business are brought into
account at the time they are received, and expenses of the business
are brought into account at the time they are paid.

(3) Subsection (2) is subject to any adjustment required or authorised by
5law in calculating profits for income tax purposes.

(4) For provision about the application of Chapter 4 (profits of property
businesses: lease premiums etc) in relation to profits calculated on
the cash basis, see section 276A.

(5) For provision about the application of Chapter 5 (rules about
10deductions and receipts) in relation to profits calculated on the cash
basis, see section 307A.

(6) The following provisions apply only where profits are calculated on
the cash basis—

(a) section 272ZA (application of trading income rules: cash
15basis), and

(b) Chapter 7A (cash basis: adjustments for capital allowances).””

14 In the italic heading before section 272, at the end insert “: application of
trading income rules”.

15 After that italic heading insert—

“271E 20 Profits of a property business: application of trading income rules

(1) The profits of a property business are calculated in the same way as
the profits of a trade.

(2) But this is subject to—

(a) section 272, which limits the rule in subsection (1) in relation
25to a property business whose profits are calculated in
accordance with GAAP, and

(b) section 272ZA, which limits that rule in relation to a property
business whose profits are calculated on the cash basis.””

16 (1) Section 272 (profits of a property business: application of trading income
30rules) is amended as follows.

(2) For the heading substitute “Application of trading income rules: GAAP”.

(3) Omit subsection (1).

(4) In subsection (2), for the words before the table substitute “In relation to a
property business whose profits are calculated in accordance with GAAP,
35the provisions of Part 2 (trading income) which apply as a result of section
271E(1) are limited to the following—”.

(5) In the table in subsection (2), omit the entry relating to section 25 (generally
accepted accounting practice).

17 After section 272 insert—

“272ZA 40 Application of trading income rules: cash basis

(1) In relation to a property business whose profits are calculated on the
cash basis, the provisions of Part 2 (trading income) which apply as