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

qualifying expenditure was incurred (or treated as incurred),
have at any time been brought into account in that pool.

(22) For the purposes of subsections (20) and (21), an activity is a
“relevant qualifying activity” if—

(a) 5it is a qualifying activity mentioned in section 15(1)(b) to (da)
of CAA 2001 (property business activities), and

(b) the property business consists of or includes that qualifying
activity.

(23) For the purposes of subsection (21), an amount of qualifying
10expenditure incurred (or treated as incurred) by a person is not to be
regarded as not carried forward because the person enters the cash
basis.

(24) In this section—

• “disposal value” means—

  (a)

  15in subsection (14)(c)—

  (i)

  a disposal value for the purposes of Part 2 of
  CAA 2001 (see, in particular, section 61 of that
  Act), or

  (ii)

  proceeds from a balancing event for the
  20purposes of Part 3A of that Act (see section
  360O of that Act), and

  (b)

  in subsection (21), a disposal value for the purposes of
  Part 2 of that Act;

• “pool” means the main pool or a class pool to which qualifying
  25expenditure is allocated under Part 2 of CAA 2001 (see
  section 54 of that Act);

• “provision” includes creation, construction or acquisition;

• “qualifying expenditure” means qualifying expenditure within
  the meaning of Part 2 of CAA 2001 (see section 11(4) of that
  30Act for the general rule);

• “unrelieved qualifying expenditure” means unrelieved
  qualifying expenditure for the purposes of Part 2 of CAA
  2001 (see section 59(1) and (2) of that Act).

307F Deemed capital receipts under, or after leaving, cash basis

(1) 35This section makes provision supplementary to section 307E.

(2) If—

(a) at any time a person ceases to use an asset or any part of it for
the purposes of a property business (other than in the
circumstances mentioned in subsection (5)), but

(b) 40the person does not dispose of the asset (or that part) at that
time,

the person is to be regarded for the purposes of section 307E as
disposing of the asset (or that part) at that time for an amount equal
to the market value amount.

(3) 45If at any time there is a material increase in the person’s non-business
use of an asset or any part of it, the person is to be regarded for the
purposes of section 307E as disposing of the asset (or that part) at that

time for an amount equal to the relevant proportion of the market
value amount.

(4) For the purposes of subsection (3)—

(a) there is an increase in a person’s non-business use of an asset
5(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 property business
decreases, and

(ii) the proportion of the person’s use of the asset (or that
10part) that is for other purposes (the “non-business
use”) increases;

(b) “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) 15the proportion of the person’s use of the asset (or that
part) that was non-business use before the increase
mentioned in subsection (3).

(5) If—

(a) the property business in respect of which capital expenditure
20relating to an asset has been brought into account as
mentioned in section 307E is an overseas property business,
and

(b) there is a move overseas,

the person is to be regarded for the purposes of section 307E as
25disposing of the asset at the time of the move overseas for an amount
equal to the market value amount.

(6) For the purposes of subsection (5) there is a “move overseas” if—

(a) the person ceases to be UK resident, or

(b) the tax year is, as respects the person, a split year, and the
30overseas part of the tax year is the later part.

(7) The move overseas occurs—

(a) in a case falling within subsection (6)(a), on the last day of the
tax year for which the person is UK resident, or

(b) in a case falling within subsection (6)(b), on the last day of the
35UK part of the tax year.

(8) In this section—

• “capital expenditure” has the same meaning as in section 307E,

• “market value amount” means the amount that would be
  regarded as normal and reasonable—

  (a)

  40in the market conditions then prevailing, and

  (b)

  between persons dealing with each other at arm’s
  length in the open market.””

24 In section 311A (replacement domestic items relief), in subsection (15)—

(a) for the definition of “the capital expenditure rule” substitute—

• 45“““the capital expenditure rule” means—

  (a)

  in relation to a property business whose
  profits are calculated in accordance with

  Finance (No. 2) BillPage 222

  GAAP, section 33 (capital expenditure), as
  applied by section 272, and

  (b)

  in relation to a property business whose
  profits are calculated on the cash basis, section
  5307B (cash basis: capital expenditure);”;”

(b) in the definition of “the wholly and exclusively rule”—

(i) omit “the rule in”, and

(ii) after “section 272” insert “or 272ZA”.

25 In section 315 (deduction for expenditure on sea walls), after subsection (6)
10insert—

“(7) In calculating the profits of a property business on the cash basis, any
reference in this section to the incurring of expenditure is to the
paying of expenditure.””

26 In section 322 (commercial letting of furnished holiday accommodation),
15after paragraph (za) in subsections (2) and (2A) insert—

“(zaa) section 307B (cash basis: capital expenditure),”.”

27 After section 329 insert—

“329A Application of Chapter where cash basis used

This Chapter applies if—

(a) 20the profits of a property business are calculated—

(i) on the cash basis for a tax year (see section 271D), and

(ii) in accordance with GAAP (see section 271B) for the
following tax year, or

(b) the profits of a property business are calculated—

(i) 25in accordance with GAAP for a tax year, and

(ii) on the cash basis for the following tax year.””

28 In section 331 (income charged)—

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

(b) after that subsection insert—

“(2) 30This is subject to section 334A (spreading on leaving cash
basis and related election).””

29 After section 334 insert—

““Spreading of adjustment income on leaving cash basis

334A Spreading on leaving cash basis and related election

35Sections 239A (spreading on leaving cash basis) and 239B (election to
accelerate charge under section 239A) apply for the purposes of this
Chapter as they apply for the purposes of Chapter 17 of Part 2, but as
if—

(a) for section 239A(1) there were substituted—

“(1) 40This section applies if the profits of a property business
are calculated—

(a) on the cash basis for a tax year (see section 271D),
and

(b) in accordance with GAAP (see section 271B) for
the following tax year.”, and”

(b) any reference to section 239A or 239B were to the section
concerned as applied by this section.

CHAPTER 7A 5Cash basis: adjustments for capital allowances

334B “Entering the cash basis”

For the purposes of this Chapter, a person carrying on a property
business enters the cash basis for a tax year if the profits of the
business are calculated—

(a) 10on the cash basis for the tax year (see section 271D), and

(b) in accordance with GAAP (see section 271B) for the previous
tax year.

334C Unrelieved qualifying expenditure

(1) This section applies if—

(a) 15a person carrying on a property business enters the cash basis
for a tax year (“the current tax year”), and

(b) the person would, apart from section 59(4A) of CAA 2001,
have unrelieved qualifying expenditure relating to a relevant
property business activity to carry forward from the
20chargeable period which is the previous tax year.

(2) But this section does not apply if section 334D applies.

(3) In calculating the profits of the property business for the current tax
year, a deduction is allowed for any cash basis deductible amount of
the expenditure relating to each relevant property business activity.

(4) 25A “cash basis deductible amount” of the expenditure means any
amount of the expenditure for which a deduction would be allowed
in calculating the profits of the property business on the cash basis
on the assumption that the expenditure was paid in the current tax
year.

(5) 30Any cash basis deductible amount of the expenditure is to be
determined on such basis as is just and reasonable in all the
circumstances.

(6) In this section—

• “relevant property business activity” means—

  (a)

  35in relation to a UK property business, an ordinary UK
  property business and a UK furnished holiday
  lettings business (within the meaning of Part 2 of
  CAA 2001 (see sections 16 and 17 of that Act)), and

  (b)

  in relation to an overseas property business, an
  40ordinary overseas property business and an EEA
  furnished holiday lettings business (within the
  meaning of Part 2 of that Act (see sections 17A and
  17B of that Act));

Finance (No. 2) BillPage 224

• “unrelieved qualifying expenditure” means unrelieved
  qualifying expenditure for the purposes of Part 2 of CAA
  2001 (see section 59(1) and (2) of that Act).

334D Assets not fully paid for

(1) 5This section applies if—

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

(b) at any time before the end of the chargeable period which is
the previous tax year the person has incurred relevant
10expenditure, and

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

(2) “Relevant expenditure” means expenditure on plant or machinery—

(a) for which a deduction would be allowed in calculating the
15profits of the property business on the cash basis on the
assumption that the expenditure was paid in the current tax
year, and

(b) in respect of which the person has obtained capital
allowances.

(3) 20If the amount of the relevant expenditure that the person has actually
paid 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 property business for the current tax year.

(4) If the amount of the relevant expenditure that the person has actually
25paid is less than the amount of capital allowances given in respect of
the relevant expenditure, the difference is to be treated as a receipt in
calculating the profits of the property business for the current tax
year.

(5) Any question as to whether or to what extent expenditure is relevant
30expenditure, or as to whether or to what extent any capital allowance
obtained is in respect of relevant expenditure, is to be determined on
such basis as is just and reasonable in all the circumstances.

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

334E Effect of election where predecessor and successor are connected
40persons

(1) This section applies if—

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

(b) the person is the successor for the purposes of section 266 of
45CAA 2001, and

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

(2) The provisions of this Chapter have effect in relation to the successor
as 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
5relevant plant or machinery is to be ignored for the purposes of
calculating the profits of the property business for the tax year.

(4) In this section—

• “the predecessor” has the same meaning as in section 266 of
  CAA 2001, and

• 10“relevant plant or machinery” has the same meaning as in
  section 267 of that Act.””

30 In section 351 (income charged), after subsection (2) insert—

“(3) Further to subsection (2), section 254 applies for the purposes of this
Chapter as if for subsection (2A) of that section there were
15substituted—

“(2A) If the time immediately before the person permanently ceases
to carry on the UK property business falls in a cash basis tax
year, assume for the purposes of subsection (2) that the
profits of the business are calculated on the cash basis.””

(4) 20For the purposes of sections 254 (as so applied) and 353, a tax year is
“a cash basis tax year” in relation to a property business if the profits
of the business for the tax year are calculated on the cash basis (see
section 271D).””

31 In section 353 (basic meaning of “post-cessation receipt”), after subsection (1)
25insert—

“(1A) If the time immediately before a person permanently ceases to carry
on a UK property business falls in a cash basis tax year (see section
351(4)), a sum is to be treated as a post-cessation receipt only if it
would have been brought into account in calculating the profits of
30the business on the cash basis had it been received at that time.””

32 In section 356 (application to businesses within the charge to corporation
tax), in subsection (1), for “section 355” substitute “sections 353(1A) and 355,
and in the modification of section 254 in section 351(3)”.

33 In section 786 (meaning of “rent-a-room receipts”), after subsection (6)
35insert—

“(6A) Subsections (6B) and (7) apply if—

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

(b) the profits are calculated on the cash basis (see section 271D).

(6B) 40Any amounts brought into account under section 307E (capital
receipts under, or after leaving, cash basis) as a receipt in calculating
the profits of the property business are to be treated as receipts
within paragraph (a) of subsection (1) above.””

34 In section 860 (adjustment income), in subsection (5), after “Chapter 17 of
45Part 2” insert “, or under section 239B as applied to property businesses by
section 334A,”.

35 In section 866 (employee benefit contributions: non-trades and non-property
businesses), in subsection (7)(b), for “section 272” substitute “sections 272
and 272ZA”.

36 In section 867 (business entertainment and gifts: non-trades and non-
5property businesses), in subsection (7)(b), for “section 272” substitute
“sections 272 and 272ZA”.

37 In section 868 (social security contributions: non-trades etc), in subsection
(6)(b), for “section 272” insert “sections 272 and 272ZA”.

38 In section 869 (penalties, interest and VAT surcharges: non-trades etc), in
10subsection (6)(b), for “section 272” substitute “sections 272 and 272ZA”.

39 In section 870 (crime-related payments: non-trades and non-property
businesses), in subsection (4)(b), for “section 272” substitute “sections 272
and 272ZA”.

40 In section 872 (losses calculated on same basis as miscellaneous income), in
15subsection (4)(b), for “section 272” substitute “sections 272 and 272ZA”.

41 In Part 2 of Schedule 4 (index of defined expressions), at the appropriate
place insert—

Part 3 Trades etc: amendments of other Acts

25TMA 1970

42 In section 42 of TMA 1970 (procedure for making claims etc), in subsection
(7)(e), after “194” insert “, 271A(10)”.

TCGA 1992

43 TCGA 1992 is amended as follows.

44 30In section 37 (consideration chargeable to tax on income), after subsection (1)
insert—

“(1A) There is to be excluded from the consideration for a disposal of an
asset taken into account in the computation of the gain a sum equal
to any amount that is taken into account by the person making the
35disposal as a receipt under section 96A or 307E of ITTOIA 2005
(capital receipts under, or after leaving, cash basis) as a result of the
operation of any deemed disposal provision in relation to the asset.

(1B) But subsection (1A) applies only to the extent that the sum has not
been excluded from the consideration for an earlier disposal of the
40asset.

(1C) The following are “deemed disposal provisions”—

(a) in relation to trades, professions and vocations, subsections
(4) and (5) of section 96A of ITTOIA 2005 (which provide for
circumstances in which a person is to be regarded as
5disposing of an asset for the purposes of that section), and

(b) in relation to property businesses, section 307F of ITTOIA
2005 (which provides for circumstances in which a person is
to be regarded as disposing of an asset for the purposes of
section 307E of that Act).””

45 (1) 10Section 41 (restriction of losses by reference to capital allowances etc) is
amended as follows.

(2) In subsection (4), after paragraph (a) insert—

“(zaa) any deduction allowable in respect of capital expenditure in
calculating profits on the cash basis (see sections 33A and
15307B of ITTOIA 2005),”.”

(3) After subsection (6) insert—

“(6A) Where—

(a) capital allowances have been made or may be made in
respect of expenditure, and

(b) 20the capital allowances include a deduction mentioned in
subsection (4)(zaa),

the capital allowances to be taken into account under this section are
to be regarded as equal to the total amount of expenditure which has
qualified for capital allowances less any balancing charge to which
25the person making the disposal is liable under the Capital
Allowances Act.””

(4) In subsection (7), after “Capital Allowances Act,” insert “and subsection (6A)
does not apply,”

(5) After subsection (8) insert—

“(9) 30In this section—

(a) in relation to a trade, profession or vocation, references to
calculating profits on the cash basis are to calculating the
profits of a trade, profession or vocation in relation to which
an election under section 25A of ITTOIA 2005 (cash basis for
35trades) has effect, and

(b) in relation to a property business, references to calculating
profits on the cash basis are to be construed in accordance
with section 271D of that Act (calculation of profits of
property businesses on the cash basis).

(10) 40In this section—

• “capital expenditure” means expenditure of a capital nature
  incurred on, or in connection with, the creation, construction,
  acquisition, alteration or disposal of an asset, and

• “property business” means a UK property business or an
  45overseas property business within the meaning of Part 3 of
  ITTOIA 2005 (see sections 264 and 265 of that Act).””

46 (1) Section 47A (exemption for disposals by persons using cash basis) is
amended as follows.

(2) For the heading substitute “Exemption for certain disposals under, or after
leaving, cash basis”.

(3) 5In subsection (1), for “A to D” substitute “A, B and D”.

(4) For subsection (2) substitute—

“(2) Condition A is that the asset is not land.””

(5) In subsection (3), for “or vocation” substitute “, vocation or property
business”.

(6) 10Omit subsection (4).

(7) For subsection (5) substitute—

“(5) Condition D is that relevant disposal proceeds—

(a) are brought into account as a receipt (whether or not on the
cash basis) under section 96A(3I) of ITTOIA 2005 in
15calculating the profits of a trade, profession or vocation
(capital receipts under, or after leaving, cash basis: trades,
professions and vocations), or

(b) are brought into account as a receipt (whether or not on the
cash basis) under section 307E(12) of that Act in calculating
20the profits of a property business (capital receipts under, or
after leaving, cash basis: property businesses).

(5A) “Relevant disposal proceeds” means disposal proceeds as mentioned
in section 96A(3F) of ITTOIA 2005 or (as the case may be) section
307E(9) of that Act which arise from the disposal mentioned in
25subsection (1).””

(8) For subsection (6) substitute—

“(6) Subsection (7) applies in the case of the disposal of, or of an interest
in, an asset—

(a) which, in the period of ownership of the person making the
30disposal—

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

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

(b) expenditure on which by the person has qualified in part only
for capital allowances.””

(9) In subsection (7)—

(a) in paragraph (a), for “was, or (as the case may be)” to the end
40substitute “qualified for capital allowances”, and

(b) in paragraph (c), at the end insert “, or to the expenditure qualifying
for capital allowances.”

(10) After subsection (7) insert—

“(8) In this section “property business” means a UK property business or
an overseas property business within the meaning of Part 3 of
ITTOIA 2005 (see sections 264 and 265 of that Act).””

47 5Section 47B (disposals made by persons after leaving cash basis) is omitted.

CAA 2001

48 CAA 2001 is amended as follows.

49 In section 1 (capital allowances), omit subsections (4) and (5).

50 After section 1 insert—

“1A 10Capital allowances and charges: cash basis

(1) This section applies in relation to a chargeable period for which the
profits of a trade, profession, vocation or property business (“the
relevant activity”) carried on by a person are calculated on the cash
basis.

(2) 15The person is not entitled to any allowance or liable to any charge
under this Act except as provided by subsections (4) and (7).

(3) No disposal value is to be brought into account except as provided
by subsections (5) and (8).

(4) If, apart from subsection (2), the person would be entitled to an
20allowance in respect of expenditure incurred on the provision of a
car or liable to a charge in connection with such an allowance, the
person is so entitled or (as the case may be) so liable.

(5) If, apart from subsection (3), a disposal value would be brought into
account in respect of a car, the disposal value is brought into account
25in respect of the car.

(6) Subsections (7) and (8) apply if—

(a) a person carrying on a relevant activity incurs qualifying
expenditure relating to an asset at a time when the profits of
that activity are not calculated on the cash basis,

(b) 30after incurring the expenditure, the person enters the cash
basis for a tax year, and

(c) no deduction would be allowed in respect of the expenditure
in calculating the profits of the relevant activity on the cash
basis for that tax year, on the assumption that the
35expenditure was paid in that tax year.

(7) If, apart from subsection (2), the person would be liable to a charge
in connection with allowances in respect of the qualifying
expenditure mentioned in subsection (6), the person is so liable.

(8) If, apart from subsection (3), a disposal value would be brought into
40account in respect of the asset mentioned in subsection (6), the
disposal value is brought into account in respect of the asset.

(9) For the purposes of this section a person carrying on a trade,
profession or vocation “enters the cash basis” for a tax year if—