Finance Bill (HC Bill 116)

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(4) Expenditure is “cash basis deductible” in relation to a tax year if, on
the 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) 5Expenditure is “brought into account under CAA 2001” in
calculating the profits of a trade if and to the extent that—

(a) 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
10Act), 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
15disposal 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
20more 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
25regarded 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)

    30a 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
    35purposes 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
    40of 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);

  • 45“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;

  • 50“pool” means—

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    (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
    5under 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—

    (a)

    10qualifying 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
    of that Act (see section 395 of that Act),

    (c)

    15qualifying 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)

    qualifying trade expenditure within the meaning of
    20Part 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
    Act),

    (b)

    25Part 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) Section 240C (unrelieved qualifying expenditure) is amended as follows.

(2) 30For 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) In subsection (3), for “the relevant portion of the expenditure” substitute
35“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
in calculating the profits of the trade on the cash basis on the
40assumption 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) For the purposes of subsection (1)(b), in determining the unrelieved
45qualifying expenditure the person has to carry forward, disregard
sections 59(4), 461A(1) and 475A(1) of CAA 2001 (which provide that

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an amount is not to be carried forward as unrelieved qualifying
expenditure when a person enters the cash basis).”

(8) For subsection (6) substitute—

(6) In this section “unrelieved qualifying expenditure” means
5unrelieved 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) Part 8 of that Act (see section 475 of that Act).”

8 After section 240C insert—

240CA 10 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) But this section does not apply if section 240D applies.

(3) In calculating the profits of the trade for the current tax year, a
15deduction 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
year, and

(b) for which a deduction would be allowed in calculating the
20profits of the trade on the cash basis on the assumption that
the expenditure was paid in the current tax year.

(4) In this section—

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

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

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

(2) In subsection (1)(b), for “obtained” to the end substitute “incurred relevant
30expenditure, and”.

(3) After subsection (1) insert—

(1A) “Relevant expenditure” means expenditure—

(a) for which a deduction would be allowed in calculating the
profits of the trade on the cash basis on the assumption that
35the 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) In subsection (4), for “The amount of any capital allowance obtained in
respect of expenditure on the provision of any plant or machinery”
40substitute “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) In subsection (5), after “given” insert “under Part 2 of CAA 2001”.

(6) Omit subsection (6).

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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
receipts)” substitute “(capital receipts under, or after leaving, cash basis)”.

5Part 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
section 271 insert—

10“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) Condition A is that the business is carried on at any time in the tax
15year by—

(a) a company,

(b) a limited liability partnership,

(c) a corporate firm, or

(d) the trustees of a trust.

(3) 20For 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) In subsection (4) “the cash basis receipts for the tax year” means the
25total 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
sum given in subsection (4) is proportionately reduced.

(7) 30Condition 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) a share of that joint property income is brought into account
35in 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
calculated in accordance with GAAP.

(8) 40In 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.

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(9) Condition D is that—

(a) an 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) 5if 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
balancing adjustment for the tax year (see section 360M of
10that 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) An election under subsection (10) must be made on or before the first
15anniversary 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) amend subsection (4) so as to substitute another sum for the
20sum 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) Subsection (13) does not apply if the regulations omit one or more
25paragraphs 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
accordance with generally accepted accounting practice, subject to
30any 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) require a person to comply with the requirements of the
35Companies 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
applies only where profits are calculated in accordance with GAAP.

271C 40Basis 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 Calculation of profits on the cash basis

(1) 45In 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
50are brought into account at the time they are paid.

(3) Subsection (2) is subject to any adjustment required or authorised by
law 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
55the cash basis, see section 276A.

(5) For provision about the application of Chapter 5 (rules about
deductions 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
60the cash basis—

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

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

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

15 After that italic heading insert—

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

(1) 5The 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
to a property business whose profits are calculated in
10accordance 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
rules) is amended as follows.

(2) 15For 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,
the provisions of Part 2 (trading income) which apply as a result of section
20271E(1) are limited to the following—”.

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

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17 After section 272 insert—

272ZA 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
5a result of section 271E(1) are limited to the following—

In Chapter 3 (basic rules)—
section 26 losses calculated on same basis as profits
section 28A money’s worth
section 29 interest
10In Chapter 4 (rules restricting deductions)—
section 34 expenses not wholly and exclusively for trade
and unconnected losses
sections 38 to 42 and
44
employee benefit contributions
sections 45 to 47 15business entertainment and gifts
section 52 exclusion of double relief for interest
section 53 social security contributions
section 54 penalties, interest and VAT surcharges
section 55 crime-related payments
section 55A 20expenditure on integral features
In Chapter 5 (rules allowing deductions)—
section 57 pre-trading expenses
sections 58 and 59 incidental costs of obtaining finance
section 69 payments for restrictive undertakings
sections 70 and 71 25seconded employees
section 72 payroll deduction schemes: contributions to
agents’ expenses
sections 73 to 75 counselling and retraining expenses
sections 76 to 80 redundancy payments etc
section 81 30personal security expenses
sections 82 to 86 contributions to local enterprise organisations
or urban regeneration companies
sections 86A and 86B contributions to flood and coastal erosion risk
management projects

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sections 87 and 88 scientific research
sections 89 and 90 expenses connected with patents, designs and
trade marks
section 91 payments to Export Credits Guarantee
5Department
In Chapter 6 (receipts)—
section 96 capital receipts
section 97 debts incurred and later released
section 104 distribution of assets of mutual concerns
section 105(1) and
(2)(b) and (c)
10industrial development grants
section 106 sums recovered under insurance policies etc
In Chapter 6A (amounts not reflecting commercial transactions)—
section 106C amounts not reflecting commercial
15transactions
section 106D capital receipts
section 106E gifts to charities etc
In Chapter 7 (gifts to charities etc)—
section 109 receipt by donor or connected person of
20benefit attributable to certain gifts

(2) In those provisions, the expression “this Part” is to be read as a
reference to those provisions as applied by subsection (1) and to the
other provisions of Part 3.

(3) In section 106D, the reference to subsection (4) or (5) of section 96A is
25to be read as a reference to subsection (2), (3) or (5) of section 307F
(deemed capital receipts under, or after leaving, cash basis).”

18 After section 272ZA insert—

19 In section 272A (restricting deductions for finance costs related to residential
property), after subsection (6) insert—

(7) 30See also section 307D (cash basis: modification of deduction for costs
of loans).”

20 (1) Section 274 (relationship between rules prohibiting and allowing
deductions) is amended as follows.

(2) For subsection (1)(b) substitute—

(b) 35is subject to—

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(i) section 36 (unpaid remuneration), as applied by
section 272,

(ii) section 38 (employee benefit contributions), as
applied by sections 272 and 272ZA,

(iii) 5section 48 (car hire), as applied by section 272,

(iv) section 55 (crime-related payments), as applied by
sections 272 and 272ZA,

(v) section 272A (finance costs), and

(vi) section 307D (cash basis: modification of deduction
10for costs of loans).”

(3) In subsection (3)—

(a) after “section 272” insert “, or sections 38 and 55 as applied by section
272ZA”, and

(b) for “section 272A” insert “sections 272A and 307D”.

(4) 15In subsection (4), after “section 272” insert “or 272ZA”.

21 In section 276(5) (introduction: profits of property businesses: lease
premiums etc), after “292” insert “; but see also section 276A”.

22 After section 276 insert—

276A Application of Chapter to property businesses using cash basis

20The following provisions of this Chapter do not apply in calculating
the profits of a property business on the cash basis—

(a) sections 291 to 294 (tenants under taxed leases: deductions),
and

(b) sections 296 and 298 (ICTA modifications).”

23 25In Chapter 5 of Part 3 (profits of property businesses: other rules about
receipts and deductions), after the Chapter heading insert—

“Cash basis: application of Chapter

307A Cash basis: application of Chapter

(1) The following provisions of this Chapter apply only where the
30profits of a property business are calculated on the cash basis—

(a) section 307B (cash basis: capital expenditure),

(b) section 307C (cash basis: deduction for costs of loans), and

(c) section 307D (cash basis: modification of deduction for costs
of loans).

(2) 35Sections 307E and 307F make provision about capital receipts in
certain cases where the profits of a property business are calculated
on the cash basis or have previously been calculated on the cash
basis.

Property businesses using cash basis

307B 40Cash basis: capital expenditure

(1) This section applies in relation to the calculation of the profits of a
property business on the cash basis.

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(2) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the acquisition or disposal of a business or part
of a business.

(3) No deduction is allowed for an item of a capital nature incurred on,
5or in connection with, education or training.

(4) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of land.

(5) But subsection (4) does not prevent a deduction being made for
expenditure that—

(a) 10is incurred on the provision of a depreciating asset which, in
being provided, is installed or otherwise fixed to qualifying
land (see subsection (8)) so as to become, in law, part of the
land, but

(b) is not incurred on, or in connection with, the provision of—

(i) 15a building,

(ii) a wall, floor, ceiling, door, gate, shutter or window or
stairs,

(iii) a waste disposal system,

(iv) a sewerage or drainage system, or

(v) 20a shaft or other structure in which a lift, hoist,
escalator or moving walkway may be installed.

(6) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of an asset
for use in ordinary residential property (see subsection (8)).

25But see section 311A (replacement domestic items relief).

(7) If an asset is provided partly for use in ordinary residential property
and partly for other purposes, such apportionment of the
expenditure incurred on, or in connection with, the provision,
alteration or disposal of the asset is to be made for the purposes of
30subsection (6) as is just and reasonable.

(8) In relation to the calculation of profits for a tax year—

(a) “ordinary residential property” means a dwelling-house or
part of a dwelling-house in relation to which an ordinary
property business (see subsection (9)) is carried on in the tax
35year, and

(b) “qualifying land” means land not falling within paragraph
(a).

(9) “Ordinary property business” means—

(a) so much of a UK property business as does not consist of the
40commercial letting of furnished holiday accommodation
(within the meaning of Chapter 6) in the UK, or

(b) so much of an overseas property business as does not consist
of the commercial letting of furnished holiday
accommodation in one or more EEA states.

(10) 45No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of—

(a) any asset that is not a depreciating asset (see subsections (11)
and (12)),