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Income Tax (Trading and Other Income) Bill


Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 16 — Averaging profits of farmers and creative artists

102

 

   

The result of this step is “one day’s worth of remaining overlap profit”.

   

Step 5

   

Subtract the number of days in the tax year from the number of days in the

basis period.

   

The balance is “the number of days’ worth of overlap profit that may be

5

deducted on this occasion”.

   

Step 6

   

Multiply one day’s worth of remaining overlap profit (see Step 4) by the

number of days’ worth of overlap profit that may be deducted on this occasion

(see Step 5).

10

   

The result of this step is the amount of the deduction.

(4)   

The above steps are expressed in terms of numbers of days in periods, but the

person carrying on the trade may use a different way of measuring the length

of the periods concerned if—

(a)   

it is reasonable to do so, and

15

(b)   

the way of measuring the length of periods is used consistently for the

purposes of the trade.

(5)   

If the accounting date in the tax year is 31st March or 1st, 2nd, 3rd or 4th April,

the person carrying on the trade may treat the basis period for the tax year as

ending on 5th April for the purpose of calculating the amount of the deduction.

20

(6)   

If a period used in calculating the amount of the deduction contains a 29th

February and—

(a)   

the accounting date in the tax year is 5th April, or

(b)   

the basis period for the tax year is treated under subsection (5) as

ending on 5th April,

25

   

the person carrying on the trade may ignore the 29th February for the purpose

of calculating the amount of the deduction.

Chapter 16

Averaging profits of farmers and creative artists

221     

Claim for averaging of fluctuating profits

30

(1)   

This Chapter enables an individual (a “taxpayer”) to make a claim (an

“averaging claim”) if—

(a)   

the taxpayer is, or has been, carrying on a qualifying trade, profession

or vocation (alone or in partnership), and

(b)   

the taxpayer’s profits from it (“the relevant profits”) fluctuate from one

35

tax year to the next.

(2)   

A trade, profession or vocation is a “qualifying trade, profession or vocation”

if—

(a)   

it is farming or market gardening in the United Kingdom,

(b)   

it is the intensive rearing in the United Kingdom of livestock or fish on

40

a commercial basis for the production of food for human consumption,

or

(c)   

the taxpayer’s profits from it are derived wholly or mainly from

creative works.

 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 16 — Averaging profits of farmers and creative artists

103

 

(3)   

For this purpose “creative works” means—

(a)   

literary, dramatic, musical or artistic works, or

(b)   

designs,

   

created by the taxpayer personally or, if the qualifying trade, profession or

vocation is carried on in partnership, by one or more of the partners personally.

5

(4)   

For the purposes of this Chapter references to the relevant profits of a tax year

are to profits before making any deduction for a loss made in any tax year.

(5)   

If the taxpayer makes a loss in the qualifying trade, profession or vocation in a

tax year, the relevant profits of the tax year for the purposes of this Chapter are

nil.

10

222     

Circumstances in which claim may be made

(1)   

An averaging claim may be made in relation to two consecutive tax years in

which a taxpayer is or has been carrying on the qualifying trade, profession or

vocation if—

(a)   

the relevant profits of one of the tax years are less than 75% of the

15

relevant profits of the other tax year, or

(b)   

the relevant profits of one (but not both) of the tax years are nil.

(2)   

An averaging claim may be made in relation to a tax year which was the later

year on a previous averaging claim.

(3)   

An averaging claim may not be made in relation to a tax year if an averaging

20

claim has already been made in relation to a later tax year in respect of the

trade, profession or vocation.

(4)   

An averaging claim may not be made in relation to the tax year in which—

(a)   

the taxpayer starts, or permanently ceases, to carry on the trade, profession or

vocation, or

25

(b)   

in the case of a trade, profession or vocation within section 221(2)(c), it

begins or ceases to be a qualifying trade, profession or vocation.

(5)   

An averaging claim must be made on or before the first anniversary of the

normal self-assessment filing date for the second of the tax years to which the

claim relates.

30

(6)   

But see section 225(4) (extended time limit if profits adjusted for some other

reason).

223     

Adjustment of profits

(1)   

If a taxpayer makes an averaging claim, the amount taken to be the taxpayer’s

profits of each of the tax years for which the claim is made is adjusted in

35

accordance with this section.

(2)   

But this is subject to paragraph 3 of Schedule 1B to TMA 1970 (claim given

effect in the second of the two tax years).

(3)   

If—

(a)   

the relevant profits of one of the tax years are 70% or less of the relevant

40

profits of the other tax year, or

(b)   

the relevant profits of one (but not both) of the tax years are nil,

 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 16 — Averaging profits of farmers and creative artists

104

 

   

the amount of the adjusted profits of each of the tax years is the average of the

relevant profits of the two tax years.

(4)   

If the relevant profits of one of the tax years—

(a)   

are more than 70%, but

(b)   

are less than 75%,

5

   

of the relevant profits of the other tax year, the amount of the adjusted profits

of each of the tax years is calculated as follows, so as to reduce the variation

between them.

   

Step 1

   

Calculate the amount of the adjustment by applying the formula—equation: cross[string["(D"],plus[rparen[num[3.0000000000000000,"3"]],minus[id[cross[char[

P],num[0.7500000000000000,"0.75"]]]]]]

10

   

where—

D is the difference between the relevant profits of the two tax years, and

P is the relevant profits of the tax year of which those profits are higher.

   

Step 2

   

Add the amount of the adjustment to the relevant profits of the tax year of

15

which those profits are lower.

   

The result is the amount of the adjusted profits of that tax year.

   

Step 3

   

Subtract the amount of the adjustment from the relevant profits of the tax year

of which those profits are higher.

20

   

The result is the amount of the adjusted profits of that tax year.

224     

Effect of adjustment

(1)   

The adjusted profits are taken to be the relevant profits of the tax years to which

the claim relates for all income tax purposes, including the further application

of this Chapter.

25

(2)   

This is subject to—

(a)   

subsection (3) of this section and section 225(2), and

(b)   

paragraph 3 of Schedule 1B to TMA 1970.

(3)   

If the relevant profits of one of the tax years are nil, this Chapter does not

prevent the taxpayer from obtaining relief under the Income Tax Acts for a loss

30

made by the taxpayer in the tax year in question or any other tax year.

(4)   

A claim by the taxpayer for relief under any other provision of the Income Tax

Acts for either of the tax years to which an averaging claim relates (“the other

claim”)—

(a)   

is not out of time if made on or before the last date on which the

35

averaging claim could have been made, and

(b)   

if already made, may be amended or revoked on or before that date.

(5)   

For this purpose—

(a)   

references to a claim include an election or notice, and

(b)   

if the other claim is made in a return, the reference to amending or

40

revoking the other claim is to amending the return by amending or

omitting the other claim.

 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income

105

 

(6)   

For provision determining in which tax year a claim, amendment or revocation

made as a result of subsection (4) has effect, see paragraph 4 of Schedule 1B to

TMA 1970 (claim, amendment or revocation given effect in the second of the

two tax years).

225     

Effect of later adjustment of profits

5

(1)   

This section applies if, after the taxpayer has made an averaging claim, the

relevant profits in either or both of the tax years to which the claim relates are

adjusted for another reason.

(2)   

The averaging claim is ignored.

(3)   

But this does not prevent a further averaging claim from being made in relation

10

to the taxpayer’s profits as adjusted for the other reason.

(4)   

A further averaging claim is not out of time as long as it is made on or before

the first anniversary of the normal self-assessment filing date for the tax year

in which the adjustment for the other reason is made.

Chapter 17

15

Adjustment income

Introduction

226     

Professions and vocations

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

apply to trades.

20

Adjustment on change of basis

227     

Application of Chapter

(1)   

This Chapter applies if—

(a)   

a person carrying on a trade changes, from one period of account to the

next, the basis on which profits of the trade are calculated for income

25

tax purposes,

(b)   

the old basis accorded with the law or practice applicable in relation to

the period of account before the change, and

(c)   

the new basis accords with the law and practice applicable in relation

to the period of account after the change,

30

   

but does not apply to income which is charged in accordance with section 832

(relevant foreign income charged on the remittance basis).

(2)   

The practice applicable in any case means the accepted practice in cases of that

description as to how profits of a trade should be calculated for income tax

purposes.

35

(3)   

A person changes the basis on which profits of a trade are calculated for income

tax purposes if the person makes—

(a)   

a relevant change of accounting approach (see subsection (4)), or

(b)   

a change in the tax adjustments applied (see subsections (5) and (6)).

 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income

106

 

(4)   

A “relevant change of accounting approach” means a change of accounting

principle or practice that, in accordance with generally accepted accounting

practice, gives rise to a prior period adjustment.

(5)   

A “tax adjustment” means any adjustment required or authorised by law in

calculating profits of a trade for income tax purposes.

5

(6)   

A “change in the tax adjustments applied”—

(a)   

does not include a change made in order to comply with amending

legislation not applicable to the previous period of account, but

(b)   

includes a change resulting from a change of view as to what is

required or authorised by law or as to whether any adjustment is so

10

required or authorised.

228     

Adjustment income and adjustment expense

(1)   

An amount by way of adjustment must be calculated in accordance with

section 231.

(2)   

If the amount produced by the calculation is positive, it is treated as income

15

and charged to income tax under this Chapter.

   

It is referred to in this Chapter as “adjustment income”.

(3)   

If the amount produced by the calculation is negative, a deduction is allowed

for it in calculating the profits of the trade.

   

It is referred to in this Chapter as an “adjustment expense”.

20

(4)   

This section is subject to section 234 (no adjustment for certain expenses

previously brought into account).

229     

Income charged

(1)   

Tax is charged under this Chapter on the full amount of any adjustment

income arising in the tax year.

25

(2)   

This is subject to—

(a)   

sections 237 to 239 (which provide for spreading of adjustment

income), and

(b)   

Part 8 (foreign income: special rules).

230     

Person liable

30

The person liable for any tax charged under this Chapter is the person

receiving or entitled to the adjustment income.

231     

Calculation of the adjustment

The amount of the adjustment is calculated as follows.

Step 1 

35

Add together any amounts representing the extent to which, comparing the

two bases, profits were understated (or losses overstated) on the old basis.

The amounts are—

 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income

107

 
  

Amounts

 
 

1

Receipts which on the new basis would have been brought

 
  

into account in calculating the profits of a period of account

 
  

before the change, so far as they were not so brought into

 
  

account.

 

5

 

2

Expenses which on the new basis fall to be brought into

 
  

account in calculating the profits of a period of account after

 
  

the change, so far as they were brought into account in

 
  

calculating the profits of a period of account before the

 
  

change.

 

10

 

3

Deductions in respect of opening trading stock or opening

 
  

work in progress in the first period of account on the new

 
  

basis, so far as they—

 
  

(a)   

are not matched by credits in respect of closing

 
  

trading stock or closing work in progress in the last

 

15

  

period of account before the change, or

 
  

(b)   

are calculated on a different basis that if used to

 
  

calculate those credits would have given a higher

 
  

figure.

 
 

4

Amounts recognised for accounting purposes in respect of

 

20

  

depreciation in the last period of account before the change,

 
  

so far as they were not the subject of an adjustment for

 
  

income tax purposes, where such an adjustment would be

 
  

required on the new basis.

 

Step 2

25

Then deduct any amounts representing the extent to which, comparing the two

bases, profits were overstated (or losses understated) on the old basis.

The amounts are—

  

Amounts

 
 

1

Receipts which were brought into account in a period of

 

30

  

account before the change, so far as they would not have been

 
  

so brought into account if the profits had been calculated on

 
  

the new basis.

 
 

2

Expenses which were not brought into account in calculating

 
  

the profits of a period of account before the change, so far as

 

35

  

they—

 
  

(a)   

would have been brought into account for a period of

 
  

account before the change if the profits had been

 
  

calculated on the new basis, and

 
  

(b)   

would have been brought into account for a period of

 

40

  

account after the change if the profits had continued to

 
  

be calculated on the old basis.

 
 
 

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income

108

 
  

Amounts

 
 

3

Credits in respect of closing trading stock or closing work in

 
  

progress in the last period of account before the change, so far

 
  

as they—

 
  

(a)   

are not matched by deductions in respect of opening

 

5

  

trading stock or opening work in progress in the first

 
  

period of account on the new basis, or

 
  

(b)   

are calculated on a different basis that if used to

 
  

calculate those deductions would have given a lower

 
  

figure.

 

10

 

An amount so deducted may not be deducted again in calculating the profits

of a period of account.

Treatment of adjustment income and adjustment expense

232     

Treatment of adjustment income

(1)   

Adjustment income is treated as arising on the last day of the first period of

15

account for which the new basis is adopted.

(2)   

But this is subject to sections 235 (cases where adjustment not required until

assets realised or written off) and 236 (change from realisation basis to mark to

market).

(3)   

Adjustment income is treated for the purposes of Chapter 1 of Part 10 of ICTA

20

(loss relief) as profits of the trade for the tax year in which tax is charged on it.

(4)   

In the case of an individual whose income from the trade is—

(a)   

earned income within section 833(4)(c) of ICTA, or

(b)   

relevant UK earnings within section 189(2)(b) of FA 2004,

   

adjustment income is similarly earned income or relevant UK earnings.

25

233     

Treatment of adjustment expense

(1)   

An adjustment expense is treated as an expense of the trade arising on the last

day of the first period of account for which the new basis is adopted.

(2)   

But this is subject to sections 235 (cases where adjustment not required until

assets realised or written off) and 236 (change from realisation basis to mark to

30

market).

Expenses previously brought into account

234     

No adjustment for certain expenses previously brought into account

(1)   

This section applies if, as a result of a change of basis, expenses brought into

account before the change on the old basis would on the new basis be brought

35

into account over more than one period of account after the change.

(2)   

In such a case—

(a)   

no adjustment is made under this Chapter, and

 
 

 
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