Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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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
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(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—
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
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(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