Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income
109

(b)
in calculating the profits of the trade no deduction is allowed for the
expenses for any period of account after the change.
Realising or writing off assets
235
Cases where adjustment not required until assets realised or written off
(1)
This section applies if there is a change of basis resulting from a tax adjustment
5
affecting the calculation of any of the following amounts.
(2)
The amounts are—
(a)
any amount brought into account in respect of closing trading stock or
closing work in progress in the last period of account before the change
of basis,
10
(b)
any amount brought into account in respect of opening trading stock or
opening work in progress in the first period of account on the new
basis, and
(c)
any amount brought into account in respect of depreciation.
(3)
Adjustment income or (as the case may be) an adjustment expense is treated as
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arising only when the asset to which it relates is realised or written off.
Mark to market
236
Change from realisation basis to mark to market
(1)
This section applies if there is a change of basis from—
(a)
not recognising a profit or loss on an asset until the asset is realised, to
20
(b)
bringing assets into account in each period of account at a fair value.
(2)
So far as—
(a)
a receipt within item 1 of step 1 in section 231 represents the fair value
of an asset that is trading stock, or
(b)
an expense within item 2 of that step relates to such an asset,
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adjustment income or (as the case may be) an adjustment expense is treated as
not arising until the period of account in which the value of the asset is realised.
(3)
In the case of adjustment income, this is subject to any election under section
237 (election for spreading).
(4)
In this section “trading stock” has the same meaning as in section 174.
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237
Election for spreading if section 236 applies
(1)
If section 236 applies, the person who is liable to tax on any adjustment income
may elect for the adjustment income to be spread over 6 periods of account.
(2)
The election must be made on or before the first anniversary of the normal self-
assessment filing date for the tax year in which the change of basis occurs.
35
(3)
If an election is made, an amount equal to one-sixth of the amount of the
adjustment income—
(a)
is treated as arising, and
(b)
is charged to tax,

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 17 — Adjustment income
110


in each of the 6 periods of account beginning with the first period to which the
new basis applies.
(4)
But if, before the whole of the adjustment income has been charged to tax, the
person permanently ceases to carry on the trade, the whole of the amount so
far as not previously brought into charge to tax—
5
(a)
is treated as arising, and
(b)
is charged to tax,

immediately before the cessation.
Spreading of adjustment income: barristers and advocates
238
Spreading on ending of exemption for barristers and advocates
10
(1)
If an individual makes a change of basis—
(a)
on ceasing to take advantage of the exemption given by section 160
(barristers and advocates in early years of practice), or
(b)
on that exemption coming to an end,

any adjustment income is spread over 10 tax years as follows.
15
(2)
In each of the 9 tax years beginning with that in which the whole amount of the
adjustment income would otherwise be chargeable to tax, an amount equal
to—
(a)
one tenth of the amount of the adjustment income, or
(b)
if less, 10% of the profits of the profession of the tax year,
20

is treated as arising and is charged to tax.
(3)
For this purpose “the profits of the profession” means the profits as calculated
for the purposes of this Part leaving out of account any allowances or charges
under CAA 2001.
(4)
In the tenth tax year the balance of the adjustment income is treated as arising
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and is charged to tax.
(5)
If, before the whole of the adjustment income has been charged to tax, the
individual permanently ceases to carry on the profession, this section
continues to apply but with the omission of the alternative limit in subsection
(2)(b).
30
(6)
This section is subject to any election under section 239 (election to accelerate
charge).
239
Election to accelerate charge under section 238
(1)
An individual who under section 238 is liable to tax for a tax year on an amount
of adjustment income may elect for an additional amount to be treated as
35
arising in the tax year.
(2)
The election must be made on or before the first anniversary of the normal self-
assessment filing date for the tax year.
(3)
The election must specify the amount to be treated as income arising in the tax
year (which may be any amount of the adjustment income not previously
40
charged to tax).

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 18 — Post-cessation receipts
111

(4)
If an election is made, section 238 applies in relation to any subsequent tax year
as if the amount of adjustment income (as reduced by any previous application
of this section) were reduced by the amount given by the following formula—

where—
A is the additional amount treated as arising in the tax year for which the election
5
is made, and
T is the number of tax years remaining after that tax year in the period of
10 tax years referred to in section 238.
Supplementary
240
Liability of personal representatives if person liable dies
10
(1)
This section applies in the case of the death of a person who would otherwise
have been liable to tax under this Chapter on adjustment income.
(2)
The tax under this Chapter for which the person would otherwise have been
liable—
(a)
is to be assessed and charged on the personal representatives, and
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(b)
is to be a debt due from and payable out of the deceased’s estate.
(3)
The personal representatives may make any election under this Chapter that
the deceased might have made.
Chapter 18
Post-cessation receipts
20
Introduction
241
Professions and vocations
The provisions of this Chapter apply to professions and vocations as they
apply to trades.
Charge to tax on post-cessation receipts
25
242
Charge to tax on post-cessation receipts
Income tax is charged on post-cessation receipts arising from a trade.
243
Extent of charge to tax
(1)
A post-cessation receipt is chargeable to tax under this Chapter only so far as
it is not otherwise chargeable to income or corporation tax.
30
(2)
Accordingly, a post-cessation receipt arising from a trade is not chargeable to
tax under this Chapter so far as it is brought into account in calculating the
profits of the trade for any period.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 18 — Post-cessation receipts
112

(3)
A post-cessation receipt is not chargeable to tax under this Chapter if—
(a)
it is received by or on behalf of a non-UK resident who is beneficially
entitled to it, and
(b)
it represents income arising outside the United Kingdom.
(4)
A post-cessation receipt is not chargeable to tax under this Chapter if it arises
5
from a trade carried on wholly outside the United Kingdom.
(5)
A post-cessation receipt is not chargeable to tax under this Chapter in the case
of a partner in a firm if—
(a)
it represents income arising outside the United Kingdom from a trade
carried on by the firm, and
10
(b)
the partner’s share of the firm’s income arising out of the United
Kingdom is treated as relevant foreign income by section 857(3)
(partners to whom the remittance basis applies).
244
Income charged
(1)
Tax is charged under this Chapter on the full amount of the receipts received
15
in the tax year.
(2)
This is subject to—
(a)
sections 254 and 255 (allowable deductions), and
(b)
section 257 (election to carry back).
245
Person liable
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The person liable for any tax charged under this Chapter is the person
receiving or entitled to the receipts.
Meaning of "post-cessation receipts"
246
Basic meaning of “post-cessation receipt”
(1)
In this Part “post-cessation receipt” means a sum—
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(a)
which is received after a person permanently ceases to carry on a trade,
and
(b)
which arises from the carrying on of the trade before the cessation.
(2)
For this purpose the reference to a person permanently ceasing to carry on a
trade includes the occurrence of an event which under section 337(1) of ICTA
30
is treated as the discontinuance of a trade.
(3)
Subsection (4) applies if—
(a)
a firm carries on a trade,
(b)
a person ceases to be a partner in the firm, and
(c)
the departure results in the partner permanently ceasing to carry on the
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notional trade (see section 852).
(4)
The partner is treated for the purposes of this Chapter as permanently ceasing
to carry on the trade.