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 6 — Trade profits: receipts
44

Capital receipts
96
Capital receipts
(1)
Items of a capital nature must not be brought into account as receipts in
calculating the profits of a trade.
(2)
But this does not apply to items which, as a result of any provision of this Part,
5
are brought into account as receipts in calculating the profits of the trade.
Debts released
97
Debts incurred and later released
(1)
This section applies if—
(a)
in calculating the profits of a trade, a deduction is allowed for the
10
expense giving rise to a debt owed by the person carrying on the trade,
(b)
all or part of the debt is released, and
(c)
the release is not part of a statutory insolvency arrangement.
(2)
The amount released—
(a)
is brought into account as a receipt in calculating the profits of the
15
trade, and
(b)
is treated as arising on the date of the release.
Amounts received following earlier cessation
98
Acquisition of trade: receipts from transferor’s trade
(1)
This section applies if —
20
(a)
a person (“the transferor”) permanently ceased to carry on a trade at
any time,
(b)
at that time the transferor transferred to another person (“the
transferee”) the right to receive sums arising from the carrying on of the
trade, and
25
(c)
the transferee subsequently carries on the transferor’s trade.
(2)
Sums—
(a)
which the transferee receives as a result of the transfer, and
(b)
which are not brought into account in calculating the profits of the
transferor’s trade for income or corporation tax purposes for any
30
period before the cessation,

are brought into account in calculating the profits of the transferee’s trade in
the period of account in which they are received.
(3)
Any sums mentioned in subsection (1)(b) which are received after the
transferor has permanently ceased to carry on the trade are not post-cessation
35
receipts (see Chapter 18).

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 6 — Trade profits: receipts
45

Reverse premiums
99
Reverse premiums
(1)
For the purposes of sections 101 and 102 a payment or other benefit is a reverse
premium—
(a)
if conditions A to C are met, and
5
(b)
it is not excluded by section 100.
(2)
Condition A is that a person (“the recipient”) receives the payment or other
benefit by way of inducement in connection with a transaction being entered
into by—
(a)
the recipient, or
10
(b)
a person connected with the recipient.
(3)
Condition B is that the transaction (the “property transaction”) is one under
which—
(a)
the recipient, or
(b)
the person connected with the recipient,
15

becomes entitled to an estate, interest or right in or over land.
(4)
Condition C is that the payment or other benefit is paid or provided by—
(a)
the person (“the grantor”) by whom the estate, interest or right is
granted or was granted at an earlier time,
(b)
a person connected with the grantor, or
20
(c)
a nominee of, or a person acting on the directions of, the grantor or a
person connected with the grantor.
100
Excluded cases
(1)
A payment or other benefit is not a reverse premium so far as it is brought into
account under section 532 of CAA 2001 (the general rule excluding
25
contributions) to reduce the recipient’s expenditure qualifying for capital
allowances.
(2)
A payment or other benefit received in connection with a property transaction
is not a reverse premium if—
(a)
the person entering into the transaction is an individual, and
30
(b)
the transaction relates to premises occupied or to be occupied by the
individual as the individual’s only or main residence.
(3)
A payment or other benefit is not a reverse premium so far as it is consideration
for the transfer of an estate or interest in land which constitutes the sale in a sale
and lease-back arrangement.
35
(4)
A “sale and lease-back arrangement” means any such arrangement as is
described in section 779(1) or (2) or 780(1) of ICTA.
101
Tax treatment of reverse premiums
(1)
A reverse premium is treated for income tax purposes as a receipt of a revenue
nature.
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Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 6 — Trade profits: receipts
46

(2)
If the recipient enters into the property transaction for the purposes of a trade
carried on (or to be carried on) by the recipient, the reverse premium is brought
into account in calculating the profits of the trade.
(3)
If subsection (2) does not apply, the reverse premium is charged to income tax
in accordance with section 311 (reverse premium taxed as property business
5
receipt).
102
Arrangements not at arm’s length
(1)
This section applies if—
(a)
two or more of the parties to the property arrangements are connected
persons, and
10
(b)
the terms of those arrangements are not such as would reasonably have
been expected if those persons had been dealing at arm’s length.
(2)
The terms of the property arrangements meet the condition in subsection (1)(b)
if they differ to a significant extent from the terms which, at the time the
arrangements were entered into, would be regarded as normal and
15
reasonable—
(a)
in the market conditions then prevailing, and
(b)
between persons dealing with each other at arm’s length in the open
market.
(3)
The whole amount or value of the reverse premium brought into account
20
under section 101 is brought into account in the first relevant period of account.
(4)
“The first relevant period of account” means the period of account in which the
property transaction is entered into.
(5)
But if the recipient enters into the property transaction for the purposes of a
trade—
25
(a)
which is not then carried on by the recipient, but
(b)
which the recipient subsequently starts to carry on,

“the first relevant period of account” means the first period of account in which
the recipient carries on the trade.
103
Connected persons and property arrangements
30
For the purposes of this section and sections 99 to 102—
(a)
persons are treated as connected with each other if they are connected
(for which see section 878(5)) at any time during the period when the
property arrangements are entered into, and
(b)
“the property arrangements” means the property transaction and any
35
arrangements entered into in connection with it (whether before it, at
the same time as it or after it).
Assets of mutual concerns
104
Distribution of assets of mutual concerns
(1)
This section applies if—
40
(a)
a deduction has been allowed in calculating the profits of a trade for a
payment to a mutual concern for the purposes of its mutual business,

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 6 — Trade profits: receipts
47

(b)
the concern is being or has been wound up or dissolved,
(c)
a person (“the recipient”) who is carrying on the trade, or was doing so
at the time of the payment, receives money or money’s worth
representing the concern’s assets, and
(d)
the assets in question represent profits of the mutual business
5
conducted by the concern.
(2)
If the recipient is carrying on the trade at the time the money or money’s worth
is received, the amount or value of the money or money’s worth is brought into
account as a receipt in calculating the profits of the trade.
(3)
If the recipient—
10
(a)
is not carrying on the trade at the time the money or money’s worth is
received, but
(b)
was doing so at the time of the payment to the mutual concern,

the amount or value of the money or money’s worth is treated as a post-
cessation receipt (see Chapter 18).
15
(4)
For the purposes of this section money or money’s worth represents assets of
a mutual concern if it—
(a)
forms part of the assets of the concern,
(b)
forms part of the consideration for the transfer of the assets of the
concern as part of a scheme of amalgamation or reconstruction which
20
involves its winding up, or
(c)
consists of the consideration for a transfer or surrender of a right to
receive anything falling within paragraph (a) or (b) and does not give
rise to a charge to income tax on the person receiving it otherwise than
as a result of this section.
25
(5)
If a transfer or surrender of a right to receive anything which—
(a)
forms part of the assets of a mutual concern, or
(b)
forms part of the consideration for the transfer of the assets of a mutual
concern,

is not at arm’s length, the person making the transfer or surrender is treated as
30
receiving consideration equal to the value of the right.
(6)
In this section references to a mutual concern are to a body corporate which has
at any time carried on a trade which consists of or includes the conduct of
mutual business (whether or not confined to the members of the body
corporate).
35
(7)
For the purposes of this section a trade does not consist of or include the
conduct of mutual business if all the profits of the trade are chargeable to
income or corporation tax.
Industrial development grants
105
Industrial development grants
40
(1)
This section applies if a person carrying on a trade receives a payment by way
of a grant under—
(a)
section 7 or 8 of the Industrial Development Act 1982 (c. 52), or
(b)
Article 7, 9 or 30 of the Industrial Development (Northern Ireland)
Order 1982 (S.I. 1982/1083 (N.I. 15)).
45

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 7 — Trade profits: gifts to charities etc.
48

(2)
The payment is brought into account as a receipt in calculating the profits of
the trade unless—
(a)
the grant is designated as made towards the cost of specified capital
expenditure,
(b)
the grant is designated as compensation for the loss of capital assets, or
5
(c)
the grant is for all or part of a corporation tax liability (including one
that has already been met).
(3)
This section does not apply to professions or vocations.
Proceeds of insurance etc.
106
Sums recovered under insurance policies etc.
10
(1)
This section applies if—
(a)
a deduction is allowed for a loss or expense in calculating the profits of
a trade,
(b)
a person carrying on the trade recovers a sum under an insurance
policy or a contract of indemnity in respect of the loss or expense, and
15
(c)
the sum is not of a revenue nature.
(2)
The sum is brought into account as a receipt in calculating the profits of the trade (but
only up to the amount of the deduction).
Chapter 7
Trade profits: gifts to charities etc.
20
107
Professions and vocations
The provisions of this Chapter apply to professions and vocations as they
apply to trades.
108
Gifts of trading stock to charities etc.
(1)
This section applies if a person carrying on a trade (“the donor”) gives an article
25
for the purposes of—
(a)
a charity, a registered club or a body listed in subsection (4), or
(b)
a designated educational establishment (see section 110),

and the article is one manufactured, or of a class or description sold, by the
donor in the course of the trade.
30
(2)
In calculating the profits of the trade, no amount is required to be brought into
account as a receipt in consequence of the disposal of the article.
(3)
In this section “registered club” has the meaning given by paragraph 1 of
Schedule 18 to FA 2002 (relief for community amateur sports clubs).
(4)
The bodies referred to in subsection (1)(a) are—
35
(a)
the Trustees of the National Heritage Memorial Fund,
(b)
the Historic Buildings and Monuments Commission for England,
(c)
the Trustees of the British Museum,
(d)
the Trustees of the Natural History Museum, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 7 — Trade profits: gifts to charities etc.
49

(e)
the National Endowment for Science, Technology and the Arts.
(5)
This section needs to be read with section 109 (receipt by donor or connected
person of benefit attributable to certain gifts).
109
Receipt by donor or connected person of benefit attributable to certain gifts
(1)
This section applies if a person carrying on a trade (“the donor”) makes a gift
5
in relation to which—
(a)
section 108 applies, or
(b)
section 63(2) of CAA 2001 applies (gifts to charities etc. of plant or
machinery used in the trade),

and the donor, or a person connected with the donor, receives a benefit which
10
is in any way attributable to the making of the gift.
(2)
An amount equal to the value of the benefit—
(a)
is brought into account in calculating the profits of the trade, as a receipt of the
trade arising on the date on which the benefit is received, or
(b)
if the donor has permanently ceased to carry on the trade before that
15
date, is treated as a post-cessation receipt (see Chapter 18).
110
Meaning of “designated educational establishment”
(1)
For the purposes of section 108 “designated educational establishment” means
an educational establishment designated, or within a category designated, in
regulations made—
20
(a)
for England and Scotland, by the Secretary of State,
(b)
for Wales, by the National Assembly for Wales, and
(c)
for Northern Ireland, by the Department of Education.
(2)
The regulations may make different provision for different areas.
(3)
If any question arises as to whether an educational establishment is within a
25
category designated in the regulations, the Inland Revenue must refer the
question for decision—
(a)
in the case of an establishment in England or Scotland, to the Secretary
of State,
(b)
in the case of an establishment in Wales, to the National Assembly for
30
Wales, and
(c)
in the case of an establishment in Northern Ireland, to the Department
of Education.
(4)
The power of the Secretary of State or the National Assembly for Wales to make
regulations under this section is exercisable by statutory instrument.
35
(5)
A statutory instrument containing any regulations made by the Secretary of
State under this section is subject to annulment in pursuance of a resolution of
the House of Commons.
(6)
Regulations made under this section by the Department of Education—
(a)
are a statutory rule for the purposes of the Statutory Rules (Northern
40
Ireland) Order 1979 (S.I. 1979/1573 (N.I. 12)), and
(b)
are subject to negative resolution within the meaning of section 41(6) of
the Interpretation Act (Northern Ireland) 1954 (c. 33 (N.I.)).

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
50

Chapter 8
Trade profits: herd basis rules
Introduction
111
Election for application of herd basis rules
(1)
A person who keeps or has kept a production herd for the purposes of a trade
5
may make an election under this Chapter (a “herd basis election”).
(2)
In calculating the profits of the trade, animals which are part of a production
herd in relation to which a herd basis election has effect—
(a)
are not treated as trading stock (see section 30), but
(b)
are treated instead in accordance with sections 114 to 123 (“the herd
10
basis rules”).
(3)
This Chapter is expressed in terms of farmers but applies to any person who
keeps or has kept a production herd for the purposes of a trade, whether or not
the trade is farming.
(4)
References in this Chapter to keeping a production herd are to keeping it for
15
the purposes of the trade.
112
Meaning of “animal”, “herd”, “production herd” etc.
(1)
In this Chapter—
(a)
“animal” means any animal or other living creature,
(b)
“herd” includes a flock and any other collection of animals (however
20
named), and
(c)
“production herd” means, in relation to a farmer, a herd of animals of
the same species (irrespective of breed) kept by the farmer wholly or
mainly for the products obtainable from the living animal which the
animals produce for the farmer to sell.
25
(2)
For this purpose “the products obtainable from the living animal” means—
(a)
the young of the animal, or
(b)
any other product obtainable from the animal without slaughtering it.
(3)
For the purposes of this Chapter the general rule is that immature animals kept
in a production herd are not part of the herd.
30
(4)
There is an exception to this rule if—
(a)
the nature of the land on which the herd is kept means that animals
which die or cease to be part of the herd can be replaced only by
animals bred and reared on the land,
(b)
the immature animals in question are bred in the herd and are
35
maintained in the herd for the purpose of replacing other animals, and
(c)
it is necessary to maintain the immature animals for that purpose.
(5)
In that case the immature animals are part of the herd for the purposes of this
Chapter, but only so far as they are required to prevent a fall in the numbers of
the herd.
40