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 11 — Trade profits: other specific trades
81

(5)
“Predecessor”, in relation to the trader, means a person who carried on the
trade at any time before the trader started to do so.
(6)
“Preparation”, in relation to land, means levelling or draining the land or
making it suitable in some other way for use as a cemetery or memorial garden.
170
Deduction for capital expenditure
5
(1)
This section applies if, in the relevant period, an interest in land in the cemetery
or memorial garden is sold with a view to the land being used—
(a)
for the purpose of interments, or
(b)
for memorial garden plots.
(2)
A deduction is allowed for—
10
(a)
capital expenditure incurred by the trader, or a predecessor, on the
purchase of an interest in the land or on the preparation of the land, and
(b)
ancillary capital expenditure allocated to the relevant period under
section 171 (allocation of ancillary capital expenditure).
(3)
But no expenditure is to be brought into account—
15
(a)
under both paragraphs (a) and (b) of subsection (2), or
(b)
under both subsection (2)(a) above and section 91(1)(b) of ICTA (relief
for corporation tax purposes) or under both subsection (2)(b) above and
section 91(1)(a) of ICTA,

whether for the same or different periods of account.
20
(4)
Any purchase price paid on a sale in connection with a change in the persons
carrying on the trade is ignored in calculating the amount of the deduction.
(5)
No deduction is allowed for any expenditure which is excluded by section 172
(exclusion of expenditure met by subsidies).
171
Allocation of ancillary capital expenditure
25
(1)
The amount of ancillary capital expenditure allocated to the relevant period for
the purposes of section 170(2)(b) is the amount given by the formula—

where—
RE means residual expenditure (see subsection (2)),
PSR means the number of grave-spaces or memorial garden plots in the
30
cemetery or memorial garden sold in the relevant period, and
PAR means the number of grave-spaces or memorial garden plots in the
cemetery or memorial garden which are or could be made available for
sale at the end of the relevant period.
(2)
“Residual expenditure” means the total of all ancillary capital expenditure
35
incurred at any time before the end of the relevant period, less—
(a)
ancillary capital expenditure incurred on buildings or structures which
were destroyed before the beginning of the first sale period,
(b)
the excluded amount of any remaining old expenditure (see subsection
(3)),
40

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 11 — Trade profits: other specific trades
82

(c)
if, after the beginning of the first sale period and before the end of the
relevant period, an asset representing ancillary capital expenditure was
sold or destroyed, the net sale proceeds or the compensation, and
(d)
any amount deducted under section 170(2)(b) above, or under section
91(1)(b) of ICTA, for a period of account ending before the relevant
5
period.
(3)
The excluded amount of remaining old expenditure is calculated by
multiplying the remaining old expenditure by the fraction—

where—
PSB means the number of grave-spaces or memorial garden plots in the
10
cemetery or memorial garden sold before the beginning of the basis
period for the tax year 1954-55, and
PAB means the number of grave-spaces or memorial garden plots in the
cemetery or memorial garden which were or could have been made
available for sale immediately before the beginning of the basis period
15
for that tax year.
(4)
In this section—
“compensation”, in relation to the destruction of an asset, means—
(a)
insurance money or other compensation received by the trader,
or a predecessor, in respect of the destruction, and
20
(b)
money received for the remains of the asset by the trader or
predecessor,
“the first sale period” means—
(a)
the period of account in which an interest in land in the
cemetery or memorial garden was first sold for the purposes of
25
the trade with a view to the land being used for the purpose of
interments or for memorial garden plots, or
(b)
if later, the basis period for the tax year 1954-55, and
“remaining old expenditure” means ancillary capital expenditure
which—
30
(a)
was incurred before the beginning of the basis period for the tax
year 1954-55, and
(b)
does not fall within subsection (2)(a).
172
Exclusion of expenditure met by subsidies
(1)
Expenditure is excluded for the purposes of section 170 so far as it has been, or
35
is to be, met (directly or indirectly) by—
(a)
the Crown,
(b)
a government or local or other public authority (whether in the United
Kingdom or elsewhere), or
(c)
any person other than the person incurring the expenditure.
40
(2)
This is subject to the following exceptions.
(3)
Expenditure is not excluded for the purposes of section 170 if it is met (directly
or indirectly) by a grant—
(a)
made under Northern Ireland legislation, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 12 — Trade profits: valuation of stock and work in progress
83

(b)
declared by the Treasury by an order under section 534 of CAA 2001 to
correspond to a grant under Part 2 of the Industrial Development Act
1982 (c. 52).
(4)
Expenditure is not excluded for the purposes of section 170 if it is met (directly
or indirectly) by—
5
(a)
insurance money, or
(b)
other compensation money,

payable in respect of an asset which has been destroyed, demolished or put out
of use.
(5)
Expenditure is not excluded for the purposes of section 170 if—
10
(a)
it has been, or is to be, met (directly or indirectly) by a person other than
the Crown or a government or local or other public authority, and
(b)
no deduction is allowed for the expenditure in calculating for income
or corporation tax purposes the profits of a trade carried on by that
person.
15
Chapter 12
Trade profits: valuation of stock and work in progress
Valuation of trading stock
173
Valuation of trading stock on cessation
(1)
If a person permanently ceases to carry on a trade, in calculating the profits of
20
the trade—
(a)
trading stock belonging to the trade at the time of the cessation must be
valued, and
(b)
the value must be determined in accordance with sections 175 to 178
(bases of valuation).
25
(2)
But no valuation of the stock is required under this Chapter if paragraph 1(2)
of Schedule 28AA to ICTA (provision not at arm’s length) has effect in relation
to any provision which—
(a)
is made or imposed in relation to the stock, and
(b)
has effect in connection with the cessation.
30
(3)
If there is a change in the persons carrying on a trade, no valuation of the stock
is required under this Chapter so long as a person carrying on the trade
immediately before the change continues to carry it on after the change.
(4)
If an individual carries on a trade alone, no valuation of the stock is required
under this Chapter if the cessation is because of the individual’s death.
35
174
Meaning of “trading stock”
(1)
In this Chapter “trading stock” means—
(a)
any property (whether land or other property) which is sold in the
ordinary course of the trade or would be so sold if it were mature or its
manufacture, preparation or construction were complete, or
40
(b)
materials used in the manufacture, preparation or construction of any
property mentioned in paragraph (a).

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 12 — Trade profits: valuation of stock and work in progress
84

(2)
In this Chapter “trading stock” includes also any services performed in the
ordinary course of the trade—
(a)
the performance of which is wholly or partly completed at the time of
the cessation, and
(b)
for which it would be reasonable to expect that a charge would be made
5
if there were no cessation and, in the case of partly completed services,
their performance were fully completed,

and any article produced, and any material used, in the performance of any
such services.
(3)
In this Chapter references to the sale or transfer of trading stock include the sale
10
or transfer of any benefits and rights which accrue, or might reasonably be
expected to accrue, from the performance of any such services.
175
Basis of valuation of trading stock
(1)
The value of trading stock belonging to the trade at the time of the cessation is
determined as follows.
15
(2)
If the stock is sold to a person who—
(a)
carries on, or intends to carry on, a trade in the United Kingdom, and
(b)
is entitled to deduct the cost of the stock as an expense in calculating the
profits of that trade for income or corporation tax purposes,

the value is determined in accordance with section 176 (sale to unconnected
20
person), 177 (sale to connected person) or 178 (election by connected persons).
(3)
But if section 127 (preventing abuse of the herd basis rules) applies—
(a)
the value is not determined in accordance with any of those sections,
and
(b)
the value is instead taken to be that given by section 127 (the price
25
which the animals transferred would have fetched if sold in the open
market at the time of the sale).
(4)
In any other case, the value is taken to be the amount which the stock would
have realised if sold in the open market at the time of the cessation.
176
Sale basis of valuation: sale to unconnected person
30
(1)
The value of trading stock is determined in accordance with this section if—
(a)
it is sold to a person who carries on, or intends to carry on, a trade in
the United Kingdom and is entitled to deduct the cost of the stock as an
expense in calculating the profits of that trade for income or
corporation tax purposes, and
35
(b)
the buyer is not connected with the seller.
(2)
The value is taken to be the amount in fact realised on the sale.
(3)
If the stock is sold together with other assets, so much of the amount realised
on the sale as, on a just and reasonable apportionment, is properly attributable
to each asset is treated as the amount realised on the sale of that asset.
40
177
Sale basis of valuation: sale to connected person
(1)
The value of trading stock is determined in accordance with this section if—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 12 — Trade profits: valuation of stock and work in progress
85

(a)
it is sold to a person who carries on, or intends to carry on, a trade in
the United Kingdom and is entitled to deduct the cost of the stock as an
expense in calculating the profits of that trade for income or
corporation tax purposes,
(b)
the buyer is connected with the seller, and
5
(c)
no election is made under section 178 (election by connected persons).
(2)
The value is taken to be the amount which would have been realised if the sale
had been between independent persons dealing at arm’s length.
178
Sale basis of valuation: election by connected persons
(1)
The value of trading stock is determined in accordance with this section if—
10
(a)
it is sold to a person who carries on, or intends to carry on, a trade in
the United Kingdom and is entitled to deduct the cost of the stock as an
expense in calculating the profits of that trade for income or
corporation tax purposes,
(b)
the buyer is connected with the seller, and
15
(c)
an election is made under this section.
(2)
The parties to the sale may make an election under this section if the value of
the stock determined under section 177 exceeds both—
(a)
its acquisition value, and
(b)
the amount in fact realised on the sale.
20
(3)
If an election is made, the value is taken to be—
(a)
its acquisition value, or,
(b)
if greater, the amount in fact realised on the sale.
(4)
An election under this section must be made by both parties on or before the
first anniversary of the normal self-assessment filing date for the tax year in
25
which the cessation occurred.
(5)
The “acquisition value” of trading stock means the amount which would have
been deductible as representing its acquisition value, in calculating the profits
of the trade, on the following assumptions—
(a)
that the stock had been sold in the course of the trade, immediately
30
before the cessation, for a price equal to the value of the stock
determined under section 177, and
(b)
that the period for which those profits were to be calculated began
immediately before the sale.
(6)
If the stock is sold together with other assets, so much of the amount realised
35
on the sale as, on a just and reasonable apportionment, is properly attributable
to each asset is treated as the amount realised on the sale of that asset.
179
Connected persons
For the purposes of sections 175 to 178 two persons are connected with each
other if any of the following tests is met—
40
(a)
they are connected with each other within the meaning of section 839 of
ICTA,
(b)
one of them is a firm and the other has a right to a share of the assets or
income of the firm,

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 12 — Trade profits: valuation of stock and work in progress
86

(c)
one of them is a body corporate and the other has control over that
body,
(d)
both of them are firms and some other person has a right to a share of
the assets or income of both of them, or
(e)
both of them are bodies corporate, or one of them is a firm and the other
5
is a body corporate, and in either case some other person has control
over both of them.
180
Cost to buyer of stock valued on sale basis of valuation
(1)
This section applies for the purpose of calculating the profits of the trade
carried on by the buyer of trading stock.
10
(2)
If the value of the stock is determined in accordance with—
(a)
section 175(3) or sections 176 to 178 (sale basis of valuation), or
(b)
section 100(1A) to (1C) of ICTA (corresponding corporation tax rules),

the cost of the stock to the buyer is taken to be the value as so determined.
181
Meaning of “sale” and related expressions
15
(1)
In sections 175 to 178 (except in section 178(5)) references to a sale include a
transfer for valuable consideration.
(2)
In relation to a transfer which is not a sale—
“amount realised on the sale” means the value of the consideration given
for the transfer,
20
“buyer” means the person to whom the transfer is made, and
“seller” means the person who makes the transfer.
Valuation of work in progress
182
Valuation of work in progress on cessation
(1)
If—
25
(a)
a person permanently ceases to carry on a profession or vocation, and
(b)
the work in progress is valued in calculating the profits of the
profession or vocation,

the value must be determined in accordance with section 184 (basis of
valuation of work in progress) or 185 (election for valuation at cost).
30
(2)
If there is a change in the persons carrying on a profession, subsection (1) does
not apply so long as a person carrying on the profession immediately before
the change continues to carry it on after the change.
(3)
If an individual carries on a profession alone or a vocation, subsection (1) does
not apply if the cessation is because of the individual’s death.
35
183
Meaning of “work in progress”
(1)
In this Chapter “work in progress” means services performed in the ordinary
course of the profession or vocation—
(a)
the performance of which is wholly or partly completed at the time of
the cessation, and
40

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 12 — Trade profits: valuation of stock and work in progress
87

(b)
for which it would be reasonable to expect that a charge would be made
if there were no cessation and, in the case of partly completed services,
their performance were fully completed,

and includes any article produced, and any material used, in the performance
of any such services.
5
(2)
In this Chapter references to the transfer of work in progress include the
transfer of any benefits and rights which accrue, or might reasonably be
expected to accrue, from the performance of any such services.
184
Basis of valuation of work in progress
(1)
If the work in progress is transferred for money or other valuable consideration
10
to a person who—
(a)
carries on, or intends to carry on, a profession or vocation in the United
Kingdom, and
(b)
is entitled to deduct the cost of the work as an expense in calculating the
profits of that profession or vocation for income or corporation tax
15
purposes,

the value of the work is taken to be the amount paid or other consideration
given for the transfer.
(2)
In any other case, the value of the work is taken to be the amount which would
have been paid for a transfer of the work at the time of the cessation as between
20
independent parties dealing at arm’s length.
(3)
These rules are subject to any election under section 185 (election for valuation
at cost).
185
Election for valuation at cost
(1)
The person who was carrying on the profession or vocation immediately
25
before the cessation may elect that—
(a)
the value of work in progress brought into account in calculating the
profits of the period immediately before the cessation is to be the actual
cost of the work, and
(b)
the amount by which any sums received for the transfer of the work
30
exceed the actual cost of the work is to be treated as a post-cessation
receipt (see Chapter 18).
(2)
An election under this section must be made on or before the first anniversary
of the normal self-assessment filing date for the tax year in which the cessation
occurred.
35
Supplementary
186
Determination of questions by Commissioners
(1)
Any question arising under—
(a)
section 175(3) or sections 176 to 178 (sale basis of valuation of trading
stock), or
40
(b)
section 184(1) (valuation of work in progress transferred for valuable
consideration),