House of Commons - Explanatory Note
Income Tax (Trading and Other Income) Bill - continued          House of Commons

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Clause 10: Commercial occupation of land other than woodlands

72.     This clause deals with the commercial occupation of land for purposes other than farming or woodlands. It is based on section 53(3) and (4) of ICTA.

73.     The clause treats the commercial occupation of land in the United Kingdom as the carrying on of a trade. It provides certainty of treatment if land is occupied on a commercial basis in circumstances that do not amount to the carrying on of a trade on first principles.

74.     The origins of section 53 of ICTA go back to the time when there was a charge to income tax under Schedule B on the occupation of land. The purpose of the Schedule B charge was to tax the profit that an occupier of the land could earn from the land itself, for example, by farming it. The tax was charged whether or not the occupier actually exploited the land.

75.     The Schedule B charge was calculated by reference to the annual value of the land. This amount could be considerably less than the amount of profit an occupier could in fact derive from the land. For this reason the basis of charge was switched from Schedule B to Schedule D Case I if the land was farmed or otherwise managed on a commercial basis.

76.     The last remnant of Schedule B was repealed by FA 1988. Schedule 6 to FA 1988 exempted any profits and losses from the occupation of commercial woodlands from income tax.

77.     The provisions of section 53 of ICTA relating to farming are rewritten as clause 9 (farming and market gardening). The provisions relating to the occupation of commercial woodlands are rewritten as clause 11.

Clause 11: Commercial occupation of woodlands

78.     This clause provides that the commercial occupation of woodlands is not treated as a trade for any income tax purpose. It is based on section 53(4) of ICTA and paragraph 3(2) of Schedule 6 to FA 1988.

79.     Subsection (3) makes clear that when this clause is read together with related clauses any profits and losses arising from the commercial occupation of woodlands are wholly outside the income tax system.

80.     This clause prevents any charge to tax as trading income and denies any claim for relief for a trade loss. Clause 267(b) performs a similar function in relation to property income. Clause 768 prevents there being any charge to tax under Part 5 of this Bill as miscellaneous income. Section 392(1)(b) of ICTA prevents any claim for a loss against miscellaneous income because it requires that for a loss to be allowed any profit on the same transaction should be taxable.

Clause 12: Profits of mines, quarries and other concerns

81.     This clause treats the profits and losses of certain concerns as if they were the profits and losses of a trade. It is based on section 55 of ICTA.

82.     The feature most of the concerns have in common is that they exploit land for its natural resources. The clause applies only if the activity carried on by the concern does not amount to a trade on first principles. If the activity is a trade on first principles the profits and losses will be taxed in accordance with clause 5.

83.     Subsection (1) provides the profits and losses of the concern are calculated as if the concern were a trade. See part (A) Change 2 in Annex 1.

84.     The clause does not deem the concern to be carrying on a trade. This means the profits will not be liable to Class 4 national insurance contributions as they are not immediately derived from the carrying on or exercise of a trade. Nor will the taxpayer qualify for capital gains tax roll-over relief under section 152 of TCGA. That section requires the taxpayer to be carrying on a trade as defined in section 158(2) of TCGA.

85.     Subsection (2) provides that the profits and losses of the concern are charged to tax as if the concern were a trade carried on in the United Kingdom. See part (B) Change 2 in Annex 1.

86.     This rule applies even if the activity is carried on outside the United Kingdom. But subsection (2) makes clear that this territorial extension applies only to UK residents.

87.     Subsection (3) provides that the normal loss rules apply. See part (C) Change 2 in Annex 1.

88.     Subsection (4) lists the concerns to which the clause applies. It updates the reference to "fishings" to "rights of fishing".

89.     Subsection (5) makes clear that clause 10 has priority over clause 12. This is because clause 10 treats the activity as if it were a trade. This contrasts with the approach of this clause, which is to the treat the profits and losses as trade profits and losses. Clause 10 may be more beneficial for the taxpayer. For example, the activity would qualify as a trade for capital gains tax purposes. See section 158(2) of TCGA.

Clause 13: Visiting performers

90.     This clause has two functions. It treats certain activities as trades and it treats those trades as carried on in the United Kingdom. It is based on sections 555 to 558 of ICTA.

91.     Section 555 of ICTA requires deduction of tax from certain payments to entertainers and sportsmen. The rules about deduction of tax are not rewritten in this Bill. But there is a cross-reference in the definition of "payment" in subsection (8) to the rule about deduction of tax to identify the sort of payment with which the clause is concerned.

92.     A visiting performer may not be in the United Kingdom long enough to become resident for tax purposes. And any trade or profession carried on by the performer may not be carried on in the United Kingdom through a branch or agency (see section 126 of FA 1995). So, without this clause, there would be no liability to tax on the activities in the United Kingdom.

93.     Subsection (1) sets out the circumstances in which the clause applies. A non-resident person performs "a relevant activity" in the United Kingdom. In accordance with subsection (8), that expression means activities prescribed by regulations. The regulations are those (currently SI 1987/530) made under sections 555 to 558 of ICTA or under clause 14.

94.     Subsection (2) creates a United Kingdom trade that includes the "relevant activity".

95.     Subsection (4) makes clear that this clause creates a trade carried on in the United Kingdom only to the extent that such a trade would not otherwise exist. If a visiting performer's activities in the United Kingdom amount to a trade on first principles, this clause does not create a trade because one already exists. But a trade is not created if the activities are part of an employment. In that case, tax is charged on the payments as employment income (see section 7 of ITEPA).

96.     Subsection (5) deals with the case where payments for the relevant activity are made to a person other than the performer - typically, a company controlled by the performer. As in subsection (2), the "relevant activity" is treated as part of a United Kingdom trade. In addition, the payments are treated as made to the performer (instead of to the "other person").

97.     Subsection (7) treats the performer's deemed trade as separate from any other trade actually carried on by the performer.

Clause 14: Visiting performers: supplementary

98.     This clause sets out the regulation-making powers that are needed for the operation of clause 13. It is based on sections 556 and 557 of ICTA.

99.     Subsection (1) is a regulation-making power to deal with the consequences of including in the performer's profits payments made to another person. It may be appropriate to allow a deduction for expenses incurred by another person (typically, but not necessarily, the person to whom the payments are made). And, if the payments are treated as receipts of the performer's trade, they may be excluded from the calculation of the other person's profits.

100.     Section 556(5) of ICTA apparently means that the regulation-making power in section 556(3) of ICTA is itself capable of being disapplied by a regulation. This is illogical. So the reference to section 556(3) in section 556(5) of ICTA is not rewritten in this Bill.

101.     Subsection (2) is a regulation-making power to deal with calculation of the performer's profits.

Clause 15: Divers and diving supervisors

102.     This clause deals with activities which are strictly the duties of an employment but which, if certain conditions are met, are taxed as if they were the carrying on of a trade. It is based on section 314 of ICTA.

Clause 16: Oil extraction and related activities

103.     This clause provides that certain oil-related activities are treated as a single, separate trade. It is based on section 492(1) of ICTA.

104.     Section 492 is in Chapter 5 of Part 12 of ICTA. Most of that Chapter is concerned with corporation tax and is not rewritten in this Bill. The section deals with oil (and gas) exploration and extraction activities in the United Kingdom and in the United Kingdom sector of the continental shelf.

105.     The main consequence of treating these oil-related activities as a separate trade is that losses from other trading activities cannot be set against oil profits. That consequence is set out in section 492(2) of ICTA.

Clause 17: Effect of becoming or ceasing to be a UK resident

106.     This clause deals with the consequence of an individual trader moving to or from the United Kingdom. It is based on section 110A of ICTA.

107.     Subsection (1) sets out the circumstances in which the clause applies. In accordance with clause 6, a non-resident individual who carries on a trade at least partly outside the United Kingdom is charged to tax only on the profits of any part of the trade carried on in the United Kingdom. Without this clause it would be possible for a taxpayer to be charged to tax on profits which accrue in part of a basis period when the taxpayer is not resident in the United Kingdom.

108.     If the trade is carried on in partnership and one of the partners changes residence, the rule in this clause does not apply. But there is a special rule that applies only to the partner. See clauses 852(6) and 854(5).

109.     Subsection (2) sets out the consequences of a change of residence. The trade is treated as ceasing and, if appropriate, a new one is treated as starting. There is no explicit rule in section 110A of ICTA to say when the trade is treated as ceasing or starting. The only sensible inference is that it is the date of the change of residence. The clause makes this clear.

110.     Subsection (3) ensures that losses are still available to be carried forward.

Clause 18: Effect of company starting or ceasing to be within charge to income tax

111.     This clause applies only to companies and deems a trade commencement or cessation to take place in particular circumstances. It is based on section 337 of ICTA.

112.     Section 337 of ICTA is primarily a corporation tax rule: it applies only to companies and originates from the introduction of corporation tax. However it can be relevant to income tax.

113.     That is because non-resident companies are within the charge to income tax in respect of United Kingdom trade profits (when the trade is not carried on through a permanent establishment in the United Kingdom) and UK property business income. Section 337 of ICTA applies in cases of either inward or outward company migration. Where that involves a continuing trade or UK property business there will be a change of taxing regime from income tax to corporation tax or vice versa.

114.     Clause 18 says what happens when a company enters or leaves the income tax regime: then its trade profits are calculated as though it had commenced or discontinued the trade. The obverse case of the company exiting or entering the corporation tax regime is proper to the rewrite of section 337 of ICTA in the corporation tax provisions.

Clause 19: Tied premises

115.     This clause treats rent received by a trader for premises let to persons to whom the trader supplies goods sold or used on those premises as a receipt of the trade rather than a receipt of a property business. It is based on section 98 of ICTA.

116.     Section 98 of ICTA is expressed in general terms. But it most commonly applies to rent received by a brewer who lets premises to tied tenants.

Clause 20: Caravan sites where trade carried on

117.     This clause allows a person who carries on a trade associated with the operation of a caravan site to include in the receipts of that trade income from letting pitches or caravans where the letting does not itself constitute a trade. It is based on ESC B29. See Change 3 in Annex 1.

118.     See clause 875 and Change 148 in Annex 1 for the definition of "caravan".

Clause 21: Surplus business accommodation

119.     This clause allows income from letting surplus business accommodation to be treated as a trade receipt instead of as rent. It is based on the practice known as "Revenue Decision 9" set out in Inland Revenue publication Tax Bulletin of 15 February 1994. See Change 4 in Annex 1.

Clause 22: Payments for wayleaves

120.     This clause applies if a trader receives rent from a wayleave granted in respect of land on which a trade is carried on. It is based on section 120 of ICTA.

121.     Rent received in respect of a wayleave is normally taxed as property income either by Chapter 2 of Part 3 of this Bill (property businesses) or by clause 344 (charge to tax on rent receivable for a UK electric-line wayleave). But if the rent is received in respect of land on which a trader carries on a trade and the trader receives no other rent in respect of the same land the rent, and any associated expenses, can be included in the calculation of the trade profits. See Change 5 in Annex 1.

122.     Subsection (2) applies if the rent is received in respect of a UK electric-line wayleave. A taxpayer is not required to include the rent and expenses in the calculation of the trade profits.

123.     Subsection (3) applies if the rent is received in respect of any other type of wayleave. A taxpayer is not required to include the rent and expenses in the calculation of the trade profits.

124.     Subsection (4) defines "rent". Section 120 of ICTA uses the definition of "rent" in section 119(3) of ICTA (rent etc. payable in connection with mines, quarries and similar concerns). Section 119 of ICTA is rewritten as Chapter 8 of Part 3 of this Bill. The definition of rent in that Chapter and in this clause must be the same. See the commentary on clause 336 for a fuller description of the rewrite of the word "rent" in Chapter 8 of Part 3 of this Bill.

125.     Subsection (5) defines "wayleave". Section 120 of ICTA uses the word "easement" as defined in section 119(3) of ICTA to describe the nature of the right for which the rent is paid. This clause uses "wayleave" as that is how most of the payments covered by this clause are usually described in practice. The definition of "easement" in section 119(3) of ICTA gives that word a meaning that is much wider than its usual legal meaning. See the comments of Uthwatt J at pages 329 and 330 of Mosley v George Wimpey Ltd (1945), 27 TC 314 CA.

126.     The definition of "wayleave" preserves the generality of the words in section 119(3) of ICTA and includes a reference to the Scottish equivalent, "servitude".

127.     The definition has no territorial limitation. So the clause covers services other than UK electric-line wayleaves.

Clause 23: Rent-a-room and foster-care relief

128.     This clause modifies the normal calculation rules when an individual is eligible for rent-a-room or foster-care relief under Part 7 of this Bill. It is new.

129.     When rent-a-room relief or foster-care relief applies the income may, depending on the total amount, be either exempt from tax or subject to a special calculation rule. This clause ensures that, when appropriate, the rent-a-room and foster-care rules take priority over the usual trading profit calculation rules.

Chapter 3: Trade profits: basic rules

Clause 24: Professions and vocations

130.     This clause makes it unnecessary to specify repeatedly that the rules in this Chapter (apart from clause 30) apply to a profession or vocation as well as to a trade. It is new.

Clause 25: Generally accepted accounting practice

131.     This clause sets out the starting point for the calculation of trade profits. It is based on section 42 of FA 1998, as amended by section 103(5) of FA 2002.

132.     Subsection (1) is the general rule that requires profits to be calculated "in accordance with generally accepted accounting practice", an expression defined in section 50 of FA 2004. In particular, such practice generally requires account to be taken of debtors and creditors and of the value of stock and work in progress. The general rule is subject to any special rule of law whether expressed in statute or explained by the courts.

133.     The relevant statutory laws are mainly those that are rewritten in this Part. But there are also provisions not included in Part 2 of this Bill which may affect the calculation of profits: for example, the pension contributions deductions provisions in FA 2004 and certain anti-avoidance provisions in ICTA that apply to all income types.

134.     Subsection (2) makes it clear that subsection (1) does not bring with it any of the other accounting requirements, such as a formal audit.

135.     Subsections (3) and (4) set out two exceptions to the general rule in subsection (1). Some barristers may use the "cash basis" of accounting (see clause 160). And Lloyd's underwriters have their own special rules (mostly in Chapter 3 of Part 2 of FA 1993).

136.     The Inland Revenue does not believe that there are currently any non-resident companies liable to income tax in respect of insurance business or that there will be any in the future as the law stands at present. So this clause does not reproduce the reference to companies carrying on life assurance mentioned in section 42(5) of FA 1998.

137.     There are no other exceptions to the general rule. So this clause does not reproduce the reference to "particular description of business" in section 42(5) of FA 1998.

Clause 26: Losses calculated on same basis as profits

138.     This clause ensures that profits and losses are calculated on a consistent basis. It is based on section 46(2) of FA 1998.

Clause 27: Receipts and expenses

139.     This clause is based on section 46(1) of FA 1998.

Clause 28: Items treated under CAA 2001 as receipts and expenses

140.     This clause signposts the CAA rules. It is new.

141.     In particular the CAA rules override the rules against the inclusion of capital items in clauses 33 and 96.

Clause 29: Interest

142.     This clause sets out the basic rule that interest is of a revenue nature. It is based on section 74(1) of ICTA.

143.     Section 74(1)(f) of ICTA provides that in computing the profits of a trade:

  • no deduction is allowed in respect of any capital withdrawn from or employed, or intended to be employed, as capital in the trade; but

  • the prohibition of any deduction in respect of capital should not be construed as disallowing the deduction of interest.

144.     This clause rewrites the second of these propositions by providing that for the purpose of calculating the profits of a trade, all interest is of a revenue nature.

145.     The question of whether interest is deductible in arriving at the trade profits falls to be determined according to whether the interest meets the general criteria for the deduction of an expense of a revenue nature in calculating the profits of a trade.

Clause 30: Animals kept for trade purposes

146.     This clause contains the basic rule for the income tax treatment of animals. It is based on paragraphs 1, 7(1) and 9(5) Schedule 5 to ICTA. The animals are treated as trading stock unless a herd basis election is made under Chapter 8 of Part 2 of this Bill.

Clause 31: Relationship between rules prohibiting and allowing deductions

147.     This clause makes clear the interaction between those provisions that allow a deduction and those provisions that prohibit a deduction. It is new. See Change 6 in Annex 1.

148.     The general principle is that a rule allowing a deduction takes priority over a rule prohibiting a deduction. But this is subject to a number of exceptions.

Chapter 4: Trade profits: rules restricting deductions

Overview

149.     This Chapter contains provisions prohibiting various deductions in calculating the profits of a trade or restricting the extent to which such deductions can be made.

Clause 32: Professions and vocations

150.     This clause makes it unnecessary to specify in each section in this Chapter that the section applies to a profession or vocation as well as to a trade. The clause is new.

Clause 33: Capital expenditure

151.     This clause is based on section 74(1) of ICTA.

152.     Section 74(1) of ICTA prohibits various deductions in computing a trader's profits including:

(f) any capital withdrawn from, or any sum employed or intended to be employed as capital in the trade, profession or vocation, ..

(g) any capital employed in improvements of premises occupied for the purposes of the trade, profession or vocation.

153.     It is a long-established and generally accepted principle that capital items are ignored in calculating the profits of a trade.

154.     Section 42(1) of FA 1998 requires that the profits of a trade:

must be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in computing profits for those purposes.

155.     But the question of whether a sum is income or capital is ultimately a question of law, not accountancy. For judicial authority for this proposition, see, for example the words of Brightman J on page 173 of ECC Quarries Ltd v Watkis (1975), 51 TC 153 CD 1:

1 STC [1975] 578

..unchallenged evidence, or a finding, that a sum falls to be treated as capital or income on principles of correct accountancy practice is not decisive of the question whether in law the expenditure is of a capital or income nature.

156.     A sum which is of a capital nature may however be allowed as a deduction in computing the profits of a trade because of a statutory exception to the general rule on the deduction of such items in this clause. See, for example, clause 89 (expenses connected with patents).

157.     Section 74(1)(g) of ICTA is not rewritten as the deduction of capital employed in the improvement of premises is covered by the general prohibition on the deduction of "items of a capital nature". In the absence of general agreement on what constitutes capital expenditure "items of a capital nature" is not defined.

Clause 34: Expenses not wholly and exclusively for trade and unconnected losses

158.     This clause contains rules for the deduction of expenses and losses in calculating the profits of a trade. It is based on section 74(1)(a) (expenses) and (e) (losses) of ICTA.

159.     Section 74(1)(a) of ICTA provides that in calculating the profits of a trade no deduction is allowed for expenditure which is not incurred "wholly and exclusively" for the purposes of that trade. This could be construed to mean that if expenditure is incurred partly for trade purposes and partly for some other purposes, no part of that expenditure can be deducted in arriving at the trade profits.

160.     But section 74(1)(c) of ICTA, which prohibits any deduction in respect of the rent of premises used for residential or "domestic" purposes, provides for the apportionment of rent paid for premises used partly as residential accommodation and partly for the purposes of a trade. And in practice, a deduction is allowed for any expenditure which can be apportioned between trade and non-trade expenditure - for example, expenditure on a car used partly for trade and partly for private purposes.

161.     There is judicial support for allowing a deduction where expenditure incurred for more than one purpose can reasonably be apportioned between expenditure incurred for the purpose of the trade and non-trade expenditure. See, for example, Lochgelly Iron and Coal Company Ltd v Crawford (1913), 6 TC 267 CS in which a deduction was allowed for part of a subscription to a trade association and Copeman v Flood (1941), 24 TC 53 KB in which a deduction was allowed for part of the remuneration paid to certain directors - the balance of the remuneration being held to have been paid to them as shareholders in the family company, rather than as directors.

162.     Conversely, the courts have held that if it is not possible to identify any part of the expenditure which is incurred wholly and exclusively for the purposes of the trade, no apportionment is possible. See, for example, Mallalieu v Drummond (1983), 57 TC 330 HL 2 in which no deduction was allowable for professional clothing worn for warmth and decency as well as being required by the taxpayer's profession.

2 STC [1983] 665

163.     So subsection (2) of this clause provides for the deduction of any part or proportion of expenses incurred partly for the purposes of the trade and partly for some other purpose which can be identified as incurred wholly and exclusively for the purposes of the trade. And because rent on dual purpose accommodation can be apportioned under subsection (2) of this clause, it is not necessary to rewrite section 74(1)(c) of ICTA.

 
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