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

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Clause 35: Bad and doubtful debts

164.     This clause is based on the relief for bad and doubtful debts in section 74(1)(j) of ICTA. It also subsumes the relief in section 89 of ICTA for debts proved irrecoverable after a trade, profession or vocation is deemed to have ceased. See Change 7 in Annex 1.

165.     See clause 259 for the meaning of "statutory insolvency arrangement" in subsection (1)(c).

Clause 36: Unpaid remuneration

166.     This clause prevents a deduction for employees' (or an office-holder's) pay until it is paid. It is based on section 43 of FA 1989.

167.     Section 43 of FA 1989 was introduced when the assessment of employment income was put on a receipts basis. No deduction is given to the employer for employees' pay until that pay is treated as received by the employees.

168.     Subsection (1)(b) makes clear that the rule in this clause is in addition to any other rules that determine whether or not a deduction is allowable.

Clause 37: Unpaid remuneration: supplementary

169.     This clause provides definitions and further explanation of the main rule in clause 36. It is based on section 43 of FA 1989.

170.     Subsection (1) applies clause 36 to provisions made in the accounts in respect of amounts that may become employees' remuneration. An example of such a provision would be an incentive payment that is payable only if the employee remains with the employer for a number of years.

171.     Subsection (3) deals with the case in which the employer submits his or her tax return before the end of the nine month limit in clause 36(2) and all or any of the remuneration is unpaid. The employer must assume the remuneration will remain unpaid. If, subsequently, the remuneration is paid within the time limit the calculation can be adjusted and the return amended. See Change 8 in Annex 1.

Employee benefit contributions

Overview

172.     The next seven clauses deal with the deduction allowed in respect of an employer's contribution to an employee benefit scheme. They are based on Schedule 24 to FA 2003.

173.     The clauses give a comprehensive set of rules for determining when deductions can be made for payments made by an employer to a third party to hold or use to provide benefits for the employer's employees. The rules apply in particular to contributions made to the trustees of an employee benefit trust but are not confined to such contributions. They do not apply to contributions made to certain pension schemes.

Clause 38: Restriction of deductions

174.     This clause sets out the conditions under which a deduction may be allowed. It is based on paragraphs 1 and 8 of Schedule 24 to FA 2003.

175.     Subsection (1) identifies the conditions for the clause to apply. It applies only to deductions that would otherwise be allowed under normal principles. It applies both to contributions made and to provisions in respect of contributions.

176.     Subsections (2)(b) and (3)(b) apply if the benefit is provided by the making of the contribution itself. This may be the case if the employer sets up a trust to meet employees' medical expenses.

177.     Subsection (4) identifies a number of cases in which employer contributions are not subject to the rules in this Chapter. Significant amendments have been made to this list by section 245(5) of FA 2004. That section is part of the regime for dealing with the taxation of pension schemes. The changes take effect from 6 April 2006.

178.     This Bill deals with this by including the new rules in clause 38(4). The commencement issue is then dealt with as a transitional measure in Schedule 2 to this Bill. The old rules apply until 5 April 2006.

Clause 39: Making of "employee benefit contributions"

179.     This clause is based on paragraphs 1 and 9 of Schedule 24 to FA 2003.

Clause 40: Provision of qualifying benefits

180.     This clause sets out what is meant by the provision of qualifying benefits. It is based on paragraph 2 of Schedule 24 to FA 2003. One of four conditions must be met.

181.     Subsection (2) identifies the general rule, condition A. Subsections (3), (4) and (5) deal with less common cases, conditions B, C and D.

182.     Subsection (3) applies if the employment income and NIC charges do not arise because the benefits are provided to an employee who works outside the United Kingdom.

183.     Subsection (4) applies if the employment income and NIC charges do not arise because the benefits are provided in connection with the termination of the recipient's employment.

184.     Subsection (5) applies if the benefit is provided under an employer-financed retirement benefits scheme. This condition will apply with effect from 6 April 2006. See the transitional measure in Schedule 2 to this Bill. An employer-financed retirement benefits scheme is an arrangement under which the employer will pay pensions outside registered pension schemes introduced by FA 2004. The policy is to tax these benefits in the same way as other employee benefits. The definition of "employer-financed retirement benefits scheme" is given in clause 44.

Clause 41: Timing and amount of certain qualifying benefits

185.     This clause sets out:

  • when benefits in the form of money are treated as provided; and

  • how to calculate the value of benefits provided by the transfer of an asset.

186.     It is based on paragraphs 2 and 5 of Schedule 24 to FA 2003.

187.     Section 245(4) of FA 2004 provides (with effect from 6 April 2006) that these rules do not apply to payments under an "employer-financed retirement benefits scheme".

188.     Subsection (2) describes how to calculate the value of a qualifying benefit provided by the transfer of an asset. The amount of the benefit is the expenditure incurred on the asset by the third party including both the cost of acquiring the asset and any subsequent expenditure. If the asset was acquired by the employer and transferred to the third party the amount of the benefit is the trading deduction that would otherwise have been allowed to the employer plus any subsequent expenditure incurred by the third party.

189.     Subsection (3) sets out an exception to the general rule in subsection (2). If the employment income charge is lower than the charge calculated in accordance with subsection (2) the value of the benefit is restricted to the lower amount.

Clause 42: Provision or payment out of employee benefit contributions

190.     This clause sets out the rules for allocating the provision of qualifying benefits, or payment of qualifying expenses, by the third party against the employee benefit contributions received. It is based on paragraph 4 of Schedule 24 to FA 2003.

191.     Other receipts and expenses of the third party are ignored. Qualifying benefits and qualifying expenses are treated as paid out of employee benefit contributions in priority to other expenditure and amounts received by the third party.

Clause 43: Profits calculated before end of 9 month period

192.     This clause applies if the taxpayer makes his or her income tax return before the end of the nine month period. It is based on paragraph 6 of Schedule 24 to FA 2003.

193.     A deduction is not allowed if the conditions in clause 38 are not met at the time the return is made. The normal Self Assessment rules allow the return to be amended if the conditions are met before the end of the nine month period.

Clause 44: Interpretation of sections 38 to 44

194.     This clause is based on paragraphs 3 and 9 of Schedule 24 to FA 2003 and section 245(7) of FA 2004.

195.     An "employer-financed retirement benefits scheme" means:

a scheme for the provision of benefits consisting of or including relevant benefits to or in respect of employees or former employees of the employer

But neither

    a registered pension scheme, nor

    a section 615(3) [of ICTA] scheme,

    is an employer-financed retirement benefits scheme.

Clause 45 Business entertainment and gifts: general rule

196.     This clause and the following two clauses deal with expenditure on business entertainment or gifts. This clause is based on section 577(1),(5),(7) and (8) of ICTA.

197.     Subsection (1) sets out the general rule that in calculating the profits of a trade no deduction is allowed for expenditure on providing entertainment or gifts.

198.     Subsection (2) says that the general rule applies to sums paid to or on behalf of, or put at the disposal of, an employee (commonly known as an "expense allowance") only if those sums are exclusively for meeting expenses in providing business entertainment or gifts.

199.     The general rule in subsection (1) does not apply to an allowance made to an employee for meeting expenses which include - but are not restricted to - expenses incurred in the provision of business entertainment or gifts. But section 356 of ITEPA provides that no deduction from the employee's earnings is allowed for expenses incurred in providing entertainment or gifts in connection with the trade, business, profession or vocation of his or her employer.

200.     The definition of "employee" in subsection (4) covers the application of this clause and clauses 46 and 47 to a non-resident company liable to income tax in the UK.

Clause 46 : Business entertainment : exceptions

201.     This clause is based on section 577(3),(5),(7) and (10) of ICTA.

Clause 47: Business gifts: exceptions

202.     This clause is based on section 577(3),(5),(8),(9) and (10) of ICTA. See Change 9 in Annex 1 regarding the provision in subsection (3) for the monetary limit on the exception in respect of certain gifts to be increased by Treasury order.

Clause 48: Car or motor cycle hire

203.     This clause restricts the amount which a trader can deduct in respect of the cost of hiring certain cars or motor cycles with a retail price (when new) of more than £12,000. The restriction is in inverse proportion to the retail price. The clause is based on sections 578A and 578B of ICTA.

204.     Section 578B(1) of ICTA says that for the purposes of section 578A of ICTA "car" includes a motor cycle. So this clause and clause 49 refer to a "car or motor cycle" throughout.

205.     Section 578A(4) of ICTA provides for amounts in respect of hire charges brought into account as a receipt of the trade under section 94 of ICTA (debts deducted and subsequently released) to be reduced in the same proportion as the deduction in respect of those charges is reduced under section 578A(3) of ICTA. Subsection (4) of this clause extends the same treatment to amounts in respect of hire charges taxed as a post-cessation receipt under section 103(4) of ICTA (debts released after cessation). See Change 10 in Annex 1.

206.     Sections 94 and 103(4) of ICTA are rewritten in clauses 97 and 249 respectively.

Clause 49: Car or motor cycle hire: supplementary

207.     This clause is based on section 578B of ICTA.

208.     Section 578B(2) of ICTA defines "qualifying hire car" for the purposes of section 578A of ICTA as a car hired under a hire-purchase agreement subject to an option to purchase which is exercisable for a nominal amount.

209.     Subsection (2)(a) of this clause extends the definition of "qualifying hire car or motor cycle" to include a car or motor cycle where there is no option to purchase. See Change 11 in Annex 1.

210.     Subsection (2)(c) defines "qualifying hire car or motor cycle" by reference to the definition of "qualifying hire car" in section 82 of CAA.

211.     Section 82 of CAA defines a "qualifying hire car" as follows:

(1) For the purposes of this Part a car is a qualifying hire car if—

    (a) it is provided wholly or mainly for hire to, or the carriage of, members of the public in the ordinary course of a trade, and

    (b) the case is within subsection (2), (3) or (4).

(2) The first case is where the following conditions are met—

    (a) the number of consecutive days for which the car is on hire to, or used for the carriage of, the same person will normally be less than 30, and

    (b) the total number of days for which it is on hire to, or used for the carriage of, the same person in any period of 12 months will normally be less than 90.

(3) The second case is where the car is provided for hire to a person who will himself use it—

    (a) wholly or mainly for hire to, or for the carriage of, members of the public in the ordinary course of a trade, and

    (b) in a way that meets the conditions in subsection (2).

(4) The third case is where the car is provided wholly or mainly for the use of a person in receipt of -

    (a) a disability living allowance under—

    (i) the Social Security Contributions and Benefits Act 1992, or

    (ii) the Social Security Contributions and Benefits (Northern Ireland) Act 1992,

    because of entitlement to the mobility component,

    (b) a mobility supplement under a scheme made under the Personal Injuries (Emergency Provisions) Act 1939,

    (c) a mobility supplement under an Order in Council made under section 12 of the Social Security (Miscellaneous Provisions) Act 1977, or

    (d) any payment appearing to the Treasury to be of a similar kind and specified by them by order.

(5) For the purposes of subsection (2) persons who are connected with each other are to be treated as the same person.

Clause 50: Hiring cars (but not motor cycles) with low carbon dioxide emissions

212.     This clause excludes cars with low CO2 emissions and electrically propelled cars from the restriction in clause 48. It is based on section 578A(2A) and (2B) of ICTA and section 60 of FA 2002.

213.     Expenditure incurred on hiring a car first registered before 17 April 2002 does not qualify for relief under this clause. See Part 3 of Schedule 2 to this Bill.

214.     Subsection (2) defines "car with low CO2 emissions" and "electrically propelled car" by reference to section 45D of CAA.

215.     Section 45D(2) to (6) of CAA defines a car with low CO2 emissions as follows:

(2) For the purposes of this section a car with low CO2 emissions is a car which satisfies the conditions in subsections (3) and (4).

(3) The first condition is that, when the car is first registered, it is so registered on the basis of an EC certificate of conformity, or a UK approval certificate, that specifies—

    (a) in the case of a car other than a bi-fuel car, a CO2 emissions figure in terms of grams per kilometre driven, or

    (b) in the case of a bi-fuel car, separate CO2 emissions figures in terms of grams per kilometre driven for different fuels.

(4) The second condition is that the applicable CO2 emissions figure in the case of the car does not exceed 120 grams per kilometre driven.

(5) For the purposes of subsection (4) the applicable CO2 emissions figure in the case of a car other than a bi-fuel car is—

    (a) where the EC certificate of conformity or UK approval certificate specifies only one CO2 emissions figure, that figure, and

    (b) where the certificate specifies more than one CO2 emissions figure, the figure specified as the CO2 emissions (combined) figure.

(6) For the purposes of subsection (4) the applicable CO2 emissions figure in the case of a bi-fuel car is—

    (a) where the EC certificate of conformity or UK approval certificate specifies more than one CO2 emissions figure in relation to each fuel, the lowest CO2 emissions (combined) figure specified, and

    (b) in any other case, the lowest CO2 figure specified by the certificate.

216.     Section 45D(7) of CAA provides that the amount specified in section 45D(4) may be amended by Treasury order.

217.     Section 45D(9) of CAA defines an electrically propelled car as a car which is:

(a) ..propelled solely by electrical power, and

(b) that power is derived from—

    (i) a source external to the vehicle, or

    (ii) an electrical storage battery which is not connected to any source of power when the vehicle is in motion.

Clause 51: Patent royalties

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

Clause 52: Exclusion of double relief for interest

219.     This clause prevents a deduction for interest paid if the taxpayer claims relief under section 353 of ICTA. It is based on section 368(4) and (6) of ICTA.

220.     The clause will apply in the limited circumstances in which it is possible to claim relief for interest paid under section 353 of ICTA and as a deduction in calculating trade profits. This is likely only if the claim under section 353 of ICTA satisfies the qualifying conditions in section 359 of ICTA (loan to buy machinery or plant). Such relief is given in the tax year in which the interest is paid.

221.     Alternatively, if the normal trade profit rules are met, the interest may qualify as a trading deduction. Such a deduction would be allowed on the normal accruals basis.

222.     The clause is mirrored by section 368(3) of ICTA which prevents a claim under section 353 of ICTA if the interest has been allowed as a trading deduction.

223.     Subsection (5) gives the rule for deciding when relief under section 353 of ICTA has been given. It uses the definition of "finally determined" in section 43C(4) of TMA. See Change 12 in Annex 1.

Clause 53: Social security contributions

224.     This clause prevents a deduction for most social security contributions in calculating trade profits. It is based on section 617 of ICTA.

225.     The rule is that there can be no deduction for the trader's own social security contributions. The clause achieves this by prohibiting a deduction for any contributions and making an exception for contributions that an employer makes for the trade's employees.

226.     The rule in section 617 of ICTA applies generally for tax purposes. The Bill splits the rule.

  • This clause sets out the income tax trading income rule (applied also to property income by clause 272).

  • Clause 868 sets out the income tax rule for non-trading income charged to tax by this Bill.

  • A new section 360A of ITEPA is introduced by this Bill (see Part 2 of Schedule 1 to this Bill) to set out the rule for employment income.

  • Section 617 of ICTA as consequentially amended (see Part 1 of Schedule 1 to this Bill) continues to apply for corporation tax.

Clause 54: Penalties, interest and VAT surcharges

227.     This clause contains the rule that most tax penalties and interest are not to be deducted for tax purposes. It is based on section 90 of TMA and section 827 of ICTA.

228.     The clause brings together all the rules prohibiting a trading deduction for penalties, interest and surcharges imposed by statute. So it deals with interest on unpaid income tax (imposed by TMA) as well as the penalties, interest, and surcharges relating to the indirect taxes that are dealt with in section 827 of ICTA. The clause is applied to property income by clause 272.

229.     There is a similar rule for non-trading income in clause 869.

230.     The table in subsection (2) sets out the specific statutory references because a general description of the penalties etc would not be precise enough. But the second column of the table is a description of the tax to indicate what is involved.

Clause 55: Crime-related payments

231.     This clause prohibits any deduction for expenses incurred in making a payment:

  • the making of which is a criminal offence, or which would be a criminal offence if the payment was made in the United Kingdom; or

  • which is made in response to a demand, the making of which is a criminal offence.

232.     The clause is based on section 577A of ICTA.

233.     It overrides any provision which otherwise allows a deduction to be made in calculating the profits of a trade. See clause 31(1)(b).

Chapter 5: Trade profits: rules allowing deductions

Overview

234.     This Chapter contains provisions allowing various deductions in calculating the profits of a trade.

Clause 56: Professions and vocations

235.     This clause makes it unnecessary to specify repeatedly that the rules in this Chapter (apart from clauses 87 to 90) apply to a profession or vocation as well as to a trade. It is new.

Clause 57: Pre-trading expenses

236.     This clause gives relief for expenses incurred before a trade starts. It is based on section 401(1) of ICTA.

237.     Originally section 401 of ICTA gave relief by creating a loss for the tax year in which the expense was incurred. It was amended to allow the expense as a deduction on the first day of trading.

238.     Subsection (1) sets the scene. Consistent with other rules in this Part, it refers to the "date" on which (instead of the "time" when) a person starts to trade.

239.     Subsection (2) identifies the expenses that are allowed by the clause. They are expenses that would be allowable if incurred after the start of the trade.

Clause 58: Incidental costs of obtaining finance

240.     This clause gives relief for certain costs incurred in obtaining a loan, or an abortive loan. It is based on section 77(1),(2),(6) and (7) of ICTA.

241.     Without this clause, no deduction would be allowed for the incidental costs of raising a loan on capital account.

242.     Subsection (2) defines "incidental costs of obtaining finance". Expenses incurred in the course of obtaining finance other than those listed in subsection (2) are subject to the rules restricting or allowing deductions in the usual way.

Clause 59: Convertible loans and loan stock etc.

243.     This clause excludes from relief under clause 58 costs relating to certain convertible securities. It is based on based on section 77(3),(4) and (5) of ICTA

Clause 60: Tenants under taxed leases: introduction

244.     This clause and the following five clauses entitle a tenant who uses land for the purposes of a trade to a deduction in calculating the profits of the trade for expenses which he or she is treated as incurring if the land is held under a lease which gives rise to an amount brought into account under Chapter 4 of Part 3 of this Bill. Chapter 4 of Part 3 of this Bill is based on sections 34 to 38 of ICTA. This clause is based on section 87(1),(2) and (8) of ICTA.

245.     Clauses 277 to 286 treat certain amounts received by landlords as receipts of a property business. Clauses 291 to 294 give a tenant carrying on a property business relief in the form of a deduction for expenses which the tenant is treated as having incurred. In rewriting section 87 of ICTA, clauses 60 to 65 follow the same approach as clauses 291 to 294 by giving relief in the form of a deduction for expenses which the tenant is treated as having incurred.

246.     Section 87(2) of ICTA treats a person who occupies for the purposes of a trade land in relation to which any amount "falls to be treated as a receipt of a Schedule A business" by virtue of section 34 or 35 of ICTA as paying rent. In accordance with the policy of treating UK and overseas property businesses in the same way as far as possible, subsection (1) extends relief under section 87(2) of ICTA to a person who occupies for the purposes of a trade land outside the United Kingdom in relation to which any amount falls to be treated as a receipt of an overseas property business by virtue of section 34 or 35 of ICTA as applied by section 65A(5) of ICTA. See Change 13 in Annex 1.

247.     The amount which a tenant can deduct in respect of rent which he or she is treated as paying under section 87(2) is qualified by:

  • the general rules as to deductions not allowable in computing the profits of a trade in section 74(1) of ICTA; and

  • rules prohibiting or restricting the deduction of specific expenditure elsewhere in ICTA.

248.     In this Bill, the rules restricting deductions are to be found in Chapter 4 of Part 2. Section 74(1)(a) of ICTA is rewritten in clause 34. Subsection (3) of this clause preserves the interaction of section 87(2) of ICTA and the general and specific rules restricting deductions in ICTA by providing that a deduction for an expense which a tenant is treated as incurring under clause 61 is subject to the application of any provision of Chapter 4 of this Bill.

 
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Prepared: 3 December 2004