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

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Clause 61: Tenants occupying land for purposes of trade treated as incurring expenses

249.     This clause treats a tenant under a lease in respect of which an amount is brought into account by the landlord under clauses 277 to 282 (a "taxed lease") as incurring an expense for each day on which the property held under the lease is occupied for the purposes of his or her trade. It is based on section 87(2),(3) and (9) of ICTA.

250.     Clauses 277 to 282 rewrite sections 34 and 35 of ICTA. Sections 34 and 35 of ICTA treat premiums and certain other amounts in respect of leases as rent. In clauses 277 to 282, a person who receives a premium, or an amount treated as a premium in section 34 or 35 of ICTA, is instead treated as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or in clause 265 (if the land is outside the United Kingdom). This gives rise to a UK or overseas property business (as defined in clauses 264 and 265) if the recipient is not already carrying on such a business.

251.     Clauses 277 to 282 then require the recipient to bring an amount in respect of the premium or other amount payable under the lease into account as a receipt in calculating the profits of his or her property business.

252.     Section 87(2) of ICTA treats a tenant who occupies land for the purposes of a trade as paying rent. This corresponds to the treatment in sections 34 and 35 of ICTA of a landlord who receives a premium, or an amount treated as a premium, as rent.

253.     Subsection (1) instead treats the tenant as incurring an expense in respect of the land subject to the taxed lease. This corresponds to the treatment of the premium or other amount in respect of the land as a receipt in calculating the profits of the landlord's property business in clauses 277 to 282.

254.     Section 87 of ICTA says that the tenant is treated as paying rent for the purposes of making deductions in calculating the profits of a trade. But the tenant is only entitled to a deduction if at least some of the property is used for the purposes of the trade. So subsection (3) defines a qualifying day as a day on which the tenant occupies all or a part of the land subject to the taxed lease for the purposes of carrying on a trade.

255.     The formula in subsection (4) calculates the expense for each qualifying day by spreading the amount of the taxed receipt evenly over the receipt period of that receipt. Defining "A" in that formula as "the unreduced amount of the taxed receipt" makes clear that the amount of the expense which the tenant is treated as incurring for each qualifying day is calculated by reference to the amount of the taxed receipt before any reductions or deductions.

256.     Subsection (5) modifies that formula for a qualifying day on which the tenant occupies only part of the land subject to the taxed lease for the purposes of a trade.

257.     Section 87(3) of ICTA requires a "just apportionment" to be made where part only of the land subject to the lease is used for the purposes of the trade. Subsection (5) instead requires the fraction of the land which is occupied by the tenant for the purposes of the trade to be calculated "on a just and reasonable basis". See Change 14 in Annex 1.

Clause 62: Limit on deductions if tenant entitled to mineral extraction allowance

258.     This clause prevents a double deduction where a tenant is entitled under section 403 of CAA to an allowance in respect of qualifying expenditure on acquiring a mineral asset. It is based on section 87(7) of ICTA.

259.     Section 87(7) of ICTA refers to an allowance for "any chargeable period". Section 832 of ICTA defines chargeable period (other than in the case of an accounting period of a company) as a year of assessment. So this clause refers instead to an allowance for "a tax year".

Clause 63: Tenants dealing with land as property employed for purposes of trade

260.     This clause applies to a tenant who, while not occupying a property, uses the property for the purposes of a trade - for example a trader who lets premises held under a taxed lease to a tenant who sells only goods supplied by that trader. It is based on section 87(4) and (6) of ICTA.

261.     Subsection (2) treats the tenant as if he or she occupied the property for the purposes of relief under clause 61.

262.     Subsection (3) is based on section 87(6) of ICTA which says that a tenant shall not be treated as paying rent under section 87(4) of ICTA for any chargeable period for which rent has, or will be, treated as paid under section 37(4) of ICTA. It prevents a tenant obtaining relief under clause 61 to the extent that relief for the same day has been allowed in calculating the profits of a property business under clause 292. Clause 292 rewrites section 37(4) of ICTA.

Clause 64: Restrictions on section 61 expenses: lease premium receipts

263.     This clause is based on section 87(5) of ICTA. It restricts the expenses a tenant is treated as incurring under clause 61 where a tenant under a taxed lease:

  • grants a sublease in respect of a property which clause 63 treats the tenant as occupying for the purposes of the trade; and

  • receives in respect of the sublease, an amount which is brought into account as a receipt under Chapter 4 of Part 3 of this Bill (a "lease premium receipt").

264.     Section 87(5) of ICTA applies where there is a reduction in a receipt of a Schedule A business by virtue of section 34 or 35 of ICTA. This clause also applies where there is a reduction in 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.

265.     Clause 61 treats a tenant who occupies land under a taxed lease for the purposes of a trade as incurring an expense for each qualifying day in the receipt period of the taxed receipt relating to the taxed lease. The expense is calculated by reference to the amount of the taxed receipt.

266.     If there is a reduction under clause 288 in the amount which the tenant brings into account as a receipt under Chapter 4 of Part 3 of this Bill in respect of the sublease, clause 64 makes a corresponding reduction in the amount of the expense which clause 61 treats the tenant as incurring for a qualifying day in the receipt period of the lease premium receipt.

267.     It is not clear how the rule in section 37(5) of ICTA (as applied to section 87(4) of ICTA by section 87(5)) of ICTA is intended to apply where there is more than one "amount chargeable" by reference to which relief can be claimed for the same qualifying day.

268.     Subsections (3) and (4) treat the tenant as incurring an expense for a qualifying day of the amount by which the "daily amount" of the taxed receipt exceeds:

  • the "daily reduction" of the lease premium receipt; or

  • if the qualifying day falls within the receipt period of more than one lease premium receipt, the total of the daily reductions of those lease premium receipts.

269.     This corresponds to the treatment in clause 293 of an expense under clause 292 for a qualifying day which falls within the receipt period of more than one lease premium receipt. See Change 15 in Annex 1.

270.     The "daily amount" of a taxed receipt and the "daily reduction" of a lease premium receipt are calculated according to the formulas in subsection (6):

  • the formula for calculating the daily amount of the taxed receipt is the same formula used in clause 61(4) to calculate the amount of the expense which the tenant is treated as incurring for each qualifying day in the receipt period of the taxed receipt; and

  • the formula for the daily reduction of the lease premium receipt allocates equal amounts of the reduction by reference to the taxed receipt under clause 288 to each day in the receipt period of the lease premium receipt.

Clause 65: Restrictions on section 61 expenses: lease of part of premises

271.     This clause is based on section 87(5) of ICTA. It adapts clause 61:

  • where clause 64 applies; and

  • the sublease granted by the tenant does not extend to the whole of the premises subject to the taxed lease.

272.     Subsection (4) deals with the case where the conditions for relief in clauses 64 and 65 are met on the same qualifying day in respect of more than one lease. This corresponds to the treatment in clause 294(4) of expenses under clauses 292 and 293 where more than one taxed receipt falls to be reduced by reference to the same taxed receipt. See Change 15 in Annex 1.

273.     Subsection (5) adapts the formulas in clauses 61(4) and 64(6) by multiplying the unreduced amount of the taxed receipt in those formulas ("A") by the fraction of the premises to which the sublease relates.

274.     Section 87(3) of ICTA requires a "just apportionment" to be made where part only of the land to which section 87(2) of ICTA applies is occupied for the purposes of a trade. This clause instead requires the fraction in subsection (5) to be calculated "on a just and reasonable basis". See Change 14 in Annex 1.

Clause 66: Corporation tax receipts treated as taxed receipts

275.     This clause and the following clause ensure that a tenant is entitled to relief for an expense under clauses 61 by reference to an amount treated as a result of section 34 or 35 of ICTA as a receipt of a Schedule A business, or an overseas property business, of a landlord liable to corporation tax in the same way as if the landlord was liable to income tax on an equivalent amount as a receipt of his or her property business under clauses 277 to 282. This clause is new.

276.     Clause 296 adapts certain terms used to give a tenant who is carrying on a property business relief under clauses 287 to 290 by reference to an amount taken into account for income tax purposes under clauses 277 to 282 so as to give relief instead by reference to an amount treated as a receipt under section 34 or 35 of ICTA for the purpose of corporation tax:

  • subsection (1) of clause 296 introduces the label "corporation tax receipt" for an amount treated as a receipt of a Schedule A business under section 34 or 35 of ICTA on the interest of a landlord liable to corporation tax for an accounting period ending after 5 April 2005, or which would be treated as such a receipt other than for relief under section 37(2) of ICTA;

  • subsection (2) of clause 296 provides that, for the purposes of Chapter 4 of Part 3 of this Bill, a corporation tax receipt is treated as a taxed receipt and the lease in respect of which it arose is treated as a taxed lease. "Taxed lease" and "taxed receipt" are defined in clause 287(4);

  • subsection (3) of clause 296 adapts the term "receipt period" (as defined in clause 288(6)) to apply to a corporation tax receipt; and

  • subsection (4) of clause 296 adapts the term "unreduced amount" (as defined in clause 290(2) and (5)) to apply to a corporation tax receipt.

277.     In applying clause 296 for the purposes of clauses 60 to 67, this clause performs the same function as clause 296 in relation to a tenant who occupies or otherwise employs property subject to a taxed lease for the purposes of his or her trade.

Clause 67: Restrictions on section 61 expenses: corporation tax receipts

278.     This clause is new. It ensures that any relief given for corporation tax purposes under section 37(2) or (3) of ICTA for an accounting period ending after 5 April 2005 by reference to:

  • a receipt brought into account under Chapter 4 of Part 3 of this Bill where the landlord is liable to income tax; or

  • a receipt brought into account under section 34 or 35 of ICTA where the landlord is liable to corporation tax,

is taken into account in applying clause 61 in the same way as any relief under clause 288.

279.     Subsections (1), (2) and (3) refer to a reduction under section 37(2) or (3) of ICTA by reference to "the amount chargeable on the superior interest".

280.     Section 37(1) of ICTA defines "the amount chargeable on the superior interest" as an amount treated as a receipt of a Schedule A business under section 34 or 35 of ICTA, or which would be so treated other than for relief under section 37(2) or (3) of ICTA, The "superior interest" is the interest in the property held by the immediate landlord.

281.     Schedule 1 to this Bill amends section 37(1) of ICTA by extending the definition of "the amount chargeable on the superior interest" to include any amount treated as a receipt of a property business under clauses 277 to 282, or which would treated as such a receipt other than for relief under the additional calculation rule in clause 288.

282.     So in this clause "the amount chargeable on the superior interest" is an amount:

  • treated as a receipt under section 34 or 35 of ICTA for any tax year; or

  • treated as a receipt under Chapter 4 of Part 3 of this Bill for an accounting period ending after 5 April 2005 as a result of the amendments to section 37(1) of ICTA made under Schedule 1 to this Bill.

Clause 68: Replacement and alteration of trade tools

283.     This clause allows a deduction for the cost of replacing or altering trade tools if the only reason a deduction would not be allowed is that the expenditure is of a capital nature. It is based on that part of section 74(1)(d) of ICTA that relates to deductions in respect of the replacement ("supply") or alteration of implements, utensils and other articles employed for the purposes of the trade.

284.     Expenditure on repairing trade premises or tools is revenue under the normal rules. And following the Special Commissioners decision in Jenners Princes Street Edinburgh Ltd v CIR (1998), SpC000166 3, it is generally accepted that the reference in section 74(1)(d) of ICTA to expenditure "beyond the sum actually expended" does not prohibit the deduction of a provision for repairs if the cost of the repairs would be allowable. So that part of section 74(1)(d) of ICTA which deals with repairs is not rewritten.

3 STC [1998] (SCD) 196

Clause 69: Payments for restrictive undertakings

285.     This clause allows a trader to deduct certain amounts paid to employees for restrictive undertakings. Such amounts might not otherwise be deductible to the extent that they are capital in nature or fall foul of the "wholly and exclusively" rule. The clause is based on section 73(2) of FA 1988.

286.     Section 73(2) of FA 1988 applies only to amounts brought into charge on the employee as earnings under section 225 of ITEPA. The former cross-refers to the latter where the definition of the amounts concerned is set out.

287.     Subsection (1) provides for the deduction. In so doing it focuses on the key element for the rule to apply: the fact of payment.

288.     Subsection (2) provides a timing rule. The deduction allowed by section 73 of FA 1998 is taken in the period of account in which the payment is made and no deduction is allowed in any other period. Similar words are used in clause 77(6) and clause 88(2) so the timing rules for deductions in Chapter 5 of Part 2 of this Bill are explicit and consistent.

Clause 70: Employees seconded to charities and educational establishments

289.     This clause allows a trader to deduct the cost of an employee seconded to a charity or educational establishment in calculating the trade profits. It is based on section 86(1),(2) and (3) of ICTA.

290.     Section 86 of ICTA allows a trader who seconds an employee to a charity or educational establishment to deduct the cost of employing the seconded person to the extent that those costs would have been deductible if the employee continued to be employed for the purposes of the employer's trade. This clause allows the employer to deduct all costs attributable to the seconded employee during the period of the secondment, regardless of whether those costs would have been allowed if the employee had not been seconded. See Change 16 in Annex 1.

291.     Subsection (3) defines "educational establishment" by reference to various bodies listed in clause 71 and to any other educational body approved by "the Secretary of State or, in Northern Ireland, the Department of Education". For the purposes of section 86 of ICTA and of this clause, "the Secretary of State" is the Secretary of State for the Department for Education and Skills.

Clause 71: Educational establishments

292.     This clause defines educational establishments for the purposes of clause 70. It is based on section 86(3),(4),(5) and (6) of ICTA.

293.     Section 86(4)(c) of ICTA refers to an independent school registered under section 465 of the Education Act 1996. Section 465 of the Education Act 1996 was repealed by the Education Act 2002. So subsection (1)(c) refers instead to an independent school registered under section 161 of the 2002 Act.

Clause 72: Payroll deduction schemes: contributions to agents' expenses

294.     This clause an allows an employer a deduction for expenses incurred in operating the payroll deduction scheme. It is based on section 86A of ICTA.

295.     The main rules for payroll deduction schemes are found in Part 12 of ITEPA. Under such a scheme, an employer deducts charitable donations from employees' salaries and pays them to an agent, who distributes them to the employees' chosen charities.

296.     The agent's administrative costs may be deducted from the donations. But many employers voluntarily pay the costs themselves so that the employees' full donations can go to the chosen charities.

297.     Normally, payments made voluntarily to meet someone else's expenses are not made wholly and exclusively for the purposes of a trade and therefore would not be deductible. Employers might get relief for donations to charitable agencies under the Gift Aid scheme. But there are restrictions on the operation of that section and relief would not be available if the agent was not itself a charity.

298.     This clause gives relief for the expenses as a trading deduction.

299.     Subsection (3) defines "approved scheme" and "approved agent" by reference to the definitions in section 714 of ITEPA.

300.     Section 714(2) of ITEPA defines "approved scheme" as:

a scheme which is approved (or is of a kind approved) by the Inland Revenue and under which—

    (a) the payer is required to pay sums withheld to a body which is an approved agent at the time of the withholding, and

    (b) the approved agent is required—

    (i) to pay sums withheld to the specified charity or charities, or

    (ii) in a case where the agent is itself a specified charity, to retain any sum due to itself ..

301.     Section 714(3) of ITEPA defines "approved agent":

For the purposes of this section a body is an "approved agent" if it is approved by the Inland Revenue for the purpose of paying donations to one or more charities.

Clause 73: Counselling and other outplacement services

302.     This clause provides a deduction for certain expenses of counselling provided for employees. It is based on sections 589A and 589B of ICTA, section 108 of FA 1993 and Schedule 6 to ITEPA.

303.     Subsection (3) cross-refers to ITEPA for the conditions that need to be met for the deduction to be allowed (section 310 of ITEPA exempts the employee from tax in respect of counselling received).

Clause 74: Retraining courses

304.     This clause gives a deduction for certain expenses of retraining provided for employees. It is based on section 588 of ICTA and Schedule 6 to ITEPA.

305.     Subsection (2) cross-refers to ITEPA for the conditions that need to be met for the deduction to be allowed (section 311 of ITEPA exempts the employee from tax in respect of qualifying retraining courses).

306.     The clause does not rewrite section 588(3)(b) of ICTA. That provision makes a deduction in calculating the employer's trade profits conditional on the employee's exemption under section 311 of ITEPA in respect of the expenditure in question. This condition is not consistent with the similar provision rewritten in clause 73 and does not serve any material purpose. See Change 17 in Annex 1.

Clause 75: Retraining courses: recovery of tax

307.     This clause allows the recovery of tax when a deduction under clause 74 subsequently proves to have been wrongly allowed. It is based on section 588 of ICTA and Schedule 6 to ITEPA.

308.     Subsection (2), like clause 74(2) cross-refers to the relevant provisions in ITEPA to refer to the conditions that have not been met.

309.     Subsections (4) and (5) refer to the Inland Revenue rather than, as in the source legislation, to the inspector. See Change 149 in Annex 1.

Clauses 76 to 80: Redundancy payments etc

Overview

310.     These five clauses are based on the trading income rules relating to redundancy payments in sections 90, 579 and 580 of ICTA. The rules that deal with the employee's liability are in section 309 of ITEPA.

311.     The trading income rules were introduced to reverse the decisions in CIR v Anglo Brewing Co Ltd (1925), 12 TC 803 and Godden v A Wilson's Stores (Holdings) Ltd (1962), 40 TC 161. In those cases the courts held that certain payments to employees on the closing down of a trade were not deductible in arriving at trading profits. In neither case was the payment made in accordance with a pre-existing obligation.

312.     In 1999 the Inland Revenue announced (Tax Bulletin 39G, February 1999) that it will be guided by the decision in Commissioner of Inland Revenue v Cosmotron Manufacturing Co Ltd (1997), 70 TC 292 4.

4 STC [1997] 1134

313.     In that Hong Kong case the Privy Council decided that redundancy payments made under a pre-existing obligation were deductible. Although that decision is merely persuasive in the United Kingdom, the Inland Revenue no longer argue that payments made under a pre-existing obligation (including a statutory obligation) are covered by the Anglo Brewing and Wilson's Stores decisions. The announcement in Tax Bulletin means that it may not be necessary to give the employer a statutory right to a deduction in calculating trading profits. But these clauses put the matter beyond doubt.

Clause 76: Redundancy payments and approved contractual payments

314.     This clause sets out the circumstances in which the following three clauses apply and explains the terms used in the main provisions. It is based on section 579(2) of ICTA.

315.     The clauses retain the label "redundancy payment" and the expression "additional payment" from the source legislation. This clause also introduces the label "approved contractual payment" to describe the payments that may replace redundancy payments in some cases.

Clause 77: Payments in respect of employment wholly in employer's trade

316.     This clause sets out the main rule governing redundancy payments made by an employer. It is based on section 579(2) of ICTA.

317.     If a payment is otherwise allowable (possibly as a result of the Cosmotron decision - see the overview for this group of clauses), this clause does not interfere with the accountancy treatment of the payment. In that case, the normal accruals basis applies.

318.     Subsection (5) is based on section 113(2) of ICTA. The timing rule in section 579(2)(b) of ICTA refers to the "discontinuance" of a trade. That word has to be interpreted in the light of section 113 of ICTA: the trade is not treated as discontinued unless there is a complete change in the persons carrying it on.

319.     The deduction allowed by section 579 of ICTA is for "a redundancy payment .. made". It is clear that a deduction is allowed only if a payment has been made. It follows that the deduction is to be taken in the period of account in which the payment is made and that no deduction is allowed in any other period.

320.     Subsection (6) has a timing rule expressed in similar words to those used in clauses 69 and 88. So the timing rules for deductions in Chapter 5 of Part 2 are explicit and consistent. This special timing rule applies if the payment is allowable only as a result of this clause.

Clause 78: Payments in respect of employment in more than one capacity

321.     This clause deals with the case where the employee is employed in more than one capacity. It is based on section 579(5) of ICTA. The clause covers the case where there is a private element in the employment and makes clear what part of the payment is allowed as a deduction in calculating trade profits.

322.     Section 579(5) of ICTA does not specify the basis on which to apportion the payment. This clause adopts the "just and reasonable" apportionment that is used consistently in this Bill. See Change 14 in Annex 1.

 
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