Clause 123: Section 122: sale outside farmer's control

506.     This clause limits the amount taxed as a trade receipt under clause 122 if the sale is for reasons outside the farmer's control and the new animal is of a worse quality. It is based on paragraph 3(9)(a) of Schedule 5 to ICTA.

507.     The clause is similar to clause 117 although it is not limited, as that clause is, to disposals under a disease control order. The source legislation for both clauses refers to the amount of the trading receipt being restricted to "the amount allowable as a deduction". It is not immediately clear what this amount is.

508.     Subsection (2) makes clear that it is the amount allowable as a deduction in respect of the new animal. The clause calls this "the equivalent amount for the new animal".

509.     Subsections (3) and (4) define "the equivalent amount for the new animal". Subsection (3) deals with the case in which the replacement animal comes from the farmer's trading stock. Subsection (4) deals with all other cases.

Clause 124: Herd basis elections

510.     This clause sets out the rules for the making of herd basis elections. It is based on paragraph 2 of Schedule 5 to ICTA.

511.     The clause does not specify that the election is to be made to "the inspector". Clause 878(4) draws attention to the rules in TMA, which apply for the purposes of this Bill. Those rules require elections to be made to "an officer of the Board".

512.     Subsection (2) sets out the time limit for making the election. It merges the rules for partnerships and all other taxpayers with one exception. See Change 34. The exception is the extension to the time limit given to taxpayers other than partnerships by paragraph 2(5) of Schedule 5 to ICTA. This extension is preserved in subsection (2)(b).

513.     Subsection (3) defines "the first relevant period of account". See Change 34 in Annex 1.

514.     Subsection (4) expands on subsection (1), which provides that an election must specify the class of production herd to which it relates. This means separate elections must be made for each class of production herd and that an election may not relate to more than one class of production herd. Separate elections may be made for different classes.

515.     Subsection (6) identifies the production herds to which the election applies.

516.     Subsection (7) identifies the periods of account to which the election applies. See Change 35 in Annex 1. Clause 129 allows earlier years to be re-opened to give effect to an election.

517.     Subsection (8) deals with the case in which the farmer is a firm and there is a change in the partners in the firm. Paragraph 2 of Schedule 5 to ICTA refers to "the farmer making the election". If the farming trade is carried on in partnership, the "farmer" means the firm. If there is a change in the members of a firm, the question arises whether there is a new "farmer". Subsection (8) makes clear that there is.

Clause 125: Five year gap in which no production herd kept

518.     This clause deals with the case where there is a period of at least five years when the farmer does not keep a production herd of the particular class for which he or she has made a herd basis election. It is based on paragraph 4 of Schedule 5 to ICTA.

519.     Subsection (2) explains the consequences for the herd basis rules if the farmer starts to keep another production herd of the same class after the end of the five year period. See Change 36 in Annex 1.

Clause 126: Slaughter under disease control order

520.     This clause sets out the rules for making an election outside the normal time limits following slaughter under a disease control order. It is based on paragraph 6 of Schedule 5 to ICTA.

521.     Subsection (1) sets out the conditions for the clause to apply. An explanation of what is meant by "substantial part of the herd" is given in clause 113(6).

522.     Subsection (2) allows the farmer to make a herd basis election in respect of the class of production herd involved in the slaughter and identifies the relevant time limits.

523.     In line with the approach adopted in the rewrite of the ordinary time limits in clause 124 this clause merges the rules for partnerships and all other taxpayers and applies the longer time limits given to partnerships. See Change 37 in Annex 1.

524.     Subsection (3) identifies the periods of account to which the election applies.

Clause 127: Preventing abuse of the herd basis rules

525.     This clause provides anti-avoidance rules that may apply if a farmer transfers the whole or part of a production herd in a transaction that is not an open market sale. It is based on paragraph 5 of Schedule 5 to ICTA.

526.     Subsection (1) sets out the conditions for the clause to apply. If the transfer is not an open market sale the clause will apply if either the "control condition" or the "herd basis benefit condition" are met.

527.     Subsection (2) defines the relationship that must exist between the parties to the transfer for the "control condition" to apply.

528.     Subsection (4) sets out the conditions for the "herd basis benefit condition" to apply.

529.     Subsection (6) gives the counter-action that applies if either the "control condition" or the "herd basis benefit condition" are met. The animals are treated as sold at their open market value. Clause 175(3) in Chapter 12 of Part 2 of this Bill (trade profits: valuation of stock and work in progress) makes clear that this clause takes priority over the provisions of that Chapter.

Clause 128: Information if election made

530.     This clause gives the Inland Revenue power to obtain information about the animals kept for the purposes of the trade. It is based on paragraph 10 of Schedule 5 to ICTA.

531.     Only the person carrying on the trade can be required to deliver a return. The reference to "inspector" has been changed to "Inland Revenue". See Change 149 in Annex 1.

Clause 129: Further assessment etc. if herd basis rules apply

532.     This clause enables effect to be given to a herd basis election made after an assessment has become final, either by amendment or by repayment of tax. It is based on paragraph 11 of Schedule 5 to ICTA.

Chapter 9: Trade profits: films and sounds recordings

Overview

533.     This Chapter rewrites the special rules for expenditure on the production and acquisition of films, tapes and discs in sections 40A to 43 of F(No 2)A 1992, section 48 of F(No 2)A 1997 and sections 99 to 101 of FA 2002 as they apply to persons trading in the exploitation of films, tapes and discs. Rules for non-trade businesses involving films or sound recordings are in clauses 609 to 613 of this Bill.

Clause 130: Expenditure to which this Chapter applies

534.     This clause is based on sections 40A to 43 of F(No 2)A 1992.

535.     Section 40A(1) F(No 2) 1992 refers to a "master version" of a film. Section 40A(5) defines a "master version" of a film as "a master negative, master tape or master audio disc" of the film. Section 43(1) of F(No 2)A 1992 defines "master negative", "master disc" and "master tape" in relation to a film.

536.     Subsections (1) to (4) refer instead to "the original master version of a film or sound recording". See Change 38 in Annex 1.

537.     Subsection (5) excludes interest and the incidental costs of obtaining finance from the definition of expenditure incurred in the production or acquisition of films and sound recordings. See Change 39 in Annex 1.

538.     Clause 135 and clauses 137 to 140 provide for a deduction in calculating the profits of the trade of the amount of preliminary, production or acquisition expenditure on the original master version of a film or sound recording allocated to a relevant period. In each case, the deduction is subject to the application of "any prohibitive rule". Subsection (7) defines "any prohibitive rule" for the purposes of such deductions.

Clause 131: Meaning of "film" and related expressions.

539.     This clause is based on section 43 of F(No 2)A 1992 and paragraph 1 of Schedule 1 to the Films Act 1985.

540.     Subsection (1) reproduces the definition of "film" in paragraph 1(1) of Schedule 1 to the Films Act 1985. This is based on the requirement in section 43(2) of F(No 2)A 1992 that references to a film in sections 41 and 42 of F(No 2)A 1992 are to be construed in accordance with paragraph 1 of Schedule 1 to the Films Act 1985.

541.     Subsection (3) provides that a series of films in respect of which the Secretary of State has given a direction under paragraph 1(4) of Schedule 1 to the Films Act 1985 is treated as a single film for the purposes of this Chapter. For the purposes of Schedule 1 to the Films Act 1985 and of this clause, "the Secretary of State" is the Secretary of State for the Department of Culture, Media and Sport.

542.     Paragraph 1(4) of Schedule 1 to the Films Act 1985 provides as follows:

(4) The Secretary of State may direct that a number of films shall be treated as a single film for the purposes of this Schedule if—

(a)     they form a series with not more than twenty-six parts;

(b)     the combined playing time is not more than twenty-six hours; and

(c)     in the opinion of the Secretary of State the series constitutes a self-contained work or is a series of documentaries with a common theme.

Clause 132: Meaning of "original master version" and "certified master version"

543.     This clause is based on sections 40A(5) and 43(1) of F(No 2)A 1992.

544.     Section 40A(5) of F(No 2)A 1992 defines a "master version" of a film as "a master negative, master tape or master audio disc" of the film. Section 43(1) of F(No 2)A 1992 defines "master negative", "master disc" and "master tape" in relation to a film.

545.     Subsection (1) defines "original master version" in relation to both a film and a sound recording. See Change 38 in Annex 1.

546.     Subsection (3) introduces the label "certified master version" for a film certified by the Secretary of State for Culture, Media and Sport as a qualifying film, tape or disc under paragraph 3 of Schedule 1 to the Films Act 1985. For the purposes of Schedule 1 to the Films Act 1985 and of this clause, "the Secretary of State" is the Secretary of State for the Department of Culture, Media and Sport.

547.     The criteria for certification under paragraph 3 of Schedule 1 to the Films Act 1985 are set out in paragraph 4 of that Schedule. Paragraph 4 of Schedule 1 to the Films Act 1985 requires the maker of the film to be ordinarily resident in a member State of the European Union and includes further requirements regarding the percentage of total expenditure on the production of the film to be incurred in the United Kingdom and on the fraction of the labour costs of the film to be paid to citizens of, or persons ordinarily in, a member State of the European Union.

548.     The special rules for the treatment of certified master versions in sections 40D, 41 and 42 of F(No 2)A 1992, section 48 of F(No 2)A 1997 and sections 99 to 101 of FA 2002 are rewritten in clauses 136 to 144 of this Bill.

Clause 133: Meaning of "relevant period"

549.     This clause is based on sections 40B, 40D and 43 of F(No 2)A 1992.

Clause 134: Expenditure treated as revenue in nature

550.     This clause is based on section 40A of F(No 2)A 1992.

551.     Expenditure on the production or acquisition of a film is in the nature of capital expenditure on the provision of a fixed asset and is eligible for capital allowances under the normal rules in CAA. This clause provides for expenditure and receipts in respect of a film to be treated instead as revenue for income tax purposes.

552.     Clause 143 allows the person carrying on the trade to elect for this clause and clauses 135 to 140 (which contain rules for allocating expenditure treated as revenue to relevant periods) not to apply.

Clause 135: Films and sound recordings: production or acquisition expenditure

553.     This clause sets out the basic rules for allocation of expenditure to a relevant period. It is based on sections 40B and 40C of F(No 2)A 1992.

554.     Section 40B of F(No 2)A 1992 refers to expenditure on the production or acquisition of a master version of a film. Subsection (1) refers instead to the original master versions of "films or sound recordings". See Change 38 in Annex 1.

555.     Subsection (2) provides that a deduction for production or acquisition expenditure allocated to the relevant period is subject to the application of "any prohibitive rule". "Any prohibitive rule" is defined in clause 130(7) as any provision of the Income Tax Acts which prohibits, or restricts the extent of, a deduction in calculating the profits of a trade.

556.     Subsection (4) provides for production and acquisition expenditure to be allocated to a relevant period in such a way that it will be written off over the period during which the value of the film or sound recording is expected to be realised. This is generally known as the "income matching" method of allocation.

557.     Subsection (5) allows the amount allocated under subsection (4) to be increased to an amount equal to the value realised in the relevant period. This is generally known as the "cost recovery" method.

558.     This clause dispenses with the requirement in section 40B(5) of F(No 2)A 1992 for a claim to be made if the "cost recovery" method is to apply. See Change 40 in Annex 1.

559.     Subsection (7) provides that if any expenditure in respect of the original master version of a film or sound recording is allocated to the relevant period under the special rules for certified master versions in clauses 137 to 140 (or under the corresponding rules in F(No 2)A 1992) no expenditure in respect of the same master version can be allocated under this clause. This gives the person carrying on the trade a choice in any relevant period between allocating expenditure under the basic rules in this clause or under the special rules for certified films in clauses 137 to 140. See Change 41 in Annex 1.

Clause 136: Application of provisions about certified master versions

560.     This clause is based on sections 41 and 42 of F(No 2)A 1992.

Clause 137: Certified master versions: preliminary expenditure

561.     This clause allows preliminary expenditure on a qualifying film "genuinely intended for theatrical release" to be written off in the relevant period in which it is incurred. It is based on section 41 of F(No 2)A 1992 and section 99(1) of FA 2002.

562.     Preliminary expenditure is not defined. It consists of expenditure incurred in deciding whether to make the film (generally known in the industry as "development" or "pre-production" expenditure). "Genuinely intended for theatrical release" is defined in clause 144 and refers to films intended for commercial release in cinemas.

563.     This clause dispenses with the requirement in section 41(1) of F(No 2)A 1992 for a claim to be made for preliminary expenditure to be allocated to a relevant period. See Change 40 in Annex 1.

564.     Subsection (3) provides that a deduction for preliminary expenditure allocated to the relevant period is subject to the application of "any prohibitive rule". "Any prohibitive rule" is defined in clause 130(7) as any provision of the Income Tax Acts which prohibits, or restricts the extent of, a deduction in calculating the profits of a trade.

565.     Subsection (7) prevents preliminary expenditure being relieved both under this clause and under the basic rules in clause 135 in the same relevant period. See Change 41 in Annex 1.

Clause 138: Certified master versions: production or acquisition expenditure

566.     This clause allows production or acquisition expenditure on a qualifying film intended for commercial release in cinemas to be written off over three years. It is based on section 42 of F(No 2)A 1992, section 48(4) and (5) of F(No 2)A 1997 and section 99(1) of FA 2002.

567.     Subsection (2) provides that a deduction for production or acquisition expenditure allocated to the relevant period is subject to the application of "any prohibitive rule". "Any prohibitive rule" is defined in clause 130(7) as any provision of the Income Tax Acts which prohibits, or restricts the extent of, a deduction in calculating the profits of a trade.

568.     Subsections (3) to (5) allow up to one-third of production or acquisition expenditure not already allocated under clauses 137, 139 or 140 (or under the corresponding rules in F(No 2)A 1992) to be allocated a relevant period under this clause.

569.     This clause dispenses with the requirement in section 42(1) of F(No 2)A 1992 for a claim to be made for production or acquisition expenditure to be allocated to a relevant period. See Change 40 in Annex 1.

570.     Subsection (7) provides that expenditure may not be allocated to a relevant period under this clause if expenditure in respect of the same film has been allocated to that period under the basic rules in clause 135.

Clause 139: Certified master versions: production expenditure on limited-budget films

571.     This clause allows production expenditure incurred before 2 July 2005 on a qualifying film with total production expenditure of £15 million or less and intended for commercial release in cinemas to be written off in full in the period in which it is incurred. It is based on section 42 of F(No 2)A 1992, section 48 of F(No 2)A 1997 and section 99(1) of FA 2002.

572.     Subsection (2) provides that a deduction for production expenditure allocated to the relevant period is subject to the application of "any prohibitive rule". "Any prohibitive rule" is defined in clause 130(7) as any provision of the Income Tax Acts which prohibits, or restricts the extent of, a deduction in calculating the profits of a trade.

Clause 140: Certified master versions: acquisition expenditure on limited-budget films

573.     This clause allows expenditure incurred before 2 July 2005 on the first acquisition of a qualifying film with total production expenditure of £15 million or less and intended for commercial release in cinemas to be written off in full in the period in which it is incurred. It is based on section 42 of F(No 2)A 1992, section 48 of F(No 2)A 1997 and sections 99(1) and 101 of FA 2002.

574.     Subsection (3) provides that a deduction for acquisition expenditure allocated to the relevant period is subject to the application of "any prohibitive rule". "Any prohibitive rule" is defined in clause 130(7) as any provision of the Income Tax Acts which prohibits, or restricts the extent of, a deduction in calculating the profits of a trade.

Clause 141: Meaning of "total production expenditure"

This clause defines "total production expenditure" for the rules on limited budget films in clauses 139 and 140. It is based on section 48(6),(6A) and (7) of F(No 2)A 1997.

575.     Subsection (4) substitutes an "arm's length" amount for any expenditure incurred as a result of a transaction between connected persons in arriving at the total production expenditure. "Connected person" is defined in section 839 of ICTA (see clause 878(5)).

Clause 142: When expenditure is incurred

576.     This clause is based on section 48(9) of F(No 2)A 1997 and section 5 of CAA.

Clause 143: Election for sections 134 to 140 not to apply

577.     This clause allows for the person carrying on the trade to elect for clauses 134 to 140 not to apply to expenditure on a certified film intended for commercial release in cinemas. It is based on section 40D of F(No 2)A 1992.

578.     The effect of such an election is that expenditure on the film will be treated not as revenue expenditure but as capital expenditure. Capital allowances may then be available under the normal rules in CAA.

579.     This clause dispenses with the requirement in section 40D(3) of F(No 2)A 1992 for an election to be made "in such form as the Board of Inland Revenue may determine". This is because under section 42(2), (10) and (11) of TMA an election must be made either in a return under sections 8, 8A and 12AA of TMA (the form of which is determined by the Board) or "in such form as the Board may determine" in accordance with paragraph 2(3) of Schedule 1A to TMA .

Clause 144: Meaning of "genuinely intended for theatrical release"

580.     This clause is based on section 99(2) of FA 2002.

581.     Section 99(3) and (4) of FA 2002 contain transitional rules for qualifying films which do not meet the "genuinely intended for theatrical release" test but for which application for certification was received before 17 April 2002 or which were commissioned on or before 17 April 2002. See Schedule 2 to this Bill.

Chapter 10: Trade profits: certain telecommunication rights

Overview

582.     This Chapter applies to certain telecommunication licences and capacity on telecommunication cable systems known as indefeasible rights to use (IRUs). It is based on Schedule 23 to FA 2000.

583.     The Chapter provides that the income tax treatment follows the treatment in the accounts provided the accounts are prepared in accordance with generally accepted accounting practice. This allows a taxpayer who acquires qualifying rights a deduction for expenditure that would otherwise be capital for tax purposes.

584.     It applies to IRUs acquired on or after 21 March 2000. See the transitional rule in Schedule 2 to this Bill.

Clause 145: Professions and vocations

585.     This clause makes it unnecessary to specify repeatedly that the rules in this Chapter apply to a profession or vocation as well as a trade. It is new.

Clause 146: Meaning of "relevant telecommunication right"

586.     This clause defines "relevant telecommunication right". It is based on paragraph 1 of Schedule 23 to FA 2000.

587.     To date, the only licences to which paragraph (a) applies were granted in response to the government auction of third generation mobile telephone licences in April 2000.

Clause 147: Expenditure and receipts treated as revenue in nature

588.     This clause sets out the general rule that the tax treatment follows the treatment in the accounts. It also identifies a number of circumstances that will be treated as the acquisition or disposal of a relevant telecommunications right. It is based on paragraph 2 of Schedule 23 to FA 2000.

589.     Subsection (1) sets out the conditions for the clause to apply. An amount in respect of the acquisition cost or disposal proceeds of the rights must be included in the calculation of profit or loss in accounts prepared in accordance with generally accepted accounting practice. In the case of acquisition costs this will usually be an amount of amortisation.

590.     This clause does not rewrite paragraph 4 of Schedule 23 to FA 2000 because it is likely to be of theoretical application only in the income tax field. Paragraph 4 of Schedule 23 to FA 2000 deals with the case in which the taxpayer is a member of a group of companies that prepares consolidated group accounts. It provides that in relation to paragraphs 2 and 3 of Schedule 23 to FA 2000 the accounting treatment in the taxpayer's accounts must be no more cautious than that adopted in the group accounts.

591.     It is unlikely that a company liable to income tax would acquire a right to which the Schedule applies. Even if it did paragraph 4 of Schedule 23 to FA 2000 would be relevant only if it was a member of a group of companies which prepared consolidated accounts on a less cautious basis.