|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Clause 148: Credits or debits arising from revaluation
592. This clause sets out the rules that apply if the rights are revalued in the taxpayer's accounts. It is based on paragraph 3 of Schedule 23 to FA 2000.
593. The main purpose of this clause is to prevent the taxpayer obtaining a cost-free increase in the amount on which amortisation will be allowed. If the value of the rights as shown in the accounts is increased in accordance with generally accepted accounting practice the amount on which amortisation is allowed is also increased. But the taxpayer has not borne any costs in respect of this increase. The effect of this clause is to tax the amount of the revaluation.
594. The clause applies even if the revaluation is not reflected in the profit and loss account. For example, generally accepted accounting practice may deal with the revaluation wholly as a balance sheet item.
595. The clause does not apply to revaluations that are not made in accordance with generally accepted accounting practice. Amounts in respect of these revaluations would not meet the test in clause 147(1).
Chapter 11: Trade Profits: Other specific trades
596. This Chapter contains special rules for the taxation of particular trades.
Clause 149:Taxation of amounts taken to reserves
597. This clause contains a special rule for the treatment of securities held by dealers on which the profits and losses are calculated by reference to the "fair value" of the securities rather than on a realisation basis. It is based on section 472A of ICTA.
598. Section 472A of ICTA applies to securities held by a person carrying on a banking or insurance business, or a business of dealing in securities, profits from the sale of which would "form part of the trading profits of that business".
599. The Inland Revenue does not believe that there are currently any individuals or non-resident companies liable to income tax in respect of a banking business. Similarly, the Inland Revenue does not believe that there are, or will be in the future as the law stands at present, any individuals (other than Lloyd's underwriters) or non-resident companies liable to income tax in respect of an insurance business.
600. So this clause does not refer specifically to banking and insurance businesses. But such businesses (except for Lloyd's underwriters who come instead within the special rules in sections 171 and 176 of and Schedule 20 to FA 1993) are covered by the reference to a trade in which a profit on the sale of securities would be brought into account in calculating the profits.
601. Financial assets can be dealt with in a number of ways for accounting purposes.
602. Where a dealer in securities uses United Kingdom generally accepted accountancy practice ("UK GAAP"), profits and losses calculated by reference to the fair value of securities treated as trading assets are taken to profit and loss account. "Fair value" is an accounting term, the meaning of which is broadly equivalent to market value.
603. UK GAAP is defined in section 50(4) of FA 2004:
In the Tax Acts "UK generally accepted accounting practice"
604. Section 50(4)(a) of FA 2004 refers to accounts "other than IAS Accounts". "IAS Accounts" is defined in section 50(1) of FA 2004 as "accounts prepared in accordance with international accounting standards".
605. "International accounting standards" is defined in section 50(2) of FA 2004 as:
.. international accounting standards, within the meaning of Regulation (EC) No. 1606/2002 of the European Parliament and the Council of 19 July 2002 on the application of international accounting standards, adopted from time to time by the European Commission in accordance with that Regulation.
606. Where a dealer in securities prepares accounts in accordance with international accounting standards, the securities would usually fall to be accounted for as at fair value, in accordance with paragraph 9 of International Accounting Standard 39, ("IAS 39") and any profits and losses calculated by reference to the fair value of securities taken to the profit and loss account. But a trader may instead account for certain securities as "available for sale" if they do not meet the conditions for being treated as at fair value through profit or loss. In such a case profits and losses calculated by reference to the fair value of securities are taken initially to a statement of changes in equity.
607. It is expected that from 2005 UK GAAP in this area will follow IAS 39. In UK terms the profits and losses on "available for sale" assets will be taken to the statement of total recognised gains and losses.
608. Section 42 FA 1998 provides that the computation of profits or losses from a trade must be based on accounts drawn up in accordance with GAAP, subject to any adjustment authorised by law. Implicit in this rule is that the profits must appear in the profit and loss account. There is no tax law (apart from section 472A) which allows profits on equity securities taken to any form of reserve to be treated as if they were taken to profit and loss account.
609. Subsection (2) provides that if changes in the fair value of the securities are taken either to the statement of recognised gains and losses (UK GAAP) or to the statement of changes in equity (IAS accounts), the profits or losses on those securities are taken into account in calculating the profits of the trade.
610. Subsection (3) disapplies subsection (2) where the profit or loss has been brought into account in an earlier accounting period. This prevents the same amount being taken into account twice.
611. Subsection (3)(b) provides that subsection (2) does not apply to "an amount recognised for accounting purposes by way of correction of a fundamental error". This refers to the requirement in International Accounting Standard 8 (Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies) that the correction of a fundamental error should be treated as a prior period adjustment. "For accounting purposes" is defined in section 832(1) of ICTA as "for the purposes of accounts drawn up in accordance with generally accepted accounting practice". See Schedule 4 to this Bill.
612. The definition of "securities" in subsection (4) is based on section 472A(4) of ICTA. Section 472A(4)(a) defines "securities" to include rights, interests or options treated as shares for the purposes of sections 126 to 136 of TCGA by virtue of sections 135(5) or 136(5) of TCGA. Sections 135(5) and 136(5) of TCGA define "shares" in the case of a company with no share capital as "any interests in the company possessed by members of the company." So subsection (4)(c) of this clause defines "securities" to include such interests.
Clause 150: Conversion etc. of securities held as circulating capital
613. This clause provides for relief on the conversion or exchange of securities held as part of the circulating capital of a trade of dealing in securities. The relief corresponds to the relief on the conversion or exchange of securities held as capital assets in sections 126 to 136 of TCGA. This clause is based on sections 473 and 730C of ICTA.
614. Section 473(1) of ICTA applies to securities to which a person carrying on a banking or insurance business, or a business of dealing in securities, is beneficially entitled - the profits from the sale of which would "form part of the trading profits of that business". This clause does not stipulate that the person must be beneficially entitled to the securities in question. See Change 42 in Annex 1.
615. The Inland Revenue does not believe that there are currently any individuals or non-resident companies liable to income tax in respect of a banking business. Similarly, the Inland Revenue does not believe that there are, or will be in the future as the law stands at present, any individuals (other than Lloyd's underwriters) or non-resident companies liable to income tax in respect of an insurance business.
616. So this clause does not refer specifically to banking and insurance businesses. But such businesses (except for Lloyd's underwriters who come instead within the special rules in sections 171 and 176 and Schedule 20 to FA 1993) are covered by the reference to a trade in which a profit on the sale of securities would be brought into account in calculating the profits.
617. Subsection (3) excludes securities brought into account at "fair value" in calculating the profits for the period in which the relevant transaction takes place. These are instead dealt with in clause 149.
618. Subsection (7) adapts the anti-avoidance rule in section 137(1) of TCGA to income tax in determining whether subsection (2)(a) of this clause applies to treat a transaction as resulting in the original holding being equated with a new holding under sections 126 to 136 of TCGA. Section 137(1) of TCGA provides that sections 135 and 136 of TCGA do not apply to an exchange of shares unless the exchange is "effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax".
619. The definition of "securities" in subsection (8) is based on section 473(6) of ICTA:
Clause 151: Exchanges of gilts for gilts strips
620. This clause sets out the trading income rules for the exchange of gilts for gilt strips. It is based on section 730C of ICTA. The rules for the consolidation of gilts are in clause 152. The rules about regulations in connection with valuations are in clause 154.
621. Clause 151 ensures that a profit or loss on the exchange of a gilt for gilt strips is recognised for tax purposes even if it is not shown in the accounts of the trade. This is the opposite of the rule in clause 150 that a conversion of a security is, in effect, ignored. Clause 150(2) provides that the special rules for gilt strips override the general rule for securities.
Clause 152: Consolidation of gilt strips
622. This clause sets out the trading income rules for the consolidation of gilt strips. It is based on section 730C of ICTA.
623. This clause ensures that a profit or loss on the consolidation of gilt strips is recognised for tax purposes even if it is not shown in the accounts of the trade. This is the opposite of the rule in clause 150 that a conversion of a security is, in effect, ignored. Clause 150(2) provides that the special rules for gilt strips overrides the general rule for securities.
Clause 153: Meaning of "gilt-edged security" and "strip"
624. This clause provides the definition of "gilt-edged security" for the purposes of this Bill and the definition of "strip" for the purposes of clauses 151 and 152. It is based on section 730C of ICTA and section 47 of FA 1942.
Clause 154: Regulations for determining market value of securities or strips
625. This clause contains the power for making regulations in connection with the valuation of gilts and gilt strips. It is based on section 730C(6) and (7) of ICTA.
Clause 155: Levies and repayments under FISMA 2000
626. This clause provides for the inclusion, in a calculation of trading profits, of certain payments arising from the Financial Services and Markets Act 2000 ("FISMA"). It is based on section 76A of ICTA.
627. Section 76A applies to all persons who are "authorised persons" for the purposes of FISMA.
628. Subsection (1)(b) reflects section 76A(1) and makes it clear that investment companies are not within the provision.
629. Subsection (2) provides for a deduction. Most FISMA levies would be allowable expenses under the basic trade profit calculation rules. The purpose of this provision is to deal with the exceptional case where deduction of a levy would otherwise be prevented by a prohibitive rule.
630. The expenses allowable and the receipts chargeable are determined by reference to FISMA. Subsections (4) and (5) provide the link with FISMA.
Clause 156: Purchase or sale of woodlands
631. This clause applies to a person carrying on a trade of dealing in land who buys and sells land on which trees are growing. It is based on section 99(1) of ICTA.
632. Subsection (2) provides that the cost of the trees or any saleable underwood is disregarded in calculating the profits of the trade. The clause applies only to the disposal of the land as part of a trade of dealing in land. It has no application to the trader's use of the land before it is sold.
633. The cost of the land will include the value of the trees and underwood growing on it. Any profit on the sale of the trees and underwood is tax-free because of the exemption for the occupation of commercial woodlands (clause 768). Subsection (2) prevents the dealer in land obtaining a trade deduction for that part of the cost of the land that is attributable to the cost of the trees.
634. Subsection (3) applies if the dealer sells the land with any of the trees and underwood still growing on it. The part of the sale price that relates to the trees and underwood is not treated as part of the sale proceeds.
635. The clause applies only to woodlands purchased under a contract entered into on or after 1 May 1963. See Schedule 2 to this Bill.
Clause 157: Relief in respect of mineral royalties
636. This clause gives relief if trade receipts include mineral royalties. It is based on section 122 of ICTA.
637. Most mineral royalties will be taxed under Chapter 8 of Part 3. That Chapter rewrites the charge under Schedule D Case VI if rents are received from a concern listed in section 55 of ICTA. That list includes mines and quarries. The charge under Schedule D Case VI results from the operation of section 119 of ICTA. That section alters the normal priority rule between Schedules A and D. It applies to rents that would normally be taxed under Schedule A and provides that the rents are to be taxed under Schedule D. It does not say under what Case of Schedule D the charge is to be imposed.
638. In nearly all cases the rents will be taxed under Schedule D Case VI as they are not received in respect of a trade. But it is possible that the receipt of the rent will be incidental to a trade. In that case clause 261 provides that the rent will be taxed under Part 2. This is only likely to happen if the rent is received by a property developer in respect of land held as trading stock.
639. If the rent is a mineral royalty as defined in section 122(5) of ICTA the trader is entitled to the relief given by section 122(1) of ICTA. The mineral royalties are halved. The relief is rewritten in this clause because dealers in land are the traders who are most likely to benefit from the relief. But the relief is not confined to dealers in land.
Clause 158: Lease premiums etc.: reduction of receipts
640. This clause prevents a person carrying on trade of dealing in land being taxed on all or part of a lease premium, or of certain other amounts received in respect of a lease, both as a receipt of the trade under Part 2 of this Bill and as a receipt of a property business under Part 3 of this Bill. It is based on section 99(2) and (3) of ICTA.
641. Subsections (2) and (3) provide for a receipt taken into account in calculating the profits of a trade of dealing in land to be reduced by the amount of that receipt taken into account under clauses 277 to 285.
642. Subsections (4) and (5) provide for a corresponding adjustment to be made in calculating the profits of the trade if tax paid as a result of clause 284 or 285 is repaid under clause 301 or 302 of this Bill.
Clause 159: Ministers of religion
643. This clause sets out special rules for self-employed ministers of religion. It is based on section 332(3) of ICTA. The rest of that section was rewritten as sections 290 and 351 of ITEPA.
644. Subsection (1) provides that the clause applies in calculating the profits of the profession or vocation of a minister of religion. This brings the wording of the rule into line with the other rules for permitting deductions. See Change 43 in Annex 1.
645. Section 332 of ICTA was originally intended to give a comprehensive set of rules for the expenses of ministers of religion. In practice, the Inland Revenue apply the usual trading rules if they are more generous. Anything within section 332(3)(a) of ICTA would not be disallowed by section 74(1)(a) of ICTA. But there may be items not within section 332(3)(a) of ICTA which are allowed in practice as being within the usual rules.
646. A self-employed minister can in practice make deductions for revenue expenses that are wholly and exclusively for the purposes of the profession or vocation. For such a minister the rule in paragraph (a) of section 332(3) of ICTA, which provides for a deduction where expenses are incurred wholly, exclusively and necessarily in the performance of the duties, imposes a harsher test.
647. So section 332(3)(a) of ICTA is not rewritten, leaving the more generous rule in clause 34 to apply. See Change 44 in Annex 1.
648. Subsection (2)(b) introduces a "just and reasonable apportionment" which does not have a special appeal mechanism. See Change 45 in Annex 1.
649. Subsection (3) uses the term "incurs" in preference to "borne". See Change 43 in Annex 1.
650. Subsection (4) sets out how to calculate the deduction under subsection (3). If the expenses of maintenance, repair, insurance or management incurred wholly and exclusively for the purposes of the profession or vocation exceed one quarter of the expenses within subsection (3) no further deduction is due but the deduction is not restricted to one quarter. If the expenses of maintenance etc do not exceed one quarter, a further deduction is due. So the total deduction for expenses within subsection (3) varies according to the extent to which they are expenses incurred wholly and exclusively for the purposes of the profession or vocation.
Clause 160: Alternative basis of calculation in early years of practice
651. This clause preserves the "cash basis" for some barristers. It is based on section 43 of FA 1998. It sets out the single exception to the general rule in clause 25 that profits must be calculated in accordance with generally accepted accounting practice. It applies to barristers in the early years of practice. They are allowed to draw up accounts on a cash basis or a "fees billed" basis.
652. The clause uses the phrase "independent practice" in line with the current Codes of Conduct of the English Bar and the Bar of Northern Ireland. The same expression correctly identifies practising advocates in Scotland.
Clause 161: Mineral exploration and access
653. This clause deals with intangible drilling costs of production wells in the oil and gas industry. It is based on section 91C of ICTA. Intangible costs are those which do not result in the acquisition or creation of machinery or plant. An example would be the cost of hiring a drilling rig. Production wells are wells that are drilled after the presence of oil in an area has been established and which are used to extract the oil.
654. Before the enactment of section 91C of ICTA in 1997, a deduction was allowed for the intangible drilling costs of the second and subsequent production wells in any area. This reflected a Special Commissioners' decision in 1920 that this expenditure is of a revenue nature. Section 91C of ICTA disallows a deduction for such costs. It does this by denying a deduction for expenditure which, if it had been carried out while exploring for oil, would not have been allowed as a deduction.
655. Subsection (1) sets out the circumstances in which the clause applies. It identifies the expenditure as being on "mineral exploration and access", an expression defined in subsection (3).
656. Subsection (2) is the main rule. It ensures that any expenditure on drilling a production well that is deductible on normal principles can continue to be deducted. But no deduction is allowed for intangible drilling costs which were previously deductible only as a result of the earlier Special Commissioners' decision. These costs are capital expenditure and qualify for mineral extraction capital allowances (see Part 5 of CAA).
Clause 162: Payments by persons liable to pool betting duty
657. This clause gives a special deduction to traders who pay pool betting duty. It is based on those parts of section 126 of FA 1990 and section 121 of FA 1991 which relate to the calculation of the profits of traders.
658. The majority of pool betting duty is paid by large companies operating football pools. But an individual or firm may carry on a trade as a pools promoter.
659. In 1990, following the Hillsborough disaster, pool betting duty was reduced on condition that the money saved be used to implement Lord Justice Taylor's recommendations on safety and comfort at football grounds. In 1991 the duty was reduced again, this time on condition that the money be paid to the Foundation for Sport and the Arts, a charitable trust which supports athletic sports and games and promotes the arts. The reductions were initially for a limited period, but have so far been maintained.
660. Subsection (1) sets out the circumstances in which the clause applies. It introduces the expression "qualifying payment".
661. Subsection (2) defines a "qualifying payment" to which the clause applies. It does not specify that payments in consequence of the 1990 reduction in pool betting duty must be paid for football safety and comfort, and that payments in consequence of the 1991 reduction must be paid to the Foundation for Sport and the Arts. Instead the clause applies to a payment for either purpose in consequence of any reduction in pool betting duty. See Change 46 in Annex 1.
662. The clause retains a general description of the payments, without identifying the bodies which were the targets of the original legislation. It is clear that payments made as a consequence of a reduction in pool betting duty to either body would qualify for relief under the clause.
663. The source legislation is restricted to the 1990 and 1991 reductions in pool betting duty. This clause applies to payments made in consequence of any reduction in the duty. See Change 47 in Annex 1.
664. Subsection (3) is the rule that allows the payments as a trading deduction. Without this rule the payments might be disallowed because they are annual payments or because they are not made wholly and exclusively for the purposes of the payer's trade.
Clause 163: Deduction for deemed employment payment
665. This clause sets out the trading income rules that were originally part of the "IR35" scheme for the taxation of workers supplied by an intermediary. It is based on paragraph 17 of Schedule 12 to FA 2000. The worker is treated as receiving a "deemed employment payment" and is taxed accordingly (see Chapter 8 of Part 2 of ITEPA). This clause ensures that an equivalent amount (and no more) is allowed as a trading deduction in calculating the profits of the intermediary.
666. Subsection (1) sets the scene, using expressions that are defined in subsection (5) by cross-reference to the employment income rules in ITEPA.
667. Subsection (2) identifies the amounts that are allowed as trading deductions.
668. Subsection (3) is a timing rule. Generally, the deemed employment payment is treated as made at the end of the tax year (see section 50(3) of ITEPA). In some circumstances the payment is treated as made earlier (see section 57 of ITEPA). In either case, the trading deduction is given for the period in which the payment is treated as made.
669. Subsection (4) is the rule that prevents any double deduction. It caters for the possibility that the payments may qualify as trading deductions on first principles and for the possibility that the payments may also qualify as trading deductions in a period of account different from that specified in subsection (3).
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