|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Clause 229: Income charged
941. This clause sets out the amount charged to tax. It is based on section 69 of ICTA. Adjustment income is charged to tax separately from the profits of a trade (see clause 5).
Clause 230: Person liable
942. This clause states who is liable for any tax charged. In FA 2002 the charge is under Schedule D Case VI. So section 59(1) of ICTA applies.
Clause 231: Calculation of the adjustment
943. This clause contains the main rules for calculating the adjustment. It is based on paragraph 2 of Schedule 22 to FA 2002. The clause presents the rules as a method statement.
944. The 2002 legislation introduced three new rules.
945. The first new rule concerns a change in the basis of valuing stock. The rule is in item 3(b) of step 1 of the method statement. For instance, in Period 1 the accounts show closing stock of £1200. That is reduced for tax purposes, in accordance with the practice then prevailing, to £1000. In Period 2 the opening stock in the accounts is £1200. So there is no adjustment within item 3(a). But if a new practice allows the opening stock value to stand for tax purposes there is an adjustment within item 3(b). There is a corresponding rule in item 3 of step 2.
946. The second new rule concerns a change in the way that depreciation is recognised. This rule is in item 4 of step 1. The expression "for accounting purposes" is defined in section 832(1) of ICTA - see Schedule 4 to this Bill.
947. The third new rule restricts the circumstances that can give rise to a deduction in step 2 to those that are purely a matter of timing. For instance, in Period 1 the accepted view was that an item of expenditure was capital and it was "added back" in the tax computation. After a Court decision, that view changes and, if the expenditure had been incurred in Period 2, no tax adjustment would have been required. Without item 2(b) of step 2, item 2(a) would give a deduction.
Clause 232: Treatment of adjustment income
948. This clause sets out two special rules for the treatment of adjustment income. It is based on paragraph 4(2) of Schedule 22 to FA 2002.
949. Subsection (1) establishes when the adjustment income arises, so that it is charged to tax for the appropriate year under clause 229.
950. Subsection (3) treats the income as trade profits for the purpose of loss relief. So, for example, any losses of the same trade brought forward can be set against the income.
951. Subsection (4) preserves the treatment of adjustment income as earned income.
952. It also makes clear that adjustment income is relevant UK earnings for the purpose of making pension contributions.
953. FA 2004 made significant changes to the taxation of pension schemes. The changes take effect from 6 April 2006. This Bill deals with this by including the new rules in clause 232. The commencement issue is then dealt with as a transitional measure in Schedule 2 of this Bill. The old rules apply until 5 April 2006.
Clause 233: Treatment of adjustment expense
954. This clause treats an adjustment deduction as a trading expense. It is based on paragraph 5 of Schedule 22 to FA 2002.
Clause 234: No adjustment for certain expenses previously brought into account
955. This clause deals with the case where the old basis of calculation allowed a tax deduction but the new basis requires the deduction to be spread over several periods. It is based on paragraph 6 of Schedule 22 to FA 2002.
956. In the absence of this clause there would be a positive adjustment within item 2 of step 1 of the calculation of the adjustment in clause 231. That would produce the right result overall but the rule would take effect too early. Instead, no adjustment is calculated but no deduction is allowed in future for expenses that have already been taken into account.
Clause 235: Cases where adjustment not required until assets realised or written off
957. This clause is a timing rule for an adjustment which results from any of the three new rules in clause 231. It is based on paragraph 7 of Schedule 22 to FA 2002.
958. These new rules are the ones mentioned in the commentary on clause 231. The general timing rule is that any adjustment is made at the end of the first period of account on the new basis (see clause 232(1) and clause 233(1)). But any adjustment income for stock, work in progress or depreciation is charged when the asset is realised or written off.
Clause 236: Change from realisation basis to mark to market
959. This clause is concerned with a change from the realisation basis to "mark to market" accounting. It is based on paragraph 8 of Schedule 22 to FA 2002.
960. "Mark to market" is a basis of accounting used by traders in financial assets. Instead of carrying the assets in the books at cost, financial traders draw up accounts to show the assets at a fair value at the accounting date. But for tax purposes the realisation basis may have been used.
961. In the first period in which mark to market is adopted for tax purposes, the opening stock may be valued at a higher (market) value than the closing stock of the previous period. Or a financial asset may have been carried in the accounts at cost but appear as a deduction in a later period at fair value. In either case, there is an adjustment within clause 231.
962. As in clause 235, the charge on adjustment income is postponed until the asset is realised.
Clause 237: Election for spreading if section 236 applies
963. This clause provides for an election to be made if there is a charge (following a change to mark to market) under clause 236. It is based on paragraph 9 of Schedule 22 to FA 2002.
964. The election is to spread the adjustment charge over six periods of account beginning with the first one in which the new basis is adopted. As the charge is postponed under clause 236 until the asset is realised, this first period is not necessarily the one in which the charge would be made without the election.
965. "Period of account" is defined in section 832(1) of ICTA.
966. Subsection (2) sets out the usual Self Assessment time limit for an election.
Clause 238: Spreading on ending of exemption for barristers and advocates
967. This clause sets out a special rule for spreading adjustment income in the case of barristers and advocates. It is based on paragraph 11 of Schedule 22 to FA 2002.
968. The income is spread over ten years, subject to a maximum charge in any one year.
969. In paragraph 4 of Schedule 6 to FA 1998 there was another rule for spreading adjustment income. Spreading was available to a person who changed accounting basis to comply with section 42 of FA 1998 (generally accepted accounting practice). Such a change would have taken effect by 5 April 2000.
970. In accordance with paragraph 17 of Schedule 22 to FA 2002 the repeal of Schedule 6 to FA 1998 takes effect only in relation to a change of basis on or after 1 August 2001. So the transitional rule in paragraph 4(2)(a) of Schedule 6 to FA 1998 may continue to affect current liabilities if they include part of a pre-2001 adjustment.
971. The rules in paragraph 13(3) and (4) of Schedule 22 to FA 2002 apply only if an election is made under paragraph 11 by a partner. As barristers and advocates do not carry on their professions in partnership, these rules are not needed.
Clause 239: Election to accelerate charge under section 238
972. This clause sets out the election that is available if adjustment income is spread under clause 238. A taxpayer may choose to have any part of the outstanding adjustment income taxed earlier than would otherwise be the case. The clause is based on paragraph 12 of Schedule 22 to FA 2002.
973. Subsection (2) sets out the usual Self Assessment time limit for an election.
974. The effect of an election is set out in paragraph 12(4) of Schedule 22 to FA 2002. It is not clear what the "additional amount" referred to in the sub-paragraph is. In some cases more than the total adjustment income could be charged to tax within the period of ten years over which it is spread. Subsection (4) of this clause sets out the effect of an election. See Change 62 in Annex 1.
Clause 240: Liability of personal representatives if person liable dies
975. This clause makes it clear that a taxpayer's personal representatives take over from the taxpayer both the liability to tax on adjustment income and the right to make any election. It is based on paragraph 14 of Schedule 22 to FA 2002.
Chapter 18: Post-cessation receipts
976. This Chapter charges receipts which are derived from a trade but are not received until after the trade has ceased and have not been brought into the calculation of profits.
Clause 241: Professions and vocations
977. 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 242: Charge to tax on post-cessation receipts
978. This clause charges post-cessation receipts to tax. It is based on sections 103 and 104 of ICTA. Post-cessation receipts are charged separately from the profits of a trade (see clause 5).
Clause 243: Extent of charge to tax
979. This clause sets out the charge to tax. It is based on sections 103 and 104 of ICTA, which create a charge under Schedule D Case VI on post-cessation receipts. This Bill deals with the income where it logically belongs. In this case the income is trading income.
980. The charge in the source legislation under Schedule D Case VI has consequences for loss relief and the charge to Class 4 national insurance contributions. This Chapter preserves the position for loss relief in clause 254. The Bill preserves the position for Class 4 national insurance contributions because the consequential amendments to the social security legislation ensure that those contributions are charged only on profits chargeable under Chapter 2 of Part 2 of this Bill.
981. Subsection (3) deals with a trader who has become non-resident after the trade has ceased. A trade carried on at least partly in the United Kingdom (see clause 6) may include income that arises abroad. When the trader was resident in the United Kingdom all the profits of the trade would have been within the charge under Part 2 of this Bill. This subsection removes the charge on a non-resident if the receipt arises abroad.
982. There is a transitional rule in Part 3 of Schedule 2 to this Bill A post-cessation receipt arising from a cessation before 6 April 2000 is not charged to tax if the recipient was born before 6 April 1917.
Clause 244: Income charged
983. This clause sets out the amount charged to tax. It is based on section 69 of ICTA, which applies because the charge in ICTA is under Schedule D Case VI.
Clause 245: Person liable
984. This clause states who is liable for any tax charged. It is based on section 59(1) of ICTA, which applies because the charge in ICTA is under Schedule D Case VI.
Clause 246: Basic meaning of "post-cessation receipt"
985. This clause sets out the basic meaning of "post-cessation receipt". It is based on sections 103 and 104 of ICTA.
986. Subsection (1) is the general rule that a post-cessation is a sum received after a person has ceased to carry on trade.
987. Subsection (2) deals with the case of a non-resident company liable to income tax. If a company ceases to be liable to corporation tax it is treated as ceasing to carry on the corporation tax trade. A post-cessation from that trade may be charged to income tax.
988. Subsections (3) and (4) explain how the idea of a person ceasing to carry on a trade is applied if the trade is carried on in partnership. If a partner leaves a firm and receives a sum, that sum may be a post-cessation receipt. In ICTA this is because the end of the partner's "deemed trade or profession" is treated as a permanent discontinuance of a trade for the purposes of the post-cessation receipts rules.
Clause 247: Other rules about what counts as post-cessation receipts
989. This clause is new. It contains signposts to:
Clause 248: Debts paid after cessation
990. This clause sets out what happens when a trader is allowed a deduction for a bad or doubtful debt owed to the trade but then recovers the debt after the trade has ceased. It is based on sections 103(5) and 109A of ICTA.
991. In the straightforward case where a deduction for the debt has been given during the course of the trade section 103(5) of ICTA makes it clear that the recovery has not been "taken into account" in calculating the trade profits. The result is that the recovery is within the charge in section 103 of ICTA.
992. In the less common case where the entitlement to relief has arisen under section 109A of ICTA after the cessation, the recovery is dealt with in section 109A of ICTA itself.
993. This clause deals with both these cases.
994. Subsections (1) and (2) deal with the straightforward case and treat the recovery of the debt as a post-cessation receipt. The references to corporation tax and section 74(1)(j) of ICTA cater for the possibility that a deduction for a bad debt is allowed to a company liable to corporation tax but the debt is paid to a person liable to income tax.
995. Subsections (3) and (4) deal with the less common case and treat the recovery of the debt as a post-cessation receipt.
Clause 249: Debts released after cessation
996. This clause sets out the rules that apply when a debt owed by the trader is released after the trade has ceased. It is based on section 103(4) of ICTA.
997. Subsection (1) sets out the four conditions to be met if the section is to apply. It is the equivalent of clause 97 which applies in the case of a continuing trade. The references to corporation tax caters for the possibility that a deduction for an expense is allowed to a company liable to corporation tax but a person liable to income tax takes over the related trade debt and is released from it.
998. Subsection (3) deals with the case of a non-resident company liable to income tax. If the company becomes liable to corporation tax it is treated as ceasing to carry on the income tax trade.
Clause 250: Receipts relating to post-cessation expenditure
999. This clause sets out what happens if relief has been claimed for post-cessation expenditure and there is a recovery. It is based on section 109A(3) of ICTA.
1000. Subsection (2) sets out the sorts of expenditure for which relief may have been claimed and which sums are treated as post-cessation receipts.
Clause 251: Transfer of rights if transferee does not carry on trade
1001. This clause deals with the position of the transferor if the right to a post-cessation receipt is transferred for value to a non-trading transferee. It is based on section 106 of ICTA.
1002. The transferor is charged to tax on the amount received for the transfer if the transfer is at arm's length. Otherwise the transferor is charged to tax on the arm's length value of the transfer. There is no later charge to tax on the transferee when the post-cessation receipt is received.
1003. Clause 98 sets out the position if the transfer is to a trading transferee.
Clause 252: Transfer of trading stock or work in progress
1004. This clause excludes from the charge on post-cessation receipts sums arising from the transfer of stock and work in progress. It is based on sections 103(3)(c), 104(6) and 110(6) of ICTA.
1005. Subsection (1) makes explicit the general rule that there is no tax charge on a post-cessation receipt arising from trading stock or work in progress.
1006. The policy is that stock and work in progress should be valued at cessation in accordance with the rules in Chapter 12 of this Part. Once that has been done there is no need to charge tax on any sums arising from the disposal or realisation of stock and work in progress.
1007. In the case of stock, clause 173 requires a valuation on cessation in all cases. It follows that its value is taken into account in calculating the profits before the cessation. But the valuation rules apply to work in progress only "if .. the work in progress is valued" (clause 182). Such a valuation is made only by businesses whose accounts are drawn up on the earnings basis.
1008. When the charge on post-cessation receipts was extended to non-earnings basis cases in 1968 the exclusion for work in progress often did not apply because in many of those cases closing work in progress was not valued. The policy was to tax post-cessation receipts arising from work in progress (under section 104 of ICTA). Nowadays non-earnings basis cases are much rarer.
1009. A valuation of work in progress is not required for barristers and advocates within clause 160. So, in these non-earnings basis cases, receipts from work in progress after the cessation are charged to tax.
1010. Subsection (2) is a signpost to the rule that allows a taxpayer to value work in progress at cost and to have the profit element of a sum received later for work in progress taxed as a post-cessation receipt.
Clause 253: Lump sums paid to personal representatives for copyright etc.
1011. This clause exempts certain lump sums from the charge on post-cessation receipts. It is based on section 103(3)(b) and (bb) of ICTA.
1012. A professional author or designer may receive lump sums from the sale of rights in artistic works in the course of the carrying on a profession. Such sums are brought into account in calculating the profits of the profession. But this clause makes it clear that, in the case of sales after the death of the author or designer, the sums are not charged to tax.
1013. The clause ensures that a lump sum received for the assignment of design right is not treated as a post-cessation receipt. See Change 63 in Annex 1.
1014. The definition of "assignment" in clause 879 applies so that the word means "assignation" in Scotland.
Clause 254: Allowable deductions
1015. This clause is the first of two that set out the rules for allowing deductions from sums charged as post-cessation receipts. It is based on section 105 of ICTA.
1016. Subsection (3) ensures that a deduction is not allowed for any expenses for which relief has already been allowed under section 109A of ICTA (relief for post-cessation expenditure). The reference to section 90(4) of FA 1995 (not part of the Tax Acts because it relates to capital gains tax) is retained because relief may be given under that section following a claim under section 109A of ICTA.
Clause 255: Further rules about allowable deductions
1017. This clause is the second of two that set out the rules for allowing deductions from sums charged as post-cessation receipts. It is based on section 105 of ICTA.
1018. Subsection (2) ensures that any loss unused at the date of cessation is set off against post-cessation receipts in the same order as it would have been set off against profits under section 385 of ICTA, that is, against an earlier year before a later year.
1019. Subsection (4) ensures that no expense or loss can be set against amounts treated as post-cessation receipts by clause 248 (debts paid after cessation) or clause 250 (receipts relating to post-cessation expenditure).
1020. The references to capital allowances in section 105(1)(b) and (3) of ICTA are no longer needed because any capital allowance is allowed as a trading expense.
Clause 256: Treatment of post-cessation receipts
1021. This clause treats most post-cessation receipts as earned income and relevant UK earnings. It is based on section 107 of ICTA. See Change 64 in Annex 1.
1022. FA 2004 made significant changes to the taxation of pension schemes. The changes take effect from 6 April 2006.
1023. This Bill deals with this by including the new rules in clause 256.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 257: Election to carry back
1024. It may be beneficial for a taxpayer to have a post-cessation receipt assessed for the year of cessation instead of the year of receipt. This clause, based on section 108 of ICTA, allows the taxpayer to elect for that treatment.
Chapter 19: Miscellaneous and supplementary
Clause 258: Changes in trustees and personal representatives
1025. This clause sets out what happens if there is a change in the trustees or personal representatives who are carrying on a trade. It is based on section 113(7) of ICTA.
1026. There is a similar rule for property income in clause 361.
Clause 259: Meaning of "statutory insolvency arrangement"
1027. This clause defines "statutory insolvency arrangement". It is based on section 74(2) of ICTA.
1028. Section 74(2)(a) of ICTA refers to a voluntary arrangement under the Insolvency Act 1986 (dealing with individual voluntary arrangements in England and Wales) and the Insolvency (Northern Ireland) Order 1989. This clause refers also to the Bankruptcy (Scotland) Act 1985. See Change 65 in Annex 1.
Part 3: Property income
1029. This Part charges "property income". That is, income from land.
1030. This Part taxes income that is taxed under different Schedules and Cases in the source legislation. So it covers, for example, income from land in the United Kingdom and abroad as well as post-cessation receipts and certain charges arising from changes in the basis on which a taxpayer calculates property business profits.
1031. This reflects the rewrite approach of grouping charges which are logically part of the same "family". In Part 3 the unifying factor is that all the charges are on amounts that are, ultimately, attributable to exploiting an interest in land.
1032. But although the charges that are, in the source legislation, distinct, are here grouped in one Part, they do not lose their identity for all purposes. Loss relief for example (not dealt with in this Bill) requires them to be kept apart. For this reason the charge on "property income" has specific components (see the commentary on clause 260).
1033. References to "profits or gains" in the source legislation which relate only to income are rewritten in this Part omitting the reference to "gains". This continues the tidying up of such references started in section 46(3) of and Schedule 7 to FA 1998.
Chapter 1: Introduction
Clause 260: Overview of Part 3
1034. This clause is introductory. It is new.
1035. Subsection (1) sets out the components of "property income".
1036. Subsection (1)(a) refers to the main component. That is income from land that is taxed in the source legislation under Schedule A if it is land in the United Kingdom and under Schedule D Case V if it is foreign land. Central to the charge is the concept of the "property business". That is discussed in more detail in the commentary on clauses 264 and 265.
1037. Subsection (1)(e) refers to post-cessation receipts of a UK property business. In the source legislation they are charged under Schedule D Case VI. This Bill deals with the income where it logically belongs. In this case, the income is property income.
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