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

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Clause 292: Tenants under taxed leases treated as incurring expenses

1204.     This clause sets out the method of calculating the expense for which a deduction may be allowed under clause 291. It is based on section 37(4) of ICTA.

1205.     Section 37(4) of ICTA treats a tenant as paying rent for the purposes of making deductions in respect of the expenses of his or her Schedule A business. In this clause, the tenant is treated instead as incurring an expense for each qualifying day in the receipt period of the taxed receipt. This corresponds to the treatment of premiums and other sums payable in respect of leases in clause 277 and clauses 279 to 282, and of amounts treated as receipts in clauses 284 and 285, as amounts to be brought into account in calculating the profits of a property business rather than as rent.

1206.     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.

Clause 293: Restrictions on section 292 expenses: the additional calculation rule

1207.     This clause supplements clause 292 where a tenant is entitled under clause 288 to a reduction in a receipt within clause 277 or clauses 279 to 282. It is based on section 37(5) of ICTA.

1208.     If an amount treated under section 34 or 35 of ICTA as income of a Schedule A business has been reduced under section 37(2) of ICTA, a tenant is entitled under section 37(5) of ICTA to a deduction in respect of deemed rent under section 37(4) of ICTA only if the appropriate fraction of the amount chargeable on the superior interest exceeds the later chargeable amount. The deduction is then allowed in the same proportion as the excess bears to the appropriate fraction of the amount chargeable on the superior interest.

1209.     This clause provides instead for a tenant to be treated as incurring an expense for a qualifying day under clause 292 only to the extent that the "daily amount of the taxed receipt" exceeds the "daily reduction of the lease premium receipt".

1210.     The daily amount of the taxed receipt and the daily reduction of the 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 292(4) to calculate the amount of the expense which the tenant is treated as incurring for each qualifying day; and

  • the formula for calculating the daily reduction of the lease premium receipt spreads the reduction calculated under clause 288 evenly over the receipt period of the lease premium receipt.

See Change 15 in Annex 1.

1211.     It is not clear how the rule in section 37(5) of ICTA governing the interaction of section 37(2) and (4) of ICTA is intended to apply if there is more than one later chargeable amount falling to be reduced under section 37(2) of ICTA by reference to an amount chargeable on the superior interest or a later chargeable amount falls to be reduced under section 37(2) of ICTA by reference to more than one amount chargeable on the superior interest.

1212.     Subsection (5) provides that where there is more than one lease premium receipt by reference to which the tenant may be treated as incurring an expense for the same qualifying day, the tenant is treated as incurring an expense for that day only to the extent that the daily amount of the taxed receipt exceeds the total of the daily reductions of each of the lease premium receipts. See Change 15 in Annex 1.

Clause 294: Restrictions on section 292 expenses: lease of part of premises

1213.     This clause adapts clauses 292 and 293 for cases where the tenant's lease does not extend to the whole of the property in respect of which the landlord received a premium. It is based on section 37(6) of ICTA.

1214.     Clause 287(1) extends relief under 288 to sums payable for variation or waiver brought into account under clause 281. This is reflected in subsection (1)(c) of this clause. See Change 71 in Annex 1.

1215.     Section 37(6) of ICTA says that where section 37(3) of ICTA applies (ie if the tenant's lease extends to part only of the premises subject to the landlord's lease) section 37(4) and (5) of ICTA are to be applied separately to that part of the premises subject to the tenant's lease and to the rest of the premises. But it is not clear how the rule in section 37(6) of ICTA is intended to apply if the premises subject to the landlord's lease are subject to more than one sublease in respect of different parts of those premises.

1216.     Subsection (3) applies clauses 292 and 293 separately to that part of the premises which is subject to the tenant's lease and to the remainder of the premises. And subsection (4) deals with the case where there is more than one sublease which does not extend to the whole of the landlord's premises. See Change 15 in Annex 1.

1217.     Subsection (5) adapts clauses 292 and 293 where the lease does not extend to the whole of the premises by multiplying the unreduced amount of the taxed receipt ("A") by the fraction of the premises to which the sublease relates in the formulas for calculating:

  • the expense for a qualifying day in clause 292(4); and

  • the daily amount of the taxed receipt in clause 293(6).

1218.     Section 37(6) of ICTA requires the amount chargeable on the superior interest to be "proportionately adjusted" where the tenant's lease does not extend to the whole of the premises. 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 295: Limit on reductions and deductions

1219.     This clause is based on the general prohibition against excess relief in section 37(9) of ICTA. It restricts total relief allowed by reference to a taxed receipt by way of:

  • reductions under the additional calculation rule in clause 288 in the amount brought into account by a tenant who is also a landlord; and

  • deductions in calculating the profits of a tenant's property business under clause 292,

to the amount of the taxed receipt after any deductions calculated by reference to that receipt for expenses incurred under clause 61 in calculating the profits of a tenant who uses the property subject to the lease for the purposes of his or her trade. See Change 73 in Annex 1.

Clause 296: Corporation tax receipts treated as taxed receipts

1220.     This clause and the next two clauses ensure that a tenant is entitled to relief under clauses 287 to 295 by reference to an amount treated under 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.

1221.     This clause adapts certain concepts used in clauses 287 to 290 to give relief by reference to an amount taken into account for income tax purposes under clauses 277 to 282 to give relief by reference to amounts treated as receipts under section 34 or 35 of ICTA for the purposes of corporation tax. The clause is new.

1222.     Section 37(1) of ICTA refers to 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, as "the amount chargeable on the superior interest". The "superior interest" is the interest in the property held by the tenant's immediate landlord.

1223.     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 be treated as such a receipt other than for relief under the additional calculation rule in clause 288.

Clause 297: Taking account of reductions in corporation tax receipts

1224.     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 to a tenant who is also a landlord by reference to:

  • a receipt brought into account under this Chapter where the tenant's landlord is liable to income tax; or

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

is taken into account in the same way as any relief under clauses 287 to 290.

1225.     Subsections (1) and (2) refer to a reduction under section 37(2) or (3) of ICTA in "the amount chargeable on the superior interest". The amount chargeable on the superior interest here refers to an amount:

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

  • treated as a receipt under this Chapter 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 298: Taking account of deductions for rent as a result of section 37(4) or 87(2) of ICTA

1226.     This clause is new. It ensures that any deduction for corporation tax purposes for rent which a tenant is deemed to pay under section 37(4) or 87(2) of ICTA for an accounting period ending after 5 April 2005 by reference to:

  • a receipt brought into account by the landlord under this Chapter where the landlord is liable to income tax; or

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

is taken into account in the same way as any deduction for an expense incurred under clause 61 or 292.

1227.     Subsections (3) and (4) refer to amounts treated as rent under section 37(4) of ICTA by reference to "the amount chargeable on the superior interest". The amount chargeable on the superior interest here refers to an amount:

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

  • treated as a receipt under this Chapter 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 299: Payment of tax by instalments

1228.     This clause is based on section 34(8) of ICTA.

1229.     Section 34(8) of ICTA entitles a taxpayer who receives an amount chargeable to tax under section 34 of ICTA in instalments to pay the tax chargeable by reference to that amount "by such instalments as the Board may allow..". Section 832(1) of ICTA defines "the Board" as the Commissioners of Inland Revenue.

1230.     This clause instead attributes the power to determine the amount and timing of the instalments to "the Inland Revenue". "The Inland Revenue" is defined in clause 878(1) as "any officer of the Board of Inland Revenue". See Change 149 in Annex 1.

Clause 300: Statement of accuracy for purposes of section 282

1231.     This clause is based on section 35(3) of ICTA.

1232.     Section 35(3) of ICTA requires "the inspector" to certify the accuracy of a statement submitted to him or her showing the amount of a chargeable receipt (if any) on the assignment of a lease granted at undervalue if he or she is satisfied as to the statement's accuracy. "Inspector" is defined in section 832(1) of ICTA as "any inspector of taxes".

1233.     This clause provides instead for the statement to be submitted to, and certified by "the Inland Revenue". "Inland Revenue" is defined in clause 878(1) as "any officer of the Board of Inland Revenue". See Change 149 in Annex 1.

Clause 301: Claim for repayment of tax payable by virtue of section 284

1234.     This clause provides that if a property is reconveyed on a date other than the date by reference to which tax was paid under clause 284, the seller must be repaid the difference between the tax paid and the tax which would have been due if the tax had been calculated on the basis of the actual date of reconveyance. It is based on section 36(2)(b) of ICTA.

1235.     Clause 302: Claim for repayment of tax payable by virtue of section 285

1236.     This clause provides that if a lease is granted on a date other than the date by reference to which tax was paid under clause 285, the seller must be repaid the difference between the tax paid and the tax which would have been due if the tax had been calculated on the basis of the actual date on which the lease was granted. It is based on section 36(2)(b) and (3) of ICTA.

Clause 303: Rules for determining effective duration of lease

1237.     This clause contains the rules for determining the effective duration of a lease. It is based on section 38(1) and (6) of ICTA.

1238.     Subsection (1) sets out various circumstances in which a lease may be treated as ceasing other than on the date specified in the lease. Rules 1, 2 and 3 in subsection (1) are based on section 38(1)(a), (1)(b) and (1)(c) of ICTA respectively.

Clause 304: Applying the rules in section 303

1239.     This clause is based on section 38(2), (3) and (4) of ICTA.

1240.     Section 38(4) of ICTA refers to benefits conferred and payments made for the purposes of securing a tax advantage "in the application of this Part". Section 38 of ICTA is in Part 2 of ICTA (provisions relating to the Schedule A charge), which consists of sections 21 to 43G of ICTA.

1241.     Other than the lease premiums rules in sections 34 to 39 of ICTA, the sections of Part 2 of ICTA which are in force are sections 21 to 21C (calculation of the profits of a Schedule A business), section 24 (construction of Part 2), section 30 (sea walls), sections 31A and 31B (deductions for expenditure by landlords on energy-saving items), section 40 (receipts and outgoings on sale of land), section 42 (appeals against determinations under sections 34 to 36), section 42A (regulations about non-residents) and sections 43A to 43G (rent factoring).

1242.     It is considered that the only tax advantage that could be secured in the context of section 38(4) of ICTA would be under sections 34 to 39 of ICTA. So subsection (4) refers instead to a tax advantage "in the application of this Chapter or sections 34 to 39 of ICTA".

Clause 305: Information about effective duration of lease

1243.     This clause is based on section 38(5) of ICTA.

1244.     Section 38(5) of ICTA says that an inspector may issue a notice requiring a person having information relevant to ascertaining the duration of a lease to supply that information within a specified time. "Inspector" is defined in section 832(1) of ICTA as "any inspector of taxes".

1245.     This clause provides instead for a notice to be issued by "the Inland Revenue". "Inland Revenue" is defined in clause 878(1) as "any officer of the Board of Inland Revenue". See Change 149 in Annex 1.

Clause 306: Provisions about premiums

1246.     This clause is based on section 24(2), (3) and (4) of ICTA. The definitions in section 24(2) to (4) of ICTA are rewritten in this Chapter as they apply only to the lease premiums rules.

Clause 307: Interpretation

1247.     This clause is based on section 24(1), (4) and (5) of ICTA.

1248.     Subsection (1) defines "premium" so as to include payments to a person "connected with" the landlord. "Connected person" is defined in section 839 of ICTA (see clause 878(5)).

Chapter 5: Profits of property businesses: other rules about receipts and deductions

Overview

1249.     This Chapter contains provisions that supplement the basic calculation rules in Chapter 3 of this Part of the Bill.

1250.     The provisions in this Chapter are about particular receipts or more unusual circumstances.

Clause 308: Furnished lettings

1251.     This clause brings the "letting" of furniture, when it is part and parcel of the letting of accommodation, within the property income charge. It is based on section 15 and 65A of ICTA.

1252.     Without this provision, rent paid for use of the furniture in furnished lettings would not be included in the property income charge because the "rent" for the furniture does not derive from land.

1253.     The purpose of subsection (1)(b) is to make it clear that related revenue expenses such as the expenses of repair and insurance of the furniture are deductible in calculating the profits of the property business.

1254.     Subsection (2) excludes income and expenses where the hiring of the furniture is not simply incidental to exploiting an interest in land.

1255.     Subsection (4) refers to a "caravan and a houseboat". There is a new Bill wide, uniform definition of "caravan": see the commentary on clause 875 and Change 148 in Annex 1.

1256.     There is also a new Bill wide, uniform definition of "houseboat": see the commentary on clause 878(1) and Change 150 in Annex 1.

Clause 309: Rent-a-room relief

1257.     This clause modifies the normal profit calculation rules in this Part 3 of the Bill when a property business consists of, or includes, rent-a-room lettings as defined in Chapter 1 of Part 7 of this Bill. It is new.

1258.     When the lettings meet the conditions for rent-a-room relief in Part 7 of this Bill the income from these lettings may, depending on the total amount, either be exempt from tax or subject to a special calculation rule. This clause ensures that the rent-a-room rules take priority over the usual calculation rules in the property income Part.

Clause 310: Acquisition of business: receipts from transferor's UK property business

1259.     This clause taxes certain receipts when a continuing UK property business is transferred from one person to another along with the right to receive future business sums to which the transferor is entitled. It is based on sections 21B and 106 of ICTA.

1260.     Subsection (1) sets out the circumstances in which the clause applies and states the three conditions necessary for it to apply.

1261.     Subsection (2) treats the "sum" received as a receipt of the property business. As this rule affects the calculation of the profits of a property business it appears in this Chapter rather than with the post-cessation receipt rules of which, in the source legislation, it forms part.

1262.     The source legislation applies "for all purposes". This clause applies for income tax purposes. Section 106(2) of ICTA (as amended by Part 1 of Schedule 1 to this Bill) applies for corporation tax purposes. Section 37(1) of TCGA ensures that any sums received as a result of the transfer are not charged to capital gains tax.

1263.     Subsection (3) makes it clear that these sums are not post-cessation receipts.

Clause 311: Reverse premiums

1264.     This clause sets out the rules for taxing reverse premiums as receipts of a property business. It is based on Schedule 6 to FA 1999.

1265.     Subsection (1) refers to a "reverse premium". In accordance with subsection (6) that expression has the same meaning as in clause 99. So this clause applies to reverse premiums excluding any of the "excluded cases" within clause 100. The subsection also excludes any reverse premium that is charged to tax as a trade receipt by clause 101.

1266.     Subsections (2) and (3) bring the reverse premium within the scope of the property income rules. The subsections treat the recipient as entering into a transaction for generating income from land (see clauses 264 and 265). So, even if the recipient is not already carrying on a property business, the reverse premium is treated as a receipt of a property business.

1267.     If a property business is deemed to be carried on, it is a UK property business if the land is in the United Kingdom or an overseas property business if the land is outside the United Kingdom. So the territorial restrictions on the scope of the charge in clause 269 for non-resident or remittance basis persons may apply.

1268.     Schedule 2 to this Bill rewrites the transitional provision in section 54(2) of FA 1999. These clauses do not apply to pre-1999 reverse premiums.

Clause 312: Deduction for expenditure on energy saving items

1269.     This clause provides a deduction for certain expenditure on energy saving items where that expenditure would not otherwise be allowable because it is capital. It is the first of three clauses that are based on sections 31A and 31B of ICTA.

1270.     The source legislation is a closely targeted relieving provision that provides for a deduction for specified energy-saving items installed in let residential property. It applies to all income tax payers including:

  • non-resident companies liable to income tax;

  • those with lettings of overseas property, the income from which is charged in the source legislation under Schedule D, Case V; and

  • income tax paying members of partnerships.

1271.     But it is not available in respect of "rent-a-room" properties or furnished holiday lettings (see Part 7 of this Bill).

1272.     Subsection (1) sets out the basic conditions. Subparagraph (a) makes it clear that relief is available only against property business income in respect of a let dwelling house. "Dwelling house" is not a defined term so it takes its ordinary meaning.

1273.     Subsection (1)(c) states the date by which the expenditure must be incurred. Expenditure incurred before that date (and on or after 6 April 2004) is deductible in what is the appropriate period of account on normal accountancy principles.

1274.     Subsection (1)(d) states the essence of the relief: it is for expenditure that is incurred wholly and exclusively for the purposes of the property business but which would not otherwise be allowable because it is capital expenditure.

1275.     Subsection (2) provides for the deduction and in so doing introduces a change. In the source legislation the relief is given only when a formal claim is made. Clause 312 provides for the relief as a simple deduction in calculating the profits of the property business that includes the dwelling house in question. See Change 74 in Annex 1.

1276.     Subsection (4) allows an apportionment of the expenditure where only part of it, for whatever reason, falls within the scope of the relief. Examples are when only a part of a single amount of capital expenditure is incurred on qualifying energy saving items or when part of the otherwise qualifying capital expenditure is incurred on a let building other than a dwelling house.

Clause 313: Restrictions on relief

1277.     This clause imposes certain restrictions on the relief that would otherwise be due under clause 312. It is based on sections 31A and 31B of ICTA.

1278.     Subsection (2) prevents relief when the expenditure is simply part of the build cost of a new property or the purchase price of an acquired one.

1279.     Subsection (3) prevents relief in respect of let property that is within Chapter 6 of Part 3 of this Bill (commercial letting of furnished holiday accommodation). It makes explicit two aspects that are only implicit in section 31A(11) of ICTA.

1280.     The first is that section 31A(11) of ICTA excludes any properties (a) that meet the definition of "commercial letting of furnished holiday accommodation" in section 504 of ICTA and (b) could therefore benefit from the concessions that section 503 of ICTA offers even if they do not, in fact, do so.

1281.     The second is that it makes clear the duration of the exclusion. The purpose of the source legislation is to prevent people getting the relief if they are using the property for furnished holiday lettings. A property falls within section 504(4) of ICTA for a year of assessment. Because of the stringency of the conditions in section 504 of ICTA the property can drop in and out of qualifying section 504 of ICTA status from one year to the next. The restriction on relief under these provisions is intended to apply only if the expenditure is incurred in a year of assessment for which the property is within section 504 of ICTA (as described in the previous paragraph) and only for that or those years. So clause 313(3) refers specifically to "the tax year".

1282.     Subsection (4) makes it clear that the relief cannot apply when rent-a-room relief is given (see Chapter 1 of Part 7 of this Bill). This prohibition does not apply however if neither form of rent-a-room relief is, in fact, taken.

1283.     Subsection (5) adapts the general preliminary expenditure deduction rules to the specific circumstances of this relief: the expenditure window is reduced to prevent claims in respect of past expenditure when the dwelling may have been the landlord's own home and it is later let.

 
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Prepared: 3 December 2004