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Clause 314: Regulations 1284. This clause provides for the Treasury's powers to make regulations for the purposes stated. It is based on section 31A(13) of ICTA. 1285. The relief applies potentially to all income tax payers, including those non-resident companies liable to income tax. Subsection (2) reflects, among other things, the fact that it is not available to companies in respect of their liability to corporation tax. Clause 315: Deduction for expenditure on sea walls 1286. This is the first of four clauses that provide relief to a landlord for expenditure on making a sea wall or other embankment to protect let premises against flooding by the sea or a tidal river. They are based on section 30 of ICTA. 1287. Clause 315 states the circumstances under which the relief is given. It is based on sections 30 and 65A of ICTA. 1288. Subsection (1)(b) states the subject of the relief. Repair and maintenance of an existing sea wall normally qualify for relief as revenue expenses of a property business but the making of a new wall is capital expenditure and would not qualify for relief without special provision. 1289. Subsection (2) makes it clear that to obtain a deduction for seawalls expenditure, the person carrying on the property business and the person incurring the seawalls expenditure must be the same person. This may appear to be stating the obvious but section 30(1) of ICTA says merely that the person incurring the expenditure is treated as making a payment "for the purpose of computing the profits of any Schedule A business carried on in relation to those premises" (emphasis added). This cannot be taken literally to mean any such business carried on by someone other than the person incurring the expenditure. There would be no point in deeming the payment to be made by that person if it were otherwise. And the provisions on transfer of interests in section 30(2) and (3) of ICTA reflect the notion that the deemed payment, and hence the right to relief, moves from the former owner to the transferee. There is no suggestion of involvement by any other party. 1290. Subsection (3) defines the "deduction period" referred to in subsection (2). Qualifying expenditure is deducted over 21 years in calculating the profits of the property business. The "deduction period" is comparable to the "writing-down period" over which expenditure qualifying for capital allowances is written off. This reflects the similarity between the relief given by the sea walls provisions and certain capital allowances provisions. The relief is for expenditure which would otherwise be capital in nature. And the expenditure is not relieved all at once but over a period, even if there are changes in the person who obtains the relief. Clause 316: Transfer of interest in premises 1291. This clause deals with the case where the person who incurred the sea walls expenditure sells the premises during the 21 year period over which the deduction is due. It is based on section 30(2) and 30(3) of ICTA. 1292. Subsection (1) applies to transfers of the relevant interest "whether by operation of law or otherwise". These words derive directly from the source legislation. They ensure that the provision applies to, for example, successions to estates as well as the sort of merger of interests envisaged in clause 317. 1293. Subsection (2)(b) requires any apportionment to be "just and reasonable" whereas section 30(2)(a) of ICTA refers simply to an apportionment that is "just". This change reflects the approach that was adopted in CAA and which has been followed in similar contexts elsewhere for consistency. There is no practical difference between the two forms of words. See Change 14 in Annex 1. 1294. Subsection (5) makes explicit what is merely implicit in the source legislation, namely, the extent of the transferor's entitlement to a deduction in subsequent years. In particular, subsection (5)(a) makes it clear that if the transfer is of only part of the premises, the transferor continues to be entitled to a deduction in relation to the part not transferred. Clause 317: Ending of lease of premises 1295. This clause deals with the case where the sea walls expenditure is incurred by a lessee and the lease comes to an end before the end of the deduction period. It is based on section 30(3) of ICTA. 1296. The cases to which subsection (3) applies include renewals of the lease to the same person. Then the deduction passes to the immediate reversioner. 1297. In the source legislation "lease" is defined for the purposes of the sea walls provisions in section 24(6)(a) of ICTA. But that definition is redundant and, since it no longer applies to any other provisions, is not rewritten in this Bill. It is redundant in the sea walls context for the following reasons. 1298. Section 24(6)(a) of ICTA defines references to a lease as extending only to a lease conferring a right, as against the person whose interest is subject to the lease, to the possession of the premises. It originated as paragraph 16 of Schedule 4 to FA 1963. Notes on Clauses to Finance Bill 1963 explain that the reference to possession was to ensure that a "lease" in Schedule A and sections 25 to 31 of ICTA must be one of land and not of incorporeal hereditament. So a lease of sporting rights, or a right of way, would not be covered. However, Street v Mountford [1985], AC 809 established that a "lease" of land which does not confer on the tenant exclusive possession is not, in fact, a lease but a licence. 1299. Section 30(2) of ICTA does not explain the meaning of the transfer of the whole of a person's interest in any premises or part of any premises. The transfer of the whole of a person's interest is significant because it can lead to the transfer of entitlement to a deduction for sea walls expenditure. But entitlement to a deduction for sea walls expenditure does not arise anyway unless a person is the owner or tenant of premises. A lease which makes a person a tenant of premises is not a lease of an incorporeal hereditament. So, although section 30 of ICTA does not expressly exclude leases of incorporeal hereditaments, to the extent that they might cover leases of incorporeal hereditaments references to "leases" in that provision are simply redundant. Clause 318: Transfer involving company within the charge to corporation tax 1300. This clause ensures that entitlement to a deduction for expenditure on seawalls continues properly when the interest in the premises is transferred between an income tax payer and a corporation tax payer. It is based on section 30(2) of ICTA. 1301. Entitlement to a deduction for expenditure on seawalls can be transferred with ownership of the premises. That transfer can be between an income tax payer and a corporation tax payer. Clause 316 deals with transfers between income tax payers. But it cannot deal with a transfer from a corporation tax payer to an income tax payer or the reverse because the provisions in this Bill apply only to income tax payers. 1302. Clause 318 allows the seawalls provisions in this Bill to work properly in respect of the party to the transfer who is subject to income tax. 1303. Subsection (4) signposts the reader to the source provision in ICTA that deals with the party to the transfer who is subject to corporation tax. Clause 319: Relief in respect of mineral royalties 1304. This clause provides that only half the net profits received in respect of mineral royalties are charged to income tax. It is based on section 122 of ICTA. The other half of the profits are charged to capital gains tax by section 201 of TCGA. 1305. The clause applies only to mineral royalties that are not taxed under Chapter 8 of this Part of the Bill. That Chapter taxes rents and royalties from concerns such as mines and quarries. In practice nearly all mineral royalties will be taxed under Chapter 8 of Part 3 of this Bill. For this reason this clause cross-refers to the definitions in that Chapter. Clause 320: Nature of item apportioned on sale of estate or interest in land 1306. This clause preserves the capital or revenue nature of an amount due, or payable in arrears, apportioned to a seller on the sale of land. It is based on section 40(3)(b) of ICTA. 1307. Most of section 40 of ICTA is not rewritten because it has become redundant following the application of Schedule D Case I principles to Schedule A. 1308. The original predecessor of section 40 of ICTA (section 20 of FA 1964) was introduced to deal with a specific problem. That was reflecting, in the calculation of income from land, any apportionments of rent (as a receipt or an expense) that took place between seller and purchaser when land was sold. That required two kinds of rule. The first were calculation rules. They were necessary because at the time section 20 of FA 1964 was introduced the charge on income from land was based on entitlement to incoming rent and payment of outgoing rent. Where there were apportionments on sale there might be neither entitlement nor payment by the "right" person. The second were timing rules to ensure that the consequential adjustments fell in the right tax year. 1309. As a result of the 1995 Schedule A reforms these rules are no longer necessary. Two main factors lead to this conclusion. 1310. The first relates to the object of charge under Schedule A: the profit of a Schedule A business. For there to be a Schedule A business a person has to be exploiting United Kingdom land for rent (section 15(1)1(1) of ICTA). In order to be a receipt (or outgoing) of the Schedule A business it is enough that an amount relates to a period when the person was exploiting the land. 1311. The second factor relates to the time when income within the charge is brought into account. The accruals principle of accounting has been imported from Schedule D Case I into Schedule A. The accruals principle brings an item into account in the period to which it relates. So the rules in section 40(1) to (3) of ICTA about the time of receipt and payment are unnecessary. 1312. Section 40(4) of ICTA is similarly now unnecessary. It provides that any reference in section 40(1) and (2) of ICTA to a party to a contract includes a person to whom the rights and obligations of that party under the contract have passed by assignment or otherwise. Since the test of whether or not an item is to be brought into account under Schedule A is whether it arises from a person's exploitation of land then whether the rights and obligations under the contract pass by assignment or otherwise, the person to whom they pass will be the person exploiting the land. 1313. Section 40(4A) of ICTA is not rewritten. It is linked to the parts of section 40 of ICTA that are unnecessary and also gives in certain circumstances the wrong result. 1314. Section 40(3)(b) of ICTA has a clear anti-avoidance purpose that is preserved in clause 320. But it also contains a timing rule. The timing rule in section 40(3)(b) of ICTA is not rewritten because the accruals principle again attributes the apportioned amount to the correct period. 1315. Clause 320 rewrites the anti-avoidance part of section 40(3)(b) of ICTA which preserves the capital or revenue nature of any amount due or paid in arrears and apportioned by the buyer to the seller on the sale of land. 1316. This rule was originally introduced to deal with the common (at the time) practice whereby, under normal conditions of sale, that part of any rent paid in arrears, apportioned to the seller and to be paid to him or her by the purchaser, was adjusted by means of an addition to the sale price. As capital gains tax did not exist the apportioned rent taken as increased sale price escaped tax altogether. 1317. Capital gains tax now takes away much of the incentive to deal with rent in this way. But this rule may still serve a useful deterrent purpose and needs to be preserved. 1318. The time of apportionment referred to in the clause is normally the time of completion of the sale. Clause 321: Mutual business 1319. This clause makes it clear that the concept of "mutuality" does not apply in the property income context. It is based on section 21C of ICTA. 1320. Mutuality is a concept that has been developed by the courts over a long period. It derives from the principle that one cannot make a profit out of oneself. It may arise in the trading context where a class of contributors to a common fund are entitled, as a class, to share in the surpluses of that fund. 1321. The approach in clause 321 is different from that in section 21C of ICTA and simpler. The approach in section 21C of ICTA is to apply the normal profit calculation rules to any "mutual business" and add the result to the profits of the rest of the Schedule A business. Clause 321 on the other hand prevents, from the outset, the concept of mutuality operating on amounts within Part 3 of this Bill. Chapter 6: Commercial letting of furnished holiday accommodation Overview 1322. The clauses in this Chapter define the lettings that can qualify for special tax advantages: "the commercial letting of furnished holiday accommodation". They are based on section 504 of ICTA. 1323. The clauses do not themselves provide the tax advantages. That is the function of the particular "relieving" provisions (such as the loss relief provisions) that are cross-referred to. 1324. The primary purpose of this Chapter is to provide a central definition of this particular type of letting, income from which benefits from tax advantages provided for in other Acts. 1325. The location of these clauses in a separate Chapter of Part 3 of this Bill reflects detailed consideration of the concept of "the commercial letting of furnished holiday accommodation" in the source legislation. 1326. When the provisions which were the predecessors of what are now sections 503 and 504 of ICTA were first introduced they were complete and free-standing in a way which is no longer the case. That is, at that time they:
1327. Since then however the practical significance of sections 503 and 504 of ICTA has been progressively eroded by changes elsewhere:
1328. Currently section 504 of ICTA merely defines the commercial letting of furnished holiday accommodation for the purposes of particular rules, the detail of which is set out elsewhere. And section 503 of ICTA refers only to what might be considered rather less significant advantages: trade-type loss relief and the treatment of profits as earned income and "relevant earnings" for pension etc relief. 1329. Where best to locate the definition of "commercial letting of furnished holiday accommodation" was therefore carefully considered. The conclusion was that readers will intuitively expect to find the central definition of a particular type of letting with the property income rules. And that is so even if the tax advantages are not prescribed in the same place. So it is located in Part 3 of this Bill. 1330. This income remains part of the single property business in clause 264 and chargeable therefore under this Part. Clause 322: Introduction 1331. This clause is introductory and explanatory. It is new. It makes clear that the provisions that provide for the tax advantages are to be found elsewhere. 1332. Subsection (2)(f) refers to "relevant earnings". There is a transitional rule in Part 3 of Schedule 2 to this Bill which ensures that the ICTA rules about "relevant earnings" apply until 5 April 2006. Clause 323: Meaning of "commercial letting of furnished holiday accommodation" 1333. This clause defines the lettings that can benefit from the special tax treatment. It is based on section 504 of ICTA. 1334. It is not sufficient that the letting is simply of furnished holiday accommodation: it must also be "qualifying holiday accommodation". Subsection (3)(b) signposts to the clauses that define "qualifying holiday accommodation". Clause 324: Meaning of "relevant period" in sections 325 and 326 1335. This clause defines the period during which certain conditions need to be satisfied in order to benefit from the special tax treatment. It is based on section 504(4) of ICTA. 1336. Subsection (1) introduces the concept of "the relevant period". 1337. Subsection (2) gives the rule for identifying the relevant period for the tax year in which the letting (as furnished accommodation) begins. 1338. Subsection (3) gives the rule for identifying the relevant period for the tax year in which the letting (as furnished accommodation) ends. 1339. Subsection (4) gives the general rule and identifies the relevant period as the tax year for the case where there is established and continuing letting. It follows the source legislation (in section 504(4)(c) of ICTA) by putting the general rule covering what is likely to be the most common case, last. This is because a person still needs to read the first two rules to know whether he or she falls within the general rule. 1340. Subsection (4) defines the "relevant period" by reference to the tax year for non-resident companies liable to income tax in respect of furnished holiday accommodation. See Change 75 in Annex 1. Clause 325: Meaning of "qualifying holiday accommodation" 1341. This clause sets out the additional tests the letting must satisfy to qualify for the special treatment. It is based on section 504(3) and section 504(4) of ICTA. 1342. Subsection 504(3) of ICTA is particularly complex. The three tests it imposes in paragraphs (a) to (c) are referred to in this clause as, respectively, the "availability", "letting" and "pattern of occupation" conditions. If all three are met, the accommodation is "qualifying holiday accommodation". 1343. Subsection (1) introduces the term "qualifying holiday accommodation" and defines it by reference to the three conditions that are set out in the subsequent subsections. 1344. Subsections (4) to (6) are based on section 504(3)(c) of ICTA. Section 504(3)(c) of ICTA is particularly ambiguous and this clause seeks to reduce that ambiguity. The approach is different from that in the source legislation and involves a change. 1345. This change alters the period during which, in order to qualify for the special treatment, the accommodation must not be occupied for more than 31 days at a stretch. 1346. Section 504(3) of ICTA provides: (3) Accommodation shall not be treated as holiday accommodation for the purposes of this section unless-
1347. It is not clear whether a "month" for the purposes of paragraph (c) means a calendar month (in the sense of January, February, etc) or any period of one month. It is not even clear whether any breaks in the period of at least seven months can fall at any time or must divide the period into periods of whole months. The better view is that any period of a month during which the accommodation is commercially let to members of the public as holiday accommodation must not overlap with any period during which it is continuously in the same occupation for more than 31 days. 1348. A further uncertainty in section 504(3) of ICTA arises over whether, for the purposes of paragraph (c), the time that the accommodation is "let as mentioned in paragraph (b)" is 70 days or (the better view) all the time that it is commercially let to the public generally as holiday accommodation. 1349. On the latter reading, section 504(3)(c) of ICTA amounts partly to a stipulation that accommodation is not let as holiday accommodation if it is let for more than 31 days continuously. It also reduces to less than five months the total periods during which the accommodation can be in the same occupation for more than 31 days. This can operate capriciously to extend the period of "at least seven months" where the holiday lettings are spaced out throughout the year and not concentrated in a few months. 1350. In clause 325, the requirement in section 504(3)(c) of ICTA is relaxed so that the periods for which the accommodation is continuously in the same occupation for more than 31 days must not amount to more than 155 days (the aggregate length of the five longest months) during the relevant period (see clause 324). This means that the period during which any occupation of the accommodation must be on a short-term basis:
1351. So, where two or three days of a holiday letting fall into a particular month, the requirement in clause 325 (unlike section 504(3)(c) of ICTA) does not restrict what can be done with the accommodation during the rest of the month (provided that the condition is satisfied over the relevant period as a whole). See Change 76 in Annex 1. Clause 326: Under-used holiday accommodation: averaging elections 1352. This clause allows accommodation that would be "qualifying holiday accommodation", were it not simply for insufficient actual letting, nevertheless to qualify if, on average, the letting condition in clause 325(3) is met. It is based on section 504(6) to (8) of ICTA. 1353. Subsection (1) introduces a new term to denote this accommodation: "under-used accommodation". 1354. Subsection (4) introduces a change. This changes the period over which lettings are averaged for the purpose of treating infrequently let property as qualifying holiday accommodation from the tax year to the relevant period (as defined in clause 324). See Change 77 in Annex 1. 1355. Subsection (5) prevents the same accommodation from being used more than once in an averaging calculation. 1356. Subsection (6) reflects the rewrite approach to aligning time limits with the Self Assessment cycle. Clause 327: Capital allowances and loss relief 1357. This is the first of two clauses that provide for separate calculations in order to give effect to the tax advantages of qualifying holiday lettings. It is new. 1358. There is no explicit requirement for separate furnished holiday lettings calculations in section 503 of ICTA. But it is clearly not possible to give effect to the special income tax treatments available to furnished holiday lettings without separating out the relevant income and expenditure. Requiring, where appropriate, separate calculations makes explicit what is only implicit in section 503 of ICTA. Clause 327 and clause 328 provide a mechanism to ensure that the special rules that can give tax advantages in respect of these lettings work properly and clearly in the context of a UK property business of which the furnished holiday lettings is part: the profit from such lettings must be identified separately but only when there is a practical need to do so. Clause 328: Earned income and relevant UK earnings for pension purposes 1359. This is the second of two clauses that provide for separate calculations to give effect to the tax advantages of qualifying holiday lettings. It is new. Chapter 7: Adjustment income Overview 1360. This Chapter applies the rules about a change of basis to property businesses, broadly as those rules apply to trades. The main rules for trades are in Chapter 17 of Part 2 of this Bill. 1361. Section 21A of ICTA provides that "the profits of a Schedule A business are computed in the same way as the profits of a trade are computed for the purposes of Case I of Schedule D". And section 21B of ICTA specifically applies the rules for change of accounting basis in FA 1998. 1362. The rules in Schedule 22 to FA 2002 apply to property businesses because they have effect "in place of" the 1998 rules (see section 64(6) of FA 2002), even though the necessary textual amendment to section 21B of ICTA was overlooked. 1363. So the change of basis rules apply to a Schedule A business. 1364. Section 65A(5) of ICTA provides that "the income from an overseas property business shall be computed .. in accordance with the rules applicable to the computation of the profits of a Schedule A business". 1365. Although the change of basis rules apply to a Schedule A business, they do so by virtue of section 21B of ICTA. That section deals with "other rules applicable to Case I of Schedule D". On the other hand, section 21A of ICTA deals with rules about the computation of profits of a trade. So section 65A of ICTA imports only the computation rules in section 21A and the change of basis rules do not apply to an overseas property business. 1366. The following trading income rules (in Chapter 17 of Part 2 of this Bill) cannot apply to a property business. So there is no corresponding rule in this Chapter:
1367. The following trading income rules apply to property businesses but are not in separate clauses in this Chapter:
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