Clause 786: Meaning of "rent-a-room receipts"

1499.     This clause defines "rent-a-room receipts". It is based on paragraph 2 and paragraphs 4 and 8 of Schedule 10 to F(No 2)A 1992.

1500.     Subsection (1)(a) makes explicit what is merely implicit in the current legislation: that the let accommodation must be in the United Kingdom to be within rent-a-room. This approach also removes a disqualification from rent-a-room relief that can arise in respect of a let United Kingdom residence when exceptionally the individual also lets an overseas residence at the same time. See Change 129 in Annex 1.

1501.     Subsection (1)(b) refers to an "income period". The period for which receipts must satisfy certain conditions is identified in the source legislation as the "basis period". "Basis period" was appropriate to Schedule D Case I income but less so when applied to Schedule A income where it was potentially confusing. The use of "income period" in the rewritten clause makes it possible to avoid using "basis period" for property income and income charged under Chapter 8 of Part 5 of this Bill: the conditions have to be satisfied by reference to the events of an "income period". That is, for trade profits, the basis period (see subsection (3)). But for property income and income charged under Chapter 8 or Part 5 of this Bill it is the tax year or, if letting begins or ends during the tax year, the date of, respectively, the beginning and the end of the letting (see subsection (4)).

1502.     One incidental consequence of this approach is the way in which it works in conjunction with the requirement in subsection (1)(c). It makes explicit the period during which the "only or main residence" requirement must be met in the years when a letting begins or ends and the income is taxable as property income (in the source legislation it was not clear what was meant by "basis period" in these cases). Now it is explicit that the period is concurrent with the period of the letting and does not extend to the whole of the tax year.

1503.     Subsection (1)(d) ensures that when the relief is in respect of income chargeable under the trading or property income Parts of this Bill, it continues to apply only to amounts to which it applies under the source legislation, that is, to rent-a-room lettings which give rise to trade or property business profits. This provision is necessary because the charges under the trading income and property income Parts of this Bill go wider than purely trade and property business profits and includes (for example) post-cessation receipts.

1504.     Subsection (1)(d) also extends rent-a-room relief to income from the provision of the incidental services mentioned in subsection (1)(a) that would, in the source legislation, be charged under Schedule D Case VI and excluded from rent-a-room. See Change 128 in Annex 1.

Clause 787: Meaning of "residence"

1505.     This clause is based on paragraph 7 of Schedule 10 to F(No 2)A 1992.

1506.     Subsection (1)(b) refers to a "caravan or houseboat". There is a Bill wide definition of "caravan": see the commentary on clause 875 and Change 148 in Annex 1.

1507.     There is also a Bill wide definition of "houseboat": see the commentary on clause 878(1) and Change 150 in Annex 1.

Clause 788: Meaning of "total rent-a-room amount"

1508.     This clause introduces and defines a key rent-a-room term: "total rent-a-room amount". It is based on paragraphs 9 and 11 of Schedule 10 to F(No 2)A 1992.

1509.     The term "total rent-a-room amount" is new. It sets out how the amount of income to be compared with the limit is calculated. The level of an individual's "total rent-a-room amount" determines which form of rent-a-room relief the individual is entitled to: the full relief or the alternative method of calculation.

1510.     Subsection (1)(b) includes any relevant balancing charges in the "total rent-a-room amount" to remove an anomaly in the source legislation. See Change 130 in Annex 1.

Clause 789: The individual's limit

1511.     This clause determines the individual's rent-a-room limit for the tax year. The "limit" is the maximum amount of rent-a-room income that is exempt from tax. It is based on paragraphs 5 and 6 of Schedule 10 to F(No 2)A 1992.

1512.     Subsection (1) signposts to the clause which sets out the full conditions that must be met to qualify for the full "basic amount".

Clause 790: Exclusive receipts condition

1513.     This clause states the detail of the conditions that must be met to qualify for the full "basic amount". It is based on paragraph 5 of Schedule 10 to F(No 2)A 1992.

1514.     Subsection (1)(a) makes it clear that a third party letting of any kind in the same residence triggers the halving rule. That in turn reflects the policy in the source legislation that only the "simplest" cases should get the full value of the relief.

1515.     The source legislation refers to a "basis period". The approach of clause 786 (described in the commentary on that clause) is reflected in clause 790 where reference to basis periods is avoided.

Clause 791: Full rent-a-room relief: introduction

1516.     This clause introduces the clauses that provide for full relief. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.

Clause 792: Full rent-a-room relief: trading income

1517.     This clause provides for full relief when the rent-a-room income is trading income. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.

1518.     This clause is simpler than the two clauses that immediately follow it. That is because for both of the latter the rent-a-room income element may have to be separately identified from non rent-a-room income taxable under the same Part of this Bill. That is not the case for rent-a-room income that is trading income. If receipts of a single trade include both rent-a-room and non rent-a-room income none of that income is eligible for relief (paragraph 2(3) of Schedule 10 to F(No 2)A 1992 rewritten as clause 785(1)). So a trade qualifies for rent-a-room relief only if its income consists wholly of rent-a-room income.

1519.     A person carrying on a trade is normally eligible for capital allowances or liable to balancing charges under CAA. The effect of subsection (2) is that neither are taken into account when full relief is due under clause 792. Saying that the profits and losses are nil achieves that because capital allowances and balancing charges are taken into account in calculating those profits and losses.

Clause 793: Full rent-a-room relief: property income

1520.     This clause provides for full relief when the rent-a-room income is property income. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.

1521.     Subsection (3) states explicitly what is merely implicit in the source legislation. That is, in calculating the profits of a property business, no capital allowances or balancing charges are to be made in respect of rent-a-room related assets.

1522.     This form of the rule is needed because the rent-a-room letting may be part of a property business comprising other lettings. Tax under Part 3 of this Bill is charged on the profits of a UK property business, which may include activities other than rent-a-room lettings. Clause 793 cannot treat the profits of the whole UK property business as nil, but instead expressly excludes all amounts relating to rent-a-room activities from the calculation of the profits of the UK property business. Those amounts include capital allowances and balancing charges which relate to rent-a-room lettings and, accordingly, clause 793(3) excludes them.

Clause 794: Full rent-a-room relief: income chargeable under Chapter 8 of Part 5

1523.     This clause provides for full relief when the rent-a-room income includes income charged under Chapter 8 of Part 5 of the Bill. It is new.

1524.     Subsection (1) reflects the change referred to in the last paragraph of the commentary on clause 786. The extension of rent-a-room relief to certain income charged under Schedule D Case VI in the source legislation requires the rule in this section to relieve such income when the relevant conditions are met. See Change 128 in Annex 1.

1525.     There is no equivalent in this clause of clause 793(3). Such a provision is not needed for rent-a-room income charged under Chapter 8 of Part 5 of the Bill because there is no statutory provision for capital allowances for that type of income.

Clause 795: Alternative calculation of profits: introduction

1526.     This clause introduces the clauses that provide for the second form of the relief - the alternative method of calculating profits. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.

1527.     Paragraphs (a) to (c) state the three conditions that must be met. See Change 130 in Annex 1.

Clause 796: Alternative calculation of profits: trading income

1528.     This clause sets out the basis of calculation when the rent-a-room income is wholly or partly trading income and it exceeds the rent-a-room limit. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.

1529.     Subsection (2)(a) makes explicit what is merely implicit in the source legislation: the retention of any balancing charge where the alternative method of calculation applies. As in exemption cases, there is no entitlement to capital allowances if the taxpayer elects for the alternative method of calculation (paragraph 11(6) Schedule 10 to F(No 2)A 1992). But - and this differs from exemption cases - any balancing charge remains. In the source legislation the retention of the balancing charge is merely implicit in paragraph 11(6) Schedule 10 to F(No 2)A 1992: it is simply not mentioned as part of the disapplication of the allowance under section 55 of CAA.

1530.     Subsection (3)(b) gives a formula for calculating the correct deduction when the rent-a-room income consists of trading income and another type of income. In these circumstances the total rent-a-room deduction is apportioned between the rent-a-room income types.

Clause 797: Alternative calculation of profits: property income

1531.     This clause sets out the basis of calculation when the rent-a-room income is wholly or partly property income and it exceeds the rent-a-room limit. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.

1532.     Subsection (3)(b) makes explicit what is merely implicit in the source legislation: the capital allowances adjustments that are required. Like clause 796(2)(a), subsection (3)(b) refers explicitly to the retention of any balancing charge where the alternative method of calculation applies. But subsection (3)(b) also refers to an allowance. That is required because this clause deals with profits that may represent only part of the overall profits of a property business. So to give proper effect to the rent-a-room adjustment it needs to state explicitly what is to be included in, and excluded from, the overall calculation of the profits of that business.

Clause 798: Alternative calculation of profits: income chargeable under Chapter 8 of Part 5

1533.     This clause sets out the basis of calculation when the rent-a-room income is income that is taxed under Chapter 8 of Part 5 of the Bill and it exceeds the rent-a-room limit. It is new.

1534.     Subsection (1) reflects the extension of rent-a-room relief to certain income that is, in the source legislation, charged under Schedule D Case VI. See Change 128 in Annex 1. It gives a deduction rule for income charged under Chapter 8 of Part 5 of the Bill that reflects similar rules for trading and property income in, respectively, clause 796 and clause 797.

1535.     Subsection (3) provides for an apportionment of the available rent-a-room deduction between income charged under Chapter 8 of Part 5 of the Bill and other income. It does not address the case where an individual's rent-a-room income consists wholly of income charged under Chapter 8 of Part 5 of the Bill. That is because such income can, in the rent-a-room context, exist only in company with other (normally property business) rent-a-room letting income.

1536.     There is no reference to any capital allowances adjustments because there is no statutory provision for capital allowances for income within Chapter 8 of Part 5 of the Bill.

Clause 799: Election not to apply full relief

1537.     This clause allows a taxpayer to opt out of full relief (it may not always be beneficial, for example, if he or she has losses to use). It is based on paragraph 10 of Schedule 10 to F(No 2)A 1992.

1538.     It follows the approach of the source legislation in making the exemption automatic unless the taxpayer opts out. That is because, in the type of small case to which the exemption will most frequently apply, the likelihood is that it will be beneficial.

1539.     Subsection (3) converts references, in the source legislation, to the Board of Inland Revenue and to an officer of the Board of Inland Revenue into references to the Inland Revenue. See Change 149 in Annex 1.

1540.     Subsection (3) follows the rewrite approach to expressing time limits by reference to the normal Self Assessment rules.

Clause 800: Election for alternative method of calculating profits

1541.     This clause provides a rule that allows a taxpayer to choose the alternative method of calculation if he or she qualifies. It is based on paragraph 12 of Schedule 10 to F(No 2)A 1992.

1542.     This clause follows the approach of the source legislation in making an election necessary in order to benefit from the alternative method of calculation. That is because this form of the relief is likely to apply to larger, more complex cases. Whether or not the relief is beneficial in these cases will depend on the particular circumstances.

1543.     Subsection (5) converts references, in the source legislation, to the Board of Inland Revenue and to an officer of the Board of Inland Revenue into references to the Inland Revenue. See Change 149 in Annex 1.

1544.     Subsection (5)(a) follows the rewrite approach to expressing time limits by reference to the normal Self Assessment rules.

Clause 801: Time limit on adjustment of assessment

1545.     This clause allows adjustments to be made to assessments within a certain time to give effect to rent-a-room elections or withdrawals of elections. It is based on paragraphs 10 and 12 of Schedule 10 to F(No 2)A 1992.

1546.     Subsection (2) follows the rewrite approach to expressing time limits by reference to the normal Self Assessment rules.

Clause 802: Minor definitions

1547.     This clause provides interpretation for terms not defined elsewhere. It is based on paragraphs 9 and 11 of Schedule 10 to F(No 2)A 1992 and paragraph 86 of Schedule 2 to CAA.

Chapter 2: Foster-care relief

Overview

1548.     The clauses in this Chapter are based on section 176 of, and Schedule 36 to, FA 2003. These provisions are entitled "Foster carers" in the source legislation.

1549.     They give relief in one of two forms for individuals who provide foster care. One form is complete tax exemption for their foster-care income provided their gross receipts do not exceed a certain level - the "full" form of relief. If gross receipts do exceed that level the income is taxable. But taxpayers can choose to have it calculated by deducting a fixed amount as expenses, rather than their actual expenses, if that is advantageous - the "alternative method of calculation" form of the relief.

1550.     Foster-care relief shares certain features with rent-a-room relief (see Chapter 1 of this Part) on which the source legislation was modelled.

Clause 803: Overview of Chapter 2

1551.     This clause introduces the relief. It is based on paragraph 1 of Schedule 36 to FA 2003.

1552.     Subsection (2) introduces the key factor in determining the form of relief available: the level of gross foster-care receipts, that is receipts before any deductions for expenses.

1553.     Subsection (3) introduces the full form of the relief where gross receipts are modest: they are simply not charged to tax.

1554.     Subsection (4) introduces the alternative method of calculation form of the relief where gross receipts are larger.

1555.     Not all taxpayers prepare accounts to 5 April. Subsection (5) alerts the reader to the fact that special rules apply in that case.

1556.     The nature of the activity requires a rather different approach to capital allowances than that in rent-a-room. Subsection (5)(b) introduces the special provisions.

Clause 804: Person who qualifies for relief

1557.     This clause states the basic condition that an individual must satisfy to obtain the relief. It is based on paragraph 2 of Schedule 36 to FA 2003.

1558.     Subsection (1) is a general condition that is satisfied only if the taxpayer claiming foster-care relief satisfies the more detailed conditions in the clauses that follow.

1559.     Subsection (1)(b) refers to an "arrangement" as well as a trade. This covers cases where the foster care does not amount to a trade and where any profits from it would be taxed, in the source legislation, under Schedule D Case VI as profits from the contractual provision of services.

1560.     Subsection (1)(b) prevents relief in cases where the foster care that would otherwise qualify for relief is combined with activities that would not. In so doing it limits the relief to the simpler cases.

Clause 805: Meaning of "foster-care receipts"

1561.     This clause defines "foster-care receipts". It is based on paragraph 3 of Schedule 36 to FA 2003.

Clause 806: Meaning of providing foster care

1562.     This clause explains what is meant by references in this Chapter to the provision of foster care. It is based on paragraph 4 of Schedule 36 to FA 2003.

1563.     Foster care is regulated by a number of non-tax laws. These are cited in the source legislation as a part of the qualifying conditions to benefit from the relief: an individual will qualify only if he or she is a foster carer by virtue of those non-tax laws.

1564.     Subsections (3) and (4) list the relevant non-tax tax laws. They do not reproduce the references in paragraph 4(3)(a) and (b)(i) of Schedule 36 to FA 2003 to the particular provision of the regulations at 9 April 2003. Those references are of no substantive effect and if the regulations are altered the references will not be helpful.

Clause 807: Calculation of "total foster-care receipts"

1565.     This clause clarifies the meaning of a key term, "total foster-care receipts". It is based on paragraph 5 of Schedule 36 to FA 2003.

1566.     "Total foster-care receipts" is a key term because the level of an individual's "total foster-care receipts" determines which form of relief the individual is entitled to: full relief or the alternative method of calculation.

Clause 808: The individual's limit

1567.     This clause defines the individual's "limit" for the tax year. It is based on paragraphs 7 and 9 of Schedule 36 to FA 2003.

1568.     This clause is the first of a group of four clauses which explain how to work out an individual's limit for a tax year. The "limit" is the maximum amount of foster-care income that is not charged to tax. It is the amount with which the taxpayer's "total foster-care receipts" are compared to determine which type of relief is due.

1569.     Subsection (1) introduces the two elements that make up the limit. One is a fixed amount (apportioned between foster carers in a single residence) and the other varies according to the number and ages of the children fostered.

Clause 809: Share of fixed amount: residence used by more than one foster carer

1570.     This clause reduces the fixed amount when a residence is used by more than one foster carer. It is based on paragraph 7 of Schedule 36 to FA 2003.

1571.     Subsection (2) apportions the fixed amount equally between each foster carer in the same residence.

1572.     Subsections (3) and (4) define "residence". The definition refers to a "caravan or houseboat". There is a Bill wide definition of "caravan": see the commentary on clause 875 and Change 148 in Annex 1.

1573.     There is also a Bill wide definition of "houseboat": see the commentary on clause 878(1) and Change 150 in Annex 1.

Clause 810: Share of fixed amount: income period not a year

1574.     This clause reduces the fixed amount when the foster-care period is for less than a year. It is based on paragraph 7 of Schedule 36 to FA 2003.

1575.     Subsection (2) makes it clear that the reduction applies to an individual's share of the fixed amount if clause 809 applies because there is more than one foster carer in the same residence.

Clause 811: The amount per child

1576.     This clause determines the variable component in calculating the individual's "limit" for the tax year: "the amount per child". It is based on paragraphs 8 and 9 of Schedule 36 to FA 2003.

1577.     The amount per child for a tax year depends on the duration of the foster care and the age of the child fostered.

1578.     The duration of the foster care is measured in weeks. Subsections (4) to (6) give rules that identify relevant weeks.

Clause 812: Full foster-care relief: introduction

1579.     This clause provides for the full form of the relief when the individual's foster-care receipts do not exceed his or her limit. It is based on paragraph 10 of Schedule 36 to FA 2003.

1580.     The reference to the limit is in terms that make it clear that foster-care receipts that equal the individual's limit are within the full relief.

1581.     The majority of foster carers who are trading prepare accounts to 5 April. There are special rules for those who do not, which are located later in the Chapter. Paragraph (c) excludes such cases from the main full relief provisions and signposts the reader to the other relevant provisions.

Clause 813: Full foster-care relief: trading income

1582.     This clause authorises the full form of the relief when the foster-care income is trading income. It is based on paragraph 10 of Schedule 36 to FA 2003.

Clause 814: Full foster-care relief: income chargeable under Chapter 8 of Part 5.

1583.     This clause authorises the full form of the relief when the income derives from foster care that does not amount to a trade. It is based on paragraph 10 of Schedule 36 to FA 2003.

1584.     Subsection (2) limits the effect of the relief to the foster-care income and associated expenses.

Clause 815: Alternative calculation of profits: introduction

1585.     This clause is the first of five clauses that provide for the alternative form of the relief. It is based on paragraph 11 of Schedule 36 to FA 2003.

1586.     The alternative calculation form of the relief applies when the individual's foster-care receipts exceed his or her limit.

1587.     Unlike the full form of the relief the alternative calculation form applies only if the individual elects for it.

1588.     As in the case of the full form of the relief (see the commentary on clause 812) there are special rules for those who do not prepare trading accounts to 5 April. These are located later in the Chapter.

Clause 816: Alternative calculation of profits: trading income

1589.     This clause sets out the basis of calculation when the foster-care income is trading income and it exceeds the individual's limit. It is based on paragraph 12 of Schedule 36 to FA 2003.