Paragraph 18 of Schedule 30 to ICTA

140.     This amendment repeals paragraph 18 of Schedule 30 to ICTA.

141.     Paragraph 18 of Schedule 30 to ICTA is a transitional measure that applies to stock relief. Stock relief was available under different schemes from 1976 to 1984. It was given as a deduction in computing trade profits. Although FA 1984 abolished stock relief with effect from 12 March 1984 it allowed any unused relief to be carried forward and deducted in later years. The relief brought forward has to be used in the first tax year that has the capacity to absorb it. Paragraph 10 of Schedule 9 to FA 1981 provided that any unused relief brought forward which is not used in six years would be lost.

142.     It was necessary to preserve the transitional right to deducted unused relief brought forward when ICTA consolidated the earlier legislation in 1988. But this transitional measure is no longer required.

Part 2: Other Enactments

Taxes Management Act 1970

Sections 9D, 12AE(2) and 31(3) of TMA

143.     These amendments repeal the sections of TMA that give effect to the "Crown Option". Under the "Crown Option" the Inland Revenue has the right to determine under what Case of Schedule D to charge income that falls both within Cases I or II and Cases III, IV or V. In practice this option is always exercised to tax the income under Schedule D Cases I or II.

144.     This Bill includes clauses that enact the Crown Option by giving priority to the trading income Part if income that is taxed under Schedule D in the source legislation falls within more than one Part. See Change 66 in Annex 1. These priority clauses mean that the determination powers in TMA are not required.

Taxation of Chargeable Gains Act 1992

145.     The following three sections rewrite paragraph 1 and paragraphs 4A(5) to (9) of Schedule 5AA to ICTA. They provide rules for computing a capital gain or loss where a chargeable profit or an allowable loss has arisen under Chapter 12 of Part 4 of this Bill which deals with futures and options involving guaranteed returns. They are considered more appropriate to TCGA than to this Bill.

Section 148A Futures and options involving guaranteed returns

146.     This new section of TCGA prevents a profit or gain chargeable under Chapter 12 of Part 4 of this Bill from being taxed again under TCGA or losses under that Chapter from being relieved other than under the provisions of new section 836B of ICTA (what is now Schedule D Case VI losses). It is based on paragraph 1 of Schedule 5AA to ICTA.

Section 148B Deemed disposals at a gain under section 564(4) of ITTOIA 2005

147.     Clause 564 (deemed disposal where futures run to delivery or options are exercised) deems a disposal to take place immediately before a future runs to delivery or an option is exercised. Eventually the asset acquired under that future or option may itself be sold for a capital gain. Any gain on that disposal will, under the TCGA rules, include that part of the gain that has already been taxed under Chapter 12 of Part 4 of this Bill as a result of the deemed disposal. This new section of TCGA provides rules to prevent that double taxation by excluding that element of the gain from the chargeable gain. It is based on paragraph 4A of Schedule 5AA to ICTA.

148.     Subsection (2) provides for the rules in sections 37 and 39 of TCGA to be disregarded. These sections prevent an amount taxed as income from being included in the disposal proceeds of an asset or sums deductible in an income tax computation from being deductible against the capital gains computation.

149.     Subsection (4) prevents indexation allowance being added to the increase in the acquisition cost made under subsection (3). This is because that adjustment is a notional adjustment only and not actual expenditure.

150.     Subsection (6) provides for the grant of an option and its deemed disposal to be treated as a single acquisition for the purposes of adjusting the capital gains computation under subsections (3) to (5). Treatment as a single acquisition allows the premium received by the grantor of the option to be taken into account in calculating the consideration for acquisition of the asset. Section 144 of TCGA, which applies by virtue of clause 562 (when disposals of futures or options occur: general), performs the same service for disposals under Chapter 12 of Part 4 of this Bill other than deemed disposals (see commentary on clause 563 (timing of certain grants of options where related disposals occur later)). This subsection is needed because deemed disposals under clause 564 (deemed disposals where futures run to delivery or options are exercised) are not disposals for the purposes of section 144 of TCGA.

Section 148C Deemed disposals at a loss under section 564(4) of ITTOIA 2005

151.     Clause 564 (deemed disposal where futures run to delivery or options are exercised) deems a disposal to take place immediately before a future runs to delivery or an option is exercised. Eventually the asset acquired under that future or option may itself be sold for a capital loss. Any loss on that eventual disposal will, under the TCGA rules, include that part of the loss that may be relieved under Chapter 12 of Part 4 of this Bill as a result of the deemed disposal. This new section of TCGA provides rules to prevent a double allowance of that loss by excluding the loss allowable under Chapter 12 of Part 4 of this Bill from the capital loss. The section is based on paragraph 4A of Schedule 5AA to ICTA.

152.     Subsection (2) provides for the rules in sections 37 and 39 of TCGA to be disregarded. These sections prevent an amount taxed as income from being included in disposal proceeds of an asset or sums deductible in an income tax computation from being deductible against the capital gains computation.

153.     Subsection (3) provides for the grant of an option and its deemed disposal to be treated as a single acquisition for the purposes of adjusting the capital gains computation under subsections (4) and (5). This allows the premium received by the grantor of the option to be taken into account in calculating the consideration for acquisition of the asset. Section 144 of TCGA which applies by virtue of clause 562 (when disposals of futures or options occur: general) performs the same service for disposals under Chapter 12 of Part 4 of this Bill other than deemed disposals (see commentary on clause 563 (timing of certain grants of options where related disposals occur later)). But deemed disposals under clause 564 (deemed disposals where futures run to delivery or options are exercised) are not disposals for the purposes of section 144 of TCGA.

154.     Subsections (4) and (5) apply where an asset has been disposed of at a loss by means of a future running to delivery or an option being exercised. The consideration for that asset for the purposes of the capital gains computation is decreased by the amount of the loss arising under Chapter 12 of Part 4 of this Bill, thus effectively preventing a double allowance of the loss that arises on the deemed disposal under that Chapter. Under subsection (4) two distinct situations are foreseen, first where the person sustaining a loss on the deemed disposal acquires an asset as a result of a future running to delivery or the exercise of an option and, second, where the person sustaining a loss on the deemed disposal disposes of an asset as a result of a future running to delivery or the exercise of an option.

155.     Subsection (5) ensures that the consideration cannot be reduced below zero. Where the loss under Chapter 12 of Part 4 of this Bill exceeds the consideration, the consideration is reduced to nil and the excess is treated as a chargeable gain.

156.     Subsections (6) and (7) deal with occasions where the loss under Chapter 12 of Part 4 of this Bill on the deemed disposal exceeds the consideration for the asset and is treated as a capital gain under subsection (5). The capital gain arises either when an asset acquired under the future or option is eventually disposed of, or, if the asset is already held but disposed of under the future or option, on that disposal.

157.     Subsections (8) and (9) supplement the rule in subsections (6) and (7). They establish when a chargeable gain under subsection (5)(b) is treated as arising in circumstances which involve special capital gains tax provisions.

Section 151C Strips: manipulation of price: associated payment giving rise to loss

158.     This new section of TCGA provides that where a capital loss accrues as part of any scheme or arrangement which has an unallowable purpose that loss is disregarded. Schedule 13 to FA 1996, relevant discounted securities, is rewritten in Chapter 8 of Part 4 of this Bill. Because this paragraph of the Schedule deals with capital losses on such securities it is more appropriate to TCGA. The section is based on paragraph 14C of Schedule 13 to FA 1996.

159.     Subsection (1)(b) requires payment to be made other than for the acquisition or disposal of a strip - these payments will typically be payments under option agreements. An allowable loss may accrue on a payment while a comparable gain on a strip escapes tax under section 115 of TCGA. "Disposal" in this subsection takes the meaning in Chapter 8 of Part 4 of this Bill (subsection (4)).

Section 254(1)(c) of TCGA

160.     Section 254(1)(c) of TCGA has been repealed in relation to loans made after 16 March 1998. The amendment for deeply discounted securities is required because it still has life for loans made before that date.

Finance Act 1993

Section 171(2) of FA 1993

161.     Section 171(2) of FA 1993 provides that the aggregate profits of an individual underwriter at Lloyd's are taxed under Schedule D Case I and under no other Case or Schedule. The integrated approach to foreign trade profits means that the trading income Part does not distinguish between income that is taxed under Schedule D Cases I and V in the source legislation. Where it is necessary to make this distinction this Bill does so through the definition of "relevant foreign income" in clause 830.

162.     This amendment also uses the concept of "relevant foreign income" to reproduce the reference to Schedule D Case I in section 171(2)(a) of FA 1993.

Income Tax (Earnings and Pensions) Act 2003

Section 325A Health and employment insurance payments

163.     This new section of ITEPA gives a person receiving payments under an insurance policy which insures against a health and employment risk exemption from taxation on those payments as employment income.

164.     This rewrites section 580A(7) of ICTA to the extent that it relates to employment income.

165.     The payment must first have the capacity for exemption under clause 735 (health and employment insurance payments) on the assumption that it is an annual payment (and thus exempt under that clause). But it must also meet two further conditions.

166.     First the payments must be to an employee (or to his or her spouse) who contributed under a policy that another person took out for his or her benefit and secondly the payments must represent the contributions the employee has made.

Section 360A Social security contributions

167.     This new section of ITEPA rewrites part of the rule in section 617(3) and (4) of ICTA, which prohibits the deduction of most social security contributions in calculating income for tax purposes. The remainder of the rule is rewritten, for income tax, in clause 868 (social security contributions) of this Bill.

168.     In some circumstances an employee may be allowed a deduction for wages paid. In that case, the associated employer's national insurance contributions may also be allowed. The deduction is allowed if it would meet the tests in section 336 of ITEPA (see section 617(4)(d) of ICTA). But it should also be allowed if it meets the tests in any of sections 337 to 342 of ITEPA. See Change 153 in Annex 1.

Section 575 of ITEPA

169.     Section 575 of ITEPA is amended because the ICTA references on which it depended are rewritten and repealed for income tax purposes. This paragraph is based on sections 65, 68, 584 and 585 of ICTA.

170.     The paragraph provides rules for calculating the income charged by virtue of Chapter 4 of Part 9 of ITEPA. The income is treated as relevant foreign income for the purposes of Chapters 2 and 3 of Part 8 of this Bill. See clause 830(4) (meaning of "relevant foreign income") and the commentary on Part 8 of this Bill for further detail (overview and Chapter 1 of that Part).

171.     Sub-paragraph (3) rewrites the 10% deduction given from pension income in the source legislation by sections 65(2) and 68(5) of ICTA. It does not rewrite one of the conditions for that deduction imposed by section 68(5) of ICTA for pension income arising in the Republic of Ireland. See Change 154 in Annex 1.

172.     Section 575(4) of ITEPA, which is inserted by sub-paragraph (3), reflects small differences in the source legislation between the conditions attached to the deduction for annual payments in section 68(3) of ICTA (income from the Republic of Ireland) and section 65(1) of ICTA (other foreign income).

Section 613 of ITEPA

173.     Section 613 of ITEPA is amended because the ICTA references on which it depended are rewritten and repealed for income tax purposes. This paragraph is based on sections 65, 68, 584 and 585 of ICTA.

174.     The commentary on the paragraph amending section 575 of ITEPA applies equally here, with the necessary modifications for the fact that this section deals with annuities rather than a pension. See Change 154 in Annex 1.

175.     As regards the 10% deduction given in the source legislation by sections 65(2) and 68(5) of ICTA, this does not extend to annuities from the Republic of Ireland. This paragraph extends the deduction to such annuities. See Change 155 in Annex 1.

Section 631 of ITEPA

176.     Section of ITEPA is amended because the ICTA references on which it depended are rewritten and repealed for income tax purposes. This paragraph is based on sections 65 and 68 of ICTA.

177.     Some of the commentary on the paragraph amending section 575 of ITEPA applies equally here. See Change 154 in Annex 1.

178.     The main difference is that, although the income is treated as relevant foreign income, it is income paid in the United Kingdom. Chapters 2 and 4 of Part 8 of this Bill (which rewrite sections 584 and 585 of ICTA) cannot apply. And the only provision in Chapter 3 of that Part which can apply is clause 838 as the other provisions in that Chapter do not apply to income paid in the United Kingdom.

Section 635 of ITEPA

179.     Section 635 of ITEPA is amended because the ICTA references on which it depended are rewritten and repealed for income tax purposes. This paragraph is based on sections 65, 68, 584 and 585 of ICTA.

180.     The commentary on the paragraph amending section 575 of ITEPA applies equally here. See Change 154 in Annex 1.

Section 644A Health and employment insurance payments

181.     This new section of ITEPA gives a person receiving payments under an insurance policy which ensures against a health and employment risk exemption from taxation on those payments as pension or annuity income.

182.     This rewrites section 580A(7) of ICTA to the extent that it relates to pension income.

183.     The commentary on new section 325A of ITEPA applies equally to this section except that the insurance payments must be to the pensioner rather than the employee.

Section 646A Foreign pensions of consular employees

184.     This new section of ITEPA provides a similar exemption for consular employees' foreign pension income to that in clause 771 of this Bill.

185.     The section is based on section 322 of ICTA and brings into ITEPA the exemption for income within subsection (1A)(b) and (c) of that section. This is income that was previously charged under Schedule D Case V. This section now brings the exemption for foreign pension income into ITEPA under which the income would be charged if it were not exempt.

186.     The commentary on clause 771 (relevant foreign income of consular officers and employees) applies also to this paragraph when read as for pension income.

Section 679

187.     Section 679 of ITEPA is amended because the ICTA references on which it depended are rewritten and repealed for income tax purposes. This paragraph is based on sections 65, 68, 584 and 585 of ICTA.

188.     The commentary on the paragraph amending section 575 of ITEPA applies substantially here, with the necessary modifications for the fact that this section deals with social security income rather than a pension. This income does not benefit from the 10% deduction provided for pension income, nor are there any special rules affecting social security income from the Republic of Ireland to be mentioned.

Section 681A Foreign benefits of consular employees

189.     This new section of ITEPA provides a similar exemption for consular employees' foreign social security benefits to that in clause 771 of this Bill.

190.     This new section is based on section 322 of ICTA and brings into ITEPA the exemption for income within subsection (1A)(d) of section 322. This is income that was previously charged under Schedule D Case V. This section now brings the exemption for foreign benefits into ITEPA under which the income would be charged if it were not exempt.

191.     The commentary on clause 771 (relevant foreign income of consular officers and employees) applies to this new section of ITEPA also when read as for foreign benefits.

Schedule 2: Transitionals and savings etc.

Part 1: General provisions - continuity of the law

192.     These paragraphs ensure continuity of the law, despite the fact that this Bill repeals and rewrites provisions.

193.     Paragraph 2 makes clear that the proposition about the continuity of the law in paragraph 1 does not apply to changes in the law made by the Bill.

194.     The paragraphs in this Part stand instead of section 17(2) of the Interpretation Act 1978 and provide a comprehensive set of transitional arrangements.

Part 2: Changes in the law

195.     This paragraph allows anyone affected by a minor change in the law made by the Bill to elect that the change does not apply to events occurring before 6 April 2005. This allows the Bill to be applied as soon as possible without imposing charges retrospectively.

196.     The Bill applies for the purposes of income tax. But it makes numerous consequential amendments to corporation tax. So corporation tax is also provided for here.

Part 3: Trading income

Training courses for employees

197.     These two paragraphs ensure continuity in the training expenses tax recovery provisions in the source legislation which are rewritten in clause 75. They are based on section 588 of ICTA.

198.     Paragraph 37 of Schedule 7 to ITEPA keeps sections 588(5)(a) and 589(3) and (4) of ICTA in force in relation to tax years before 2003-04. It also preserves the reference to section 589(3) and (4) of ICTA in section 588(6) of ICTA in relation to such tax years.

199.     The first paragraph ensures that the rewrite of section 588 of ICTA does not stop paragraph 37 of Schedule 7 to ITEPA from working: where section 588 has effect by virtue of paragraph 37 of Schedule 7 to ITEPA the amendments do not apply in relation to the section.

200.     The second paragraph ensures continuity in the case of determinations of an employer's income tax liability for the tax years between the dates that ITEPA and the rewrite of section 588 of ICTA come into force. Those determinations will be made on the assumption that a deduction is allowed under section 588(3) of ICTA. Doubt might arise whether clause 75 applies in such cases: clause 75(1) says that the clause applies if an employer's liability has been determined on the assumption that a deduction is allowed under clause 74.

201.     The effect of the transitional is that even though a deduction has been allowed under section 588(3) of ICTA, clause 75 will operate if there is a later breach of section 311(4)(a) or (b) of ITEPA.

202.     If the expenditure is incurred on or after 6 April 2005, the employer's right to a deduction will arise under clause 74 and clause 75 will operate if there is a later breach of section 311(4)(a) or (b) of ITEPA.

203.     Sub-paragraph (1)(c) of the second paragraph makes it clear that this transitional does not apply if an assessment has already been made before the rewritten provisions come into force.

Apportionment of profits or losses to tax years before tax year 2005-06 - basis periods

204.     Clause 883 provides that the Bill takes effect for income tax purposes for the tax year 2005-06. For trade profits taxed under Chapter 2 of Part 2 of this Bill the income chargeable for 2005-06 is determined by reference to the basis period for that tax year.

205.     Chapter 15 of Part 2 of this Bill sets out the rules for relating basis periods to periods of account. In the case of an established trade the basis period for 2005-06 will usually be the 12 month period of account ending in the year 2005-06. That period of account will not normally form the basis period for any other tax year.

206.     But if the trade has just started it may be necessary to apportion the result of a period of account. For example, if a trade starts on 1 January 2005 and the first accounts are made up to 31 December 2005 that period of account will form the following basis periods:

• tax year 2004-05 basis period 1 January 2005 to 5 April 2005; and

• tax year 2005-06 basis period 1 January 2005 to 31 December 2005.

207.     Section 72 of ICTA, rewritten as clause 203 allows the profits for the basis period 1 January to 5 April 2005 to be arrived at by apportionment.

208.     In calculating the amount of overlap relief, (see clause 204), it is important that the same figure of taxable profit is attributed to the period 1 January 2005 to 5 April 2005 for both tax years.

209.     The purpose of this paragraph is to allow the profits of a period of account that straddles 6 April 2005 to be calculated using the rewritten legislation even though tax years earlier than 2005-06 will be affected. This Bill includes a number of minor changes in the law. Without this paragraph it would be necessary for traders to take account of those changes only for the tax year 2005-06.

210.     If a taxpayer does not want the new law to apply to a transaction that occurred before 6 April 2005 he or she can elect for the old legislation to continue to apply.

Profits or losses of a trade, profession or vocation previously chargeable in accordance with section 65(1) of ICTA

211.     This transitional provision relates to Change 1 in Annex 1. The profits of a trade, profession or vocation may exceptionally not be charged in accordance with section 65(3) of ICTA (because they are not "immediately derived" from it). In that case this Bill may produce a change from assessment on a tax year basis to assessment on the basis of the profits of a basis period. This transitional provision ensures that profits are not assessed twice.

Profits of mines, quarries and other concerns not chargeable by reference to a basis period

212.     Section 55 of ICTA, rewritten as clause 12, provides that the profits of certain concerns are taxed under Schedule D Case I. It is not clear in the source legislation whether or not the basis period rules rewritten as Chapter 15 of Part 2 of this Bill apply to these profits. It is possible that some taxpayers may be returning the profits by reference to the full amount arising in the tax year and not by reference to the period of account ending in the basis period for the tax year.

213.     Clause 12 makes clear that all the Schedule D Case I rules apply including the basis period rules. This paragraph deals with the transition to that regime if the taxpayer has used the basis period rules in the tax year 2004-05. Deeming the trade to start on 6 April 2005 means the taxpayer will be taxed on the full amount of the profit arising in that tax year and no part of that profit will also be taxed in the earlier year.

214.     If a taxpayer has arrived at the profits for the tax year by apportioning the profits of periods of account the paragraph also allows the taxpayer to use the rules in this Bill to calculate the profits in any part of the period that straddles 6 April 2005.