This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 14: Requiring an apportionment to be just and reasonable: clauses 61, 65, 78, 93, 289, 294, 316, 471, 472, 645, 719 and 722

This change requires any apportionment that is not required by the source legislation to be made on a just and reasonable basis to be made on such a basis.

In some cases where there is an apportionment under legislation rewritten in the Bill, the apportionment is required by the source legislation to be made on a just and reasonable basis. In other cases, it is required to be made only on a just basis or only on a reasonable basis, or there are no requirements. In new tax legislation it is now the practice to require an apportionment to be just and reasonable. For example, before it was replaced by ITEPA, section 140B(4) of ICTA (inserted by FA 1998) required a just and reasonable apportionment to be made of any consideration given partly in respect of one thing and partly in respect of another. There is no reason why an apportionment should not be on a just and reasonable basis. And it is desirable that all apportionments should be made on the same basis.

Accordingly, where an apportionment under legislation rewritten in the Bill is not required to be made on a just and reasonable basis, the rewritten provision requires the apportionment to be made on a just and reasonable basis. The changes are as follows:

• section 87(3) of ICTA (apportionment of deemed rent attributable to part of land not occupied for the purposes of a trade, profession or vocation required to be just) (see clause 61(5));

• section 87(5) of ICTA, which applies section 37(6) of ICTA (amount chargeable on the superior interest to be proportionately adjusted between parts of premises; no requirements as to the basis on which the adjustment is to be made) (see clause 65(6));

• section 579(5) of ICTA (apportionment of a redundancy payment where the employee is employed in different capacities; no requirements as to the basis on which the apportionment is to be made) (see clause 78(2));

• sections 80(4) and (8) and 81(5) of ICTA (apportionment of expenses between foreign trades required to be made on a reasonable basis) (see clause 93(2), (3) and (5));

• section 37(3) of ICTA (apportionment of appropriate fraction of the amount chargeable on the superior interest attributable to a part of premises required to be just) (see clause 289(3));

• section 37(6) of ICTA (amount chargeable on the superior interest to be proportionately adjusted between parts of premises; no requirements as to the basis on which the adjustment is to be made) (see clause 294(6));

• section 30(2)(a) of ICTA (apportionment of deemed payment in respect of expenditure on sea walls, as may be just) (see clause 316(2));

• section 547A(12) of ICTA (non-fractional interest in the rights conferred by a policy or contract treated as if it were such a share in the rights as may justly and reasonably be regarded as representing the interest) (see clause 471(7));

• section 547A(7) of ICTA (apportionment of any property that represents property provided for the purpose of a trust and other property required to be just) (see clause 472(4));

• section 660E(5) of ICTA (apportionment of any property that represents both property provided by the settlor and other property required to be just) (see clause 645(1));

• section 656(3) of ICTA (in the case of certain purchased life annuities, the proportion which the capital element in any annuity payment bears to the total amount of the payment is in certain circumstances to be such as may be just, having regard to certain factors) (see clause 719(8)); and

• section 656(4) of ICTA (apportionment of consideration given in connection with the grant of an annuity required to be just) (see clause 722(3) and (4)).

This change makes minor amendments to a number of existing rules, but is expected to have no practical effect as it is in line with current practice.

Change 15: Restrictions on expenses under clauses 61 and 292: clauses 64, 65, 293 and 294

This change clarifies how expenses that a tenant is treated as incurring by reference to a taxed receipt under clauses 61 or 292 are affected in cases in which there is a reduction under clause 288 by reference to the taxed receipt in calculating the amount of a receipt.

Section 37(4) of ICTA provides:

Subject to subsection (5) below, the person for the time being entitled to the head lease shall be treated for the purpose, in computing the profits of a Schedule A business, of making deductions in respect of the disbursements and expenses of that business as paying rent for those premises (in addition to any actual rent), becoming due from day to day, during any part of the period in respect of which the amount chargeable on the superior interest arose for which he was entitled to the head lease, and, in all, bearing to that amount the same proportion as that part of the period bears to the whole.

Section 37(4) of ICTA is rewritten in clauses 291 and 292.

Section 37(5) of ICTA modifies section 37(4) of ICTA, if the reduced amount of a later chargeable amount has been calculated under section 37(2) of ICTA by reference to the amount chargeable on the superior interest. Section 37(5) of ICTA provides:

Where subsection (2) above applies, subsection (4) above shall apply for the period in respect of which the later chargeable amount arose only if the appropriate fraction of the amount chargeable on the superior interest exceeds the later chargeable amount, and shall then apply as if the amount chargeable on the superior interest were reduced in the proportion which that excess bears to that appropriate fraction.

Section 37(5) of ICTA is rewritten in clause 293.

The general principle behind section 37(5) of ICTA is that if part of the amount chargeable on the superior interest has been used to reduce the amount of a later chargeable amount, only the balance of the amount chargeable on the superior interest should be available under section 37(4) of ICTA. This is achieved by reducing the amount of rent that the tenant is treated as paying under section 37(4) of ICTA for the period in respect of which the later chargeable amount arose. If in the calculation under section 37(2) of ICTA the appropriate fraction of the amount chargeable on the superior interest did not exceed the later chargeable amount, section 37(4) of ICTA does not apply. So the tenant is not treated as paying rent under section 37(4) of ICTA for the period in respect of which the later chargeable amount arose.

Section 87(5) of ICTA applies section 37(5) of ICTA if a tenant under a taxed lease is treated as paying rent under section 87(2) of ICTA in circumstances in which section 87(4) of ICTA applies.

(A) It is possible that the reduced amount of a later chargeable amount calculated under section 37(2) of ICTA by reference to more than one amount chargeable on the superior interest has been reduced to zero but that the appropriate fraction of the amount chargeable on the superior interest does not, in any one case, exceed the later chargeable amount. In these circumstances, section 37(5) of ICTA prevents any relief under section 37(4) of ICTA for the period in respect of which the later chargeable amount arose.

But it is more consistent with the principle behind section 37(5) of ICTA that if the total of the appropriate fractions of the amounts chargeable on the superior interest involved exceeds the later chargeable amount, rent equal to that excess should be treated as paid for the period in respect of which the later chargeable amount arose. Otherwise, that excess will not be available to provide relief under section 37(4) of ICTA. It will be lost, unless it can be used in the calculation of a reduced amount for a different later chargeable amount.

It is also possible that the reduced amount of more than one later chargeable amount has been calculated under section 37(2) of ICTA by reference to an amount chargeable on the superior interest and that the amount of each of the later chargeable amounts has been reduced to nil. In these circumstances, sections 37(4) and (5) of ICTA work satisfactorily if there is no overlap between the periods in respect of which each of the later chargeable amounts arose. But it is not at all clear how sections 37(4) and (5) are intended to operate if there is such an overlap.

If there is an overlap between the periods in respect of which each of the later chargeable amounts arose, it is reasonable that section 37(5) of ICTA should apply so that the total of the reductions in all later chargeable amounts by reference to the amount chargeable on the superior interest should be taken into account in determining how much, if any rent should be treated as paid under section 37(4) of ICTA.

Clause 293(3) replaces the test that the appropriate fraction of the amount chargeable on the superior interest must exceed the later chargeable amount in section 37(5) of ICTA with the test that the "daily amount" of the taxed receipt must exceed the "daily reduction" of the lease premium receipt (as defined in clause 293(6)). Clause 290(6) provides that references to a reduction under clause 288 by reference to a taxed receipt are to a reduction under that clause as far as is attributable to the taxed receipt.

Clause 293(5) deals with the application of section 37(5) of ICTA if more than one later chargeable amount has been reduced by reference to the amount chargeable on the superior interest.

Without these changes, clause 293 would produce the same result as section 37(5) of ICTA if there is one taxed receipt and one lease premium receipt. These changes make clause 293 work if a later chargeable amount has is reduced by reference to more than one amount chargeable on the superior interest or an amount chargeable on the superior interest is reduced by reference to more than one later chargeable amount.

Clause 64(2), (5) and (6) is based on that part of section 87(5) of ICTA that applies section 37(5) of ICTA. It includes similar changes to those in clause 293.

(B) Section 37(6) of ICTA provides for the application of section 37(4) and (5) of ICTA if the later chargeable amount is in respect of a lease for only part of the premises subject to the head lease. Section 37(6) of ICTA is rewritten in clause 294.

Section 37(6) of ICTA does not deal with the possibility that more than one lease may have been granted out of the head lease and that there may be a later chargeable amount reduced under section 37(3) of ICTA by reference to the amount chargeable on the superior interest in respect of each such lease. This is dealt with in clause 294(4) .

Clause 65 is based on that part of section 87(5) of ICTA that applies section 37(6) of ICTA. Clause 65(4) includes a similar change to that in clause 294.

The relief to which a person is entitled by reference to a taxed receipt under clauses 288 and 292 is restricted by clause 295 to the amount of the taxed receipt after any deductions under clause 61. So if, as a result of this change, the relief to which a person is entitled is increased or decreased, this may affect the amount of relief to which somebody else is entitled.

This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 16: Clarification of position of employees seconded to charities: clause 70

This change provides that a trader who seconds an employee to a charity or educational establishment is entitled to a deduction in calculating the trade profits, irrespective of the duties undertaken by the employee while on secondment.

Section 86 of ICTA gives relief for employers who second employees to charities or educational establishments. It does this by providing that, notwithstanding anything in the general rules on deductions not allowable in section 74 of ICTA, the cost of the seconded employee:

shall continue to be deductible in the manner and to the like extent as if, during the time that his services are so made available..they continued to be available for the purposes of the employer's trade..

So if the costs of the employee would not be allowed under the normal rules - for example because the employee is employed on a capital project - the employer is not entitled to any deduction under section 86 of ICTA.

In practice, the costs of the secondment are allowed whatever the nature of the work carried out by the employee during the secondment. So if, for example, an employee is seconded to a medical charity to help build a hospice, the employer is allowed to deduct the cost of employing the seconded person. This change gives statutory effect to that practice.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 17: Retraining courses: deduction no longer dependent on employee's exemption: clause 74

This change removes the link in the source legislation between the employee's exemption and the employer's entitlement to a deduction.

Section 588(3)(b) of ICTA permits a deduction in calculating the employer's trade profits when:

by virtue of section 311 of ITEPA 2003, no liability to income tax arises in respect of the payment or reimbursement [of retraining course expenditure].

The requirement for the deduction to be allowed in clause 74(1) is that the "relevant conditions" in section 311 of ITEPA are met. "Relevant conditions" is defined in clause 74(2) which cross-refers to the detail of the conditions in section 311of ICTA. That does not include the employee's exemption from tax under that provision.

The effect is that the employer's entitlement to a deduction ceases to be dependent, in part, on the employee's exemption.

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 18: Redundancy payments: legislate the practice of allowing voluntary payments made in connection with a cessation: clause 79

This change legislates the practice of allowing as a deduction voluntary redundancy payments made in connection with the cessation of part of a trade.

Statement of Practice 11/81 extends the operation of section 90 of ICTA to payments in connection with the cessation of part of a trade. Clause 79 gives effect to that practice in subsections (1) and (5).

If part of the trade continues, it would be possible to allow the deduction in the period of account in which the payment is made. But it is logical, and usually beneficial to the taxpayer, to make the deduction in the last period of account in which the part of the trade was carried on.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 19: Devolution: clauses 80, 83, 110, 167, 207, 732, 755, 769, 879 and 880.

This change concerns the effect of the devolution settlements.

Scotland

The approval function in section 79(4) of ICTA conferred on the Secretary of State is exercisable in relation to Scotland by the Scottish Ministers (see SI 1999/1750 made under section 63 of the Scotland Act 1998). Clause 83 reflects that transfer of functions.

In Schedule 1 to the Interpretation Act 1978 "Act" is defined to mean an Act of Parliament and "enactment" is defined as not including "an enactment comprised in, or in an instrument made under, an Act of the Scottish Parliament". The definitions in that Schedule apply "unless the contrary intention appears" (see section 5 of the 1978 Act).

Section 581 of ICTA confers an exemption from tax in relation to foreign currency securities, including those issued by a statutory corporation. The definition of "statutory corporation" refers in a number of places to an "Act". Because of the definition of "Act" in the Interpretation Act 1978, the definition of "statutory corporation" may not include bodies corporate established by an Act of the Scottish Parliament (ASP) (eg Scottish Water established by section 20 of the Water Industry (Scotland) Act 2002).

Clause 879 widens the definition of "Act" as that term is used in clause 755 to include such corporations. If this is a change in the law, it reflects current practice, and the fact that it can be assumed that the devolution settlement did not intend section 581 of ICTA to operate differently in relation to England and Wales on the one hand and Scotland on the other. The change also widens the scope of the exemption and is therefore favourable to the taxpayer.

Section 578 of ICTA confers an exemption from tax in relation to housing grants made under any enactment. Again the Interpretation Act 1978 means that it is not clear that "enactment" covers ASPs or Scottish statutory instruments.

Clause 879 provides that ASPs and Scottish statutory instruments are covered by the reference to "enactment" in clause 769, so that payments under them are capable of falling within the exemption in that clause. If this is a change, it is in line with practice, reflects the intention of the devolution settlement and widens the scope of the exemption.

Northern Ireland

The reference to the Department for Employment and Learning in clause 80 reflects the transfer of functions to that Department from the Department of Economic Development under Part II of Schedule 2 to SR (NI) 1999 No. 481.

Clause 207 refers to the Department for Employment and Learning, which is the current name for the former Department of Higher and Further Education, Training and Employment (see the Department for Employment and Learning Act (Northern Ireland) 2001).

Section 91A(6)(ba) of ICTA refers to a permit under regulations under section 2 of the Pollution Prevention and Control Act 1999. That reference was inserted by regulations made under that Act. The provision in Northern Ireland corresponding to section 2 of that Act is Article 4 of the Environment (Northern Ireland) Order 2002 (N.I. 7). An amendment along the lines of section 91A(6)(ba) of ICTA would have been ultra vires that Order because taxation is an excepted matter for the purposes of the Northern Ireland Act 1998.

In order to maintain parity of treatment throughout the United Kingdom, the definition of "waste disposal licence " in clause 167(1)(c) is expanded to include a permit under any corresponding provision for the time being in force in Northern Ireland. The "corresponding provision" formula is preferred to specifying the 2002 Order. If the Order is subsequently re-enacted by the Northern Ireland Assembly, the Interpretation Act 1978 cannot be relied on to update the statutory reference.

A criminal injuries compensation scheme for Northern Ireland was established under the Criminal Injuries (Northern Ireland) Order 2002 (SI 2002/ 796 (N.I. 1)). That scheme does not fall within the current definition of "the Criminal Injuries Compensation Scheme" in section 329AB(2) of ICTA. To maintain parity of treatment throughout the United Kingdom the definition of that expression in clause 732 is extended to cover the Northern Ireland criminal injuries compensation scheme.

There is doubt whether, in the application of section 581 of ICTA to Northern Ireland, "Act" covers the full range of legislation which applies or could apply to Northern Ireland. This means that, as with Scotland, it may not be clear in every case whether the definition of "statutory corporation" in that section covers corporations incorporated by, or on which functions are conferred by, such legislation.

Clause 880 widens the definition of "Act" as that term is used in clause 755 to include such corporations. This change in the law reflects current practice and widens the scope of the exemption, and so is favourable to the taxpayer.

Section 578 of ICTA confers an exemption from tax in relation to housing grants made under any enactment. Again it is not clear that "enactment" covers all of the different kinds of legislation which may apply to Northern Ireland.

Clause 880 makes it clear that such legislation is covered by the reference to "enactment" in clause 769, so that payments under such legislation are capable of falling within the exemption in that clause. Again, if this is a change in the law, it is in line with practice and is taxpayer favourable.

Wales

Clauses 83 and 110 refer to functions exercisable by the National Assembly for Wales. The references reflect the transfer of functions from the Secretary of State to the Assembly under the Transfer of Functions Order made under the Government of Wales Act 1998 (SI 1999/672). So far as those functions are concerned, the Order is partly superseded by the Bill (and any change in the persons by whom those functions are exercisable will also have to be made by primary legislation).

The changes are in line with current practice and reflect the devolution settlements.

Change 20: Contributions to local enterprise organisations or urban regeneration companies: disqualifying benefits: clause 82

This change amends the anti-avoidance rules in sections 79(3) and (9), 79A(3) and (4) and 79B(3) and (4) of ICTA.

The aim of the anti-avoidance rules is to stop traders obtaining a deduction for contributions that have strings attached. For example, a trader may give money to a local enterprise agency which is used to meet the costs of a relative setting up in business. These costs would normally not be tax deductible. So the anti-avoidance rules are designed to prevent the costs becoming tax deductible by passing the money through a local enterprise organisation.

The denial of the deduction in the source legislation is "all or nothing". This may cause a problem. For example, a trader gives £1 million to a training and enterprise council, but asks that employees be given free places on a word processing course (worth say £5000). The anti-avoidance rule bars any deduction under these provisions.

When section 79A of ICTA was enacted in 1990 an assurance was given that in a case such as this a deduction would be allowed. In practice the Inland Revenue ignores such benefits, or treats the payment as split into two, one part for the training and one for the donation.

Paragraph 47610 of the Inland Revenue Business Income Manual makes it clear that relief is not denied if the costs of obtaining the benefit provided would have been allowable as a deduction if incurred directly on an arm's length basis. So the clause disallows a deduction only if there is a "disqualifying benefit".

Even if there is a "disqualifying benefit" the deduction may not be lost entirely. Instead, the deduction is restricted to take account of the benefit.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 21: Contributions to local enterprise organisations or urban regeneration companies: gifts of trading stock: charge any benefit by reference to periods of account: clauses 82 and 109

This change deals with a benefit that arises to a trader in connection with:

• a contribution to a local enterprise organisation or urban regeneration company; or

• a gift of trading stock.

It makes it explicit that the benefit is charged to tax by treating the benefit as a trade receipt in the period in which it is received.

Sections 79(9), 79A(4), 79B(4) and 84A(4) of ICTA charge the benefit for the "chargeable period" in which it is received. For a person chargeable to income tax, this period is a year of assessment. If the benefit is received on a date in a tax year that is later than the accounting date, it is taxed in the same tax year as the profits of the period of account ended on that accounting date. This produces practical problems. It is in any event illogical to charge trading receipts to tax by reference to a tax year rather than a period of account.

This change will not alter the amount charged to tax. The most it will do is affect the timing of that tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to individual circumstances. Any overall tax effect is likely to be negligible.

Change 22: Contributions to local enterprise organisations or urban regeneration companies, assets of mutual concerns, gifts of trading stock to charities etc, income charged on withdrawal of relief after source ceases: clauses 82, 104, 109 and 844

This change treats certain amounts as post-cessation receipts.

Sections 79(9), 79A(4), 79B(4), 83A(4), and 84(4) of ICTA create a charge under Schedule D Case VI if the trader is not chargeable under Schedule D Case I or II in the "chargeable period" in which a benefit is received. Section 491(3) of ICTA creates a similar charge on a distribution by a mutual concern. Section 584(4) of ICTA creates a charge under Schedule D Case VI if income becomes remittable after the trade has ceased.

This Bill unpacks Schedule D Case VI charges and deals with the income where it logically belongs. In these cases, the income is trading income.

By treating the benefit or distribution as a post-cessation receipt, the Bill:

• allows the trader to make the same deductions as those available from other post-cessation receipts;

• makes it clear that the benefit or distribution may be earned income and relevant earnings;

• allows an election to carry the benefit or distribution back in accordance with clause 257; and

• removes any possibility that the benefit is charged both by the specific rule about benefits and by any general rule.

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 23: Patent fees paid: clauses 89 and 90

This change sets out the basis on which a deduction is allowed for patent fees. It brings the timing of the deduction into line with the vast majority of deductions allowed in calculating trading income.

Section 83 of ICTA allows a deduction for "fees paid or expenses incurred" in connection with the grant of patents etc. It is thought that the "fees paid" are those paid when a patent application is made. Such fees are incurred only when they are paid. So it is unlikely that business accounts would recognise the fees until they are paid.

There is no doubt that "expenses" include "fees".

These clauses allow a deduction for all expenses on the basis of the amounts incurred. In principle the rule in these clauses may allow taxpayers to take a deduction for fees earlier than the ICTA rule.