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 39: Treatment of interest in production and acquisition expenditure on films and sound recordings: clause 130

This change clarifies the treatment of interest and the incidental costs of obtaining finance in calculating expenditure on the production and acquisition of films and sound recordings.

Sections 40A to 43 of F(No 2)A 1992, section 48 of F(No 2)A 1997 and sections 99 to 101 of FA 2002 contain special rules for the tax treatment of expenditure on the production and acquisition of films.

It has always been the Inland Revenue's view that interest and the incidental costs of obtaining finance should be treated as the costs of borrowing money, not the costs of producing or acquiring the film. It follows that the normal rules for deducting such expenditure should apply, rather than the special rules for production or acquisition expenditure on films. The Inland Revenue understand from discussions and consultation with the film industry that the exclusion of interest etc from production costs is accepted industry practice.

Clause 130(5) gives statutory effect to the practice of excluding interest etc from expenditure on the production or acquisition of a film or sound recording.

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 40: Allocation of expenditure to relevant periods: clauses 135, 137 and 138

This change drops the requirement to make a claim to allocate expenditure to a relevant period under the "cost recovery" method in section 40B(5) of F(No 2)A 1992 and the special rules for preliminary expenditure and production and acquisition expenditure on a qualifying film in sections 41 and 42 of F(No 2)A 1992.

(A) Under section 40A of F(No 2)A 1992 expenditure on the production or acquisition of a film or sound recording is treated as revenue expenditure. Section 40B(4) of F(No 2)A 1992 gives the basic method for allocating expenditure to a relevant period with reference to the estimated value of that film expected to be realised in that period. This method, which is generally known as the "income matching " method, is rewritten in subsections (3) and (4) of clause 135.

Section 40B(5) of F(No 2)A 1992 provides that a claim may be made to increase the amount allocated to the relevant period under section 40B(4) of F(No 2)A 1992 to the value actually realised in that period. This method, which is generally known as the "cost recovery" method, is rewritten in subsection (5) of clause 135.

This change dispenses with the requirement for the taxpayer to make a claim for the "cost recovery" method to apply. Expenditure allocated under the "cost recovery" method in clause 135(5) can simply be deducted in the calculation of income in the taxpayer's self-assessment return.

(B) Under section 41 of F(No 2)A 1992, a claim may be made to deduct preliminary expenditure on a film certified under the Films Act 1985 - or which was likely to qualify for certification under the Films Act 1985 if it had been completed - incurred in the relevant period, or in an earlier period, in computing the profits of a relevant period.

This change dispenses with the requirement for the taxpayer to make a claim for preliminary expenditure on a qualifying film to be allocated to a relevant period. Preliminary expenditure allocated under clause 137 can simply be deducted in the calculation of income in the taxpayer's self-assessment return.

(C) Under section 42 of F(No 2)A 1992, a claim may be made to allocate up to one-third of the production or acquisition expenditure on a film certified as a qualifying film under the Films Act 1985 to the relevant period in which the film was completed and to any later relevant periods until all the expenditure has been allocated.

This change dispenses with the requirement for the taxpayer to make a claim for production or acquisition expenditure on a qualifying film to be written off over three years. Production or acquisition expenditure allocated under clause 138 can simply be deducted in the calculation of income in the taxpayer's self-assessment return for the years in question.

The provisions that govern claims are not the same as the provisions that govern returns. But in practice, the only consequences of the change from claim to deduction relate to the time available for "claiming" the deduction.

The absolute time limit for making a claim is replaced by a time limit that may vary according to the particular circumstances. That may be because the return is issued late or because the taxpayer makes a late return. Accordingly, the Inland Revenue is no longer able to refuse a claim because it is late by reference to an absolute time limit: returns time limits and sanctions will apply and they depend on the date the return was issued and submitted.

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

Change 41: Allocation of expenditure to relevant periods: clauses 135 and 137

This change gives a choice of relief for preliminary expenditure on a qualifying film under either the basic rules for allocation of expenditure to a relevant period or the special rules for qualifying films.

Under sections 40A to 40D of F(No 2)A 1992, expenditure on any film or sound recording can be allocated to a relevant period under the "income matching" method in section 40B(4) of F(No 2) 1992 or the "cost recovery" method in section 40B(4) of F(No 2) 1992 as augmented by section 40B(5) of F(No 2)A 1992.

Section 42 of F(No 2)A 1992 provides that claims may be made to allocate up to one-third of the production or acquisition expenditure on a film certified as a qualifying film under the Films Act 1985 to the relevant period in which the film was completed and any later relevant periods until all the expenditure has been allocated.

Section 42(7) of F(No 2)A 1992 provides that production or acquisition expenditure in respect of a qualifying film may not be deducted under both section 40B and section 42 of F(No 2)A 92 in the same relevant period.

Section 40C(1) of F(No 2)A 1992 further provides that if production or acquisition expenditure has been allocated to a relevant period under section 42 of F(No 2)A 1992, neither that expenditure, nor any other expenditure on the production or acquisition of the same film, can be allocated to that period under section 40B of F(No 2)A 1992.

The combined effect of sections 40C and 42(7) of F(No 2)A 1992 is to give the taxpayer a choice in any relevant period between relief under the "income matching" or "cost recovery" methods in section 40B of F(No 2)A 1992 and the special rules for qualifying films in section 42 of F(No 2)A 1992.

Section 41 of F(No 2)A 1992 provides that a claim may be made to allocate preliminary expenditure on a film certified as a qualifying film under the Films Act 1985 to the relevant period in which it is incurred or a later relevant period.

Section 40C(1) of F(No 2)A 1992 does not apply to preliminary expenditure under section 41 of F(No 2)A 1992. There is no restriction in section 41 of F(No 2)A 1992 on the deduction of preliminary expenditure on a qualifying film under both section 40B and section 42 of F(No 2)A 1992 in the same relevant period equivalent to the restriction for production or acquisition expenditure in section 42(7) of F(No 2)A 1992.

It is possible therefore that the taxpayer could claim relief for preliminary expenditure on a qualifying film (but not for the same expenditure) under both section 40B and section 42 of F(No 2)A 1992.

This change removes the inconsistency between the treatment of preliminary and of production or acquisition expenditure to give the taxpayer a choice in any relevant period between relief under the "income matching" or "cost recovery" methods in section 40B of F(No 2)A 1992 and the special rules for qualifying films in sections 41 and 42 of F(No 2)A 1992.

This change has no implications for the amount of income liable to tax or who is liable for tax on it. It affects (in principle but not in practice) only when tax is paid.

Change 42: Securities held as circulating capital: clause 150

This change dispenses with the requirement that securities within section 473 of ICTA must be beneficially held by the trader.

Section 473 of ICTA contains special rules for the tax treatment of certain securities held as circulating capital, the profit on the sale of which would form part of the trading profits. The effect is that that neither a profit nor a loss is crystallised on a conversion of the securities.

Persons carrying on a trade of dealing in securities on their own behalf would not normally bring a profit or loss on the sale of securities into account in calculating the profits of the trade if they were not beneficially entitled to the securities.

And there is no reason to calculate the profits of a trade carried on by a person in a fiduciary or representative capacity in a different manner from those of a trade carried on by a person beneficially.

So clause 150 dispenses with the requirement that the person carrying on the business must be beneficially entitled to the shares in question. This means that clause 150 will apply to transactions by trustees and by personal representatives who carry on a trade of dealing in securities as well as to individual dealers.

It also means that clause 150 will apply to securities in stock lending or sale and repurchase arrangements where beneficial ownership has passed to the dealer's counterparty but where the dealer continues to account for profits and losses as if those securities had not been disposed of.

This change affects the timing of the tax liability. It 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 43: Ministers of religion: deductions to be allowed in calculating profits of profession or vocation: clause 159

This change extends the way in which deductions are allowed by section 332(3) of ICTA.

Section 332(3) of ICTA allows deductions from any profits, which may mean particular income receipts. It is more logical for the deductions to be made in calculating the profits of the profession or vocation, in line with the other calculating rules in Part 2 of this Bill. It will no longer be arguable that a taxpayer has to match the deductions against a particular income receipt.

This allows a deduction in calculating the profits of the profession or vocation instead of requiring the taxpayer to set a deduction against a particular receipt.

Section 332(3)(c) of ICTA refers to expenses "borne" by the taxpayer. It is more logical for the deductions to be made when the taxpayer incurs the expenses, in line with other deduction rules in Part 2 of this Bill. The effect of this is that a deduction may be available earlier than it is under the ICTA 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 44: Ministers of religion: omission of section 332(3)(a) of ICTA: clause 159

This change drops section 332(3)(a) of ICTA.

Section 332(3)(a) of ICTA allows deductions for "any sums of money paid or expenses incurred by [the minister] wholly, exclusively and necessarily in the performance of his duty as a clergyman or minister". Those words are almost identical to the words of the employment income rule, in section 351 of ITEPA.

In practice, the Inland Revenue applies the more generous "wholly and exclusively" rule in section 74(1)(a) of ICTA in calculating the profits of a profession or vocation carried on by a minister of religion. This means that a deduction may be allowed for expenses that are not incurred necessarily or in the performance of the duties.

The change removes the more restrictive test for expenses and brings the statute into line with 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 45: Ministers of religion: alter the deduction rule in section 332(3)(b) of ICTA so that it is applied without reference to an inspector: remove the special appeals mechanism: clause 159

This change applies the deduction rule without reference to an inspector. And the special appeal mechanism against the inspector's decision is removed.

Section 332(3)(b) of ICTA provides that a deduction is allowed in respect of a dwelling-house for "such part of the rent (not exceeding one-quarter) as the inspector by whom the assessment is made may allow". The inspector's decision is subject to review by the General or Special Commissioners.

These rules do not fit with Self Assessment. So the clause applies the deduction rule ("a deduction is allowed for ..") without reference to an inspector and without a special appeal mechanism.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

Change 46: Combine pools payments rules: clauses 162 and 748

This change combines sections 126 of FA 1990 and 121 of FA 1991.

Clause 162 does not specify that payments in consequence of the 1990 reduction in pool betting duty must be made for football safety and comfort, and that payments in consequence of the 1991 reduction in pool betting duty must be made to the Foundation for Sport and the Arts. Instead payments in consequence of any reduction in pool betting duty for either purpose will qualify.

Lord Justice Taylor's report into the Hillsborough disaster, published on 18 January 1990, recommended that significant capital expenditure should be incurred to improve safety and comfort at football grounds. To facilitate this the rate of pool betting duty was reduced from 42.5% to 40% in FA 1990, in exchange for an agreement that the money saved by pools promoters would be given to the Football Trust 1990, which would use it to implement the Taylor recommendations.

The following year the government agreed to a further reduction of 2.5% in pool betting duty on condition that the money saved was paid to a charitable trust to be set up by the three main pools companies. The trust is called the Foundation for Sport and the Arts. For legal reasons connected with pool betting duty, the Foundation's main purpose is the support of athletic sports and games, but up to one third of its funds may be used to promote the arts.

The objectives of sections 120 of FA 1990 and 126 of FA 1991 are to ensure that the money saved in pool betting duty can flow through to its intended purpose in full, without tax liabilities.

Because the source sections have very similar objectives and consequences, this Bill combines them.

In principle a taxpayer could divert payments from one destination to the other and still obtain a deduction, but in practice (because the payments are made under agreements with the bodies concerned) this is not possible. Even if it were possible the payments would still be supporting the defined good causes.

Clause 748 adopts the same approach to rewriting section 126(3) of FA 1990 and section 121(3) of FA 1991. The payments made are not treated as annual payments.

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

Change 47: Extend pools payments treatment to the 1995 reduction: clauses 162 and 748

This change extends the treatment of payments in consequence of reductions in pool betting duty so that it applies to the reduction in pool betting duty made in any year.

Pool betting duty was reduced in 1990 and 1991 in exchange for agreements that the money saved would be paid to particular good causes (the Football Trust 1990 and the Foundation for Sport and the Arts, respectively).

Sections 126 of FA 1990 and 121 of FA 1991 were enacted in order to ensure that the money could flow through to the beneficiaries without tax consequences.

In 1995 pool betting duty was reduced again, with half of the money saved to be paid to the Football Trust and the other half to the Foundation for Sport and the Arts. But no equivalent tax legislation was enacted. In practice the payments are treated in the same way as those made from the 1990 and 1991 reductions.

Clause 162 allows the tax treatment to apply to payments made because of any reduction in pool betting duty, so that the 1995 reduction and any further reductions which result in payments being made to the two "good causes" are covered.

Clause 748 adopts the same approach to rewriting section 126(3) of FA 1990 and section 121(3) of FA 1991. The payments made are not treated as annual payments.

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

Change 48: Waste disposal: site preparation expenditure: drop requirements to make claim and submit plans and documents: clause 165

This change drops the requirements to make a claim and submit plans and documents when making deductions under clause 165.

Section 91B of ICTA 1988 allows a revenue deduction for capital expenditure on preparing a waste disposal site for use. The expenditure is spread over the life of the site by means of a formula based on the total capacity of the site and the amount of that capacity which has been used.

The taxpayer must make a claim for relief under section 91B of ICTA (in such form as the Board may direct), and submit such plans and documents as the Board may require.

The requirement to submit plans and documents sits uneasily with Self Assessment - the Self Assessment record-keeping rules require taxpayers to keep such information and produce it in the event of an enquiry.

The clause also drops the requirement to make a claim for relief, with the result that relief will simply be a deduction in the taxpayer's self-assessment. Once the requirement to submit plans and documents is removed, there seems no reason to require a claim for this particular deduction as opposed to any other.

The claim under section 91B of ICTA must be made within 70 months from the end of the tax year. Removing the claim means that taxpayers will have 22 months from the end of the tax year in which to include the deduction in their self-assessment. However, error or mistake claims will be available if too much tax had been paid as a result of omitting to include the deduction on the tax return.

This change is adverse to some taxpayers and favourable to others in principle but is not expected to have any practical effect.

Change 49: Valuation of trading stock: adopt the normal self-assessment time limit for an election by connected persons: clause 178

This change adopts the normal self-assessment time limit of 22 months for an election by connected persons.

This Bill expresses time limits consistently. Where possible, the time limit for an election is the first anniversary of the "normal self-assessment filing date" (defined in clause 878 as 31 January following the relevant tax year). The time limit for the election in section 100(1C) of ICTA was not changed to take account of the introduction of Self Assessment. So in that section the time limit for income tax is two years from the end of the tax year of cessation. This is inconsistent with most other time limits for income tax.

This change is adverse to some taxpayers and favourable to others in principle but is not expected to have any practical effect.

Change 50: Deductions for unremittable amounts: clauses 187 to 191

This change gives statutory effect to ESC B38 (tax concessions on overseas debts). In doing this the Bill makes a number of changes to the approach in the extra-statutory concession.

ESC B38 provides relief for trade debts that cannot be remitted to the United Kingdom. It is similar in scope to section 584 of ICTA which provides relief for unremittable income arising outside the United Kingdom, including unremittable trade profits. But section 584 of ICTA does not extend to trade debts owed to, or paid to, the trader outside the United Kingdom if the profits of the trade arise in the United Kingdom. For example, debts or payments arising from export sales. The extra-statutory concession gives relief for such debts and payments.

(A)     Chapter 13 of Part 2 of this Bill gives statutory effect to the extra-statutory concession.

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.

(B) ESC B38 requires the relief to be claimed. Clause 189 provides for the relief to be allowed as a deduction in calculating the taxpayer's trade profits. This not only simplifies the procedure for giving the relief; it may also reduce the time a taxpayer has to wait before the relief is given and, in certain circumstances, extend the time limit for giving the relief.

Paragraph 5(d) of the extra-statutory concession gives the time limits for making the claim. Relief can be claimed no earlier than 12 months after the end of the accounting period in which the unremittable payment was received or the unremittable debt arose. Giving the relief by means of a deduction will apply the normal self-assessment time limits.

In certain circumstances the time limit for giving the relief may be extended:

• if the notice to make a return is issued late then an amendment to a simple deduction may also be made late; and

• an error or mistake claim may be made up to (almost) six years from the end of the tax year.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

(C) Paragraph 4 of the extra-statutory concession denies any relief for a debt to the extent that the debt is insured. Clause 190(3) (restrictions on relief) denies relief only to the extent that an insurance recovery has been received in respect of the debt. Also clause 191(2)(f) withdraws relief only to the extent that an insurance recovery has been received in respect of the debt.

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 51: Disclosure of know-how: restore an express definition of mineral deposits: clauses 192 and 583

This change restores (for income tax purposes) a previous definition of "mineral deposits".

The definition of "mineral deposits" in these clauses is the definition that applied for the purposes of the definition of "know-how" in the source legislation for clauses 192 and 583. That definition applied before certain amendments of Chapter 1 of Part 13 of ICTA were made by CAA.

Section 531 of ICTA makes provision about the tax treatment of certain disposals of know-how. Different provision is made about disposals of know-how that has been used in the course of a trade and other disposals of know-how. The former provision is rewritten in clauses 193 and 194 and the latter in clauses 583 to 586.

Know-how is defined for the purposes of section 531 of ICTA as:

any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations.

Before certain amendments of ICTA were made by CAA, the following definition applied to the expression "mineral deposits" in that definition.

"mineral deposits" includes any natural deposits capable of being lifted or extracted from the earth and, for this purpose, geothermal energy, whether in the form or aquifers, hot dry rocks or otherwise, shall be treated as a natural deposit.

The history of that definition is as follows. The provisions of section 531 of ICTA derive from section 21 of FA 1968, which included the following definition.

(7) In this section "know-how" means any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery, or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations.

Subsection (9) of that section required the above definition to be construed as if it were contained in Part 1 of the Capital Allowances Act 1968, so that the following definition of "mineral deposits" applied:

"mineral deposits" includes any natural deposits capable of being lifted or extracted from the earth.

That definition was amended by paragraph 2(3) of Schedule 13 to FA 1968, which added the words from "and, for this purpose" onwards.

The relevant provisions were consolidated in 1970 and again in 1988. Section 532 of ICTA originally provided for the definition of "know-how" to be construed as if it were contained in Part 1 of the Capital Allowances Act 1968. A reference to "the 1990 Act" was substituted by the Capital Allowances Act 1990. This attracted the definition of "mineral deposits" which is set out above in the fourth paragraph of this note, and applied throughout that Act.

CAA rewrote provisions about know-how allowances that were previously in Chapter 1 of Part 13 of ICTA. In consequence of the repeal of the Capital Allowances Act 1990, CAA also amended section 532 of ICTA so that it provides for the definition of "know-how" to be construed as if it were contained in the 2001 Act. However, no definition of "mineral deposits" applies for the purposes of CAA as a whole. So the consequential amendment failed to preserve the application of the Capital Allowances Act 1990 definition of "mineral deposits" to the remaining provisions of Chapter 1 of Part 13 of ICTA (including those on which clauses 192 and 583 are based).

It is noteworthy that a version of the definition of "mineral deposits" is carried forward in CAA to apply to the rewritten material about know-how allowances. See section 452(3) of that Act.

The failure to preserve the application of the Capital Allowances Act 1990 definition of "mineral deposits" to the remaining provisions of Chapter 1 of Part 13 of ICTA is believed to have resulted from an oversight. The inclusion of a definition of "mineral deposits" in clauses 192 and 583 corrects this error.

The definition of "mineral deposits" in clauses 192 and 583 differs from the definition formerly in section 161(2) of the Capital Allowances Act 1990 in that the words "whether in the form of aquifers, hot dry rocks or otherwise" are omitted. The definition of "mineral deposits" in section 452(3) of CAA also omits these words. The omission was made in that Act on the basis that the words are merely illustrative and that leaving them out does not change the legal effect of the definition. They are omitted in the present Bill for the same reasons. A fuller discussion of this point can be found in Note 46 in Annex 2 to the Explanatory Notes to CAA.

This change clarifies the law by making it certain that the definition of "mineral deposit" continues to apply for the purposes described above.