This change clarifies the law and removes uncertainty. But it is expected to have no practical effect as it is in line with current practice.

Change 52: Basis periods etc: to allow any reasonable and consistent time basis for apportioning profits or for calculating deductible overlap profit: clauses 203, 220, 275 and 871

This change involves giving statutory effect to a concessionary practice for apportioning profits or losses to different periods.

Section 72(1) of ICTA permits the apportionment of profits or losses for the purposes of Schedule D Case I, II or VI. Section 72 of ICTA is applied by section 21A(2) of ICTA for the purpose of calculating the profits of a Schedule A business.

Section 72(2) of ICTA secures that the apportionment must be by reference to days. But, by concession, taxpayers can adopt any other reasonable basis for time apportionment (described in paragraph 71025 of the Business Income Manual).

Clause 203 re-writes section 72 of ICTA (so far as trades, professions and vocations are concerned); and clause 275 reproduces the effect of applying that section by section 21A(2) of ICTA. Subsection (4) of each clause allows the periods to be measured otherwise than by reference to days if it is reasonable to do so and the measure is used consistently. Similarly, clause 871 rewrites section 72 of ICTA (in respect of profits formerly charged under Schedule D Case VI which are now listed in section 836B of ICTA), and subsection (5) of that clause operates like subsection (4) of clauses 203 and 275.

Section 63A(2) of ICTA provides for the calculation and deduction of overlap profit by reference to "days" and the "overlap period" is defined by section 63A(5) of ICTA as the number of days in the period in which the overlap profit arose.

Clause 220 preserves that basic approach. But, by concession, taxpayers can adopt any other reasonable measure provided it is used consistently (described in paragraph 71140 of the Business Income Manual). Subsection (4) gives effect to this 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 53: Enterprise allowance: include in trade profits: clause 207

This change involves including enterprise allowance in the calculation of trade profits.

The former enterprise allowance scheme provided financial assistance for unemployed people starting their own businesses. The payments are now more commonly known as business start-up allowances. They may be in variable amounts including lump sums in certain circumstances.

Without section 127 of ICTA these allowances would be taxed as trade profits. With the former prior year basis of assessment some profits of the first year of trading were taxed more than once. As the allowance is usually paid for the first year this might be the case for the allowance. Section 127 of ICTA was introduced to avoid this. It does so by taxing the allowance under Schedule D Case VI instead of Schedule D Case I or II, circumventing the basis period rules.

Even under the current year basis of assessment there may still be an overlap period when trading commences. So clause 207(2) ensures that the allowance is taxed only once, by being included in the profits of only the first of two basis periods.

In some cases this change may lead to a delay in the assessment of the allowances. This is because they will be taken into account in a basis period of the trade rather than in the tax year in which they are received.

It will no longer be possible to set Schedule D Case VI losses against the allowances. But trading losses brought forward and terminal losses may become available against the allowances.

As the allowances will be included in the calculation of trade profits, there is no need to rewrite section 127(3) of ICTA, which treats the allowances in appropriate cases as relevant earnings.

The charge to national insurance contributions is unchanged because contributions are specifically charged on the allowances by section 15(4) of the Social Security Contributions and Benefits Act 1992. This specific charge is no longer needed and is therefore repealed.

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 54: Basis periods: treat accounts regularly prepared to dates near the end of the tax year as if prepared to 5 April subject to a taxpayer's opt out: clauses 208, 209 and 210

This change makes automatic, subject to a taxpayer's right to opt out, the treatment under which accounts regularly prepared to dates near the end of the tax year are treated as if prepared to 5 April.

Change 55 gives statutory effect to the non-statutory practice described in paragraph 71170 of the Business Income Manual under which accounts prepared to 31 March (and 1, 2, 3 and 4 April) are treated as prepared to 5 April. That simplifies the operation of the rules by avoiding the creation of very short overlaps of basis periods - and therefore small amounts of overlap profit - during the first years of trading.

Most people with a late accounting date are likely to wish to take advantage of this rule. So clause 208(3) makes it automatic unless the taxpayer "elects out".

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 55: Basis periods: to allow accounts prepared to a date near the end of the tax year to be treated as if prepared to 5 April: clauses 208, 209, 210 and 220

This change allows accounts regularly prepared to 31 March or 1, 2, 3 or 4 April to be treated as if prepared to 5 April and a change of accounting date to 31 March (or 1, 2, 3 or 4 April) to be treated, for overlap relief purposes, as a change to 5 April.

The source legislation in sections 61 to 63A of ICTA distinguishes between the case where accounts are regularly prepared to 5 April and the case where they are prepared to a different date. In the latter case the rules are more complex and involve periods of overlap of basis periods (and, as a consequence, the creation of overlap profit that must subsequently be relieved) during the first years of trading.

Many taxpayers prepare accounts regularly to 31 March. In practical terms there is little difference between these cases and the 5 April cases but strictly under the source legislation, they nevertheless fall within the more complex "accounting date other than 5 April" rules.

Change 55 allows, for the purposes of the basis period rules, accounts prepared to 31 March to be treated as prepared to 5 April. That simplifies the operation of the basis period rules by avoiding the creation of very short overlaps of basis periods - and therefore of small amounts of overlap profit - during the first years of trading.

But it would be illogical to exclude from this simplification cases where the chosen accounting date would result in overlaps even shorter than those arising from an accounting date of 31 March. So accounts prepared to dates 1 to 4 April are also included.

This change gives statutory effect to the non-statutory practice described in paragraph 71170 of the Business Income Manual and prevents overlaps of less than six days.

A similar problem can arise where there is a change of accounting date. The effect of the source legislation in section 63A of ICTA is that where there is a change of accounting date that is effective for tax purposes and that change is to an accounting date of 5 April, all previous overlap profit is deductible without restriction. But taxpayers who change to a date very close to 5 April would normally be potentially subject to a minor restriction of their overlap relief.

Clause 220 provides statutory authority for the non-statutory practice referred to in paragraph 71170 of the Business Income Manual. That practice allows a change of accounting date to 31 March to be treated as though it were a change to 5 April. And that allows all previous overlap profit to be deducted in the year in which such a change takes effect for tax purposes.

Again, it would be illogical to exclude change of accounting date cases where the chosen accounting date fell between 31 March and 5 April. So a change of accounting date to 1, 2, 3 or 4 April is also treated as though it were a change to 5 April.

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 56: Basis periods: to allow accounts regularly prepared to a particular day in the year to be treated as if prepared to a particular date: clauses 211, 212 and 213

This change allows accounts regularly prepared to a particular day in the year to be treated as if prepared to a particular date. This avoids the need to apply complex change of accounting date provisions.

In the source legislation whenever there is a change of accounting date complex rules in sections 62 and 62A of ICTA are triggered. Those rules determine when - or whether - the basis period can align with the new accounting date.

For most taxpayers changes of accounting date are relatively infrequent. But it is sometimes more practical for taxpayers to prepare their accounts to a particular day in the year - a mean date - rather than to a particular date. Examples might include the last Friday in September or the last day of the summer term. Because the resulting accounting date will be different year by year the complex change of accounting date rules would normally apply to such changes.

Change 56 allows taxpayers to prepare their accounts to a mean date without triggering the change of accounting date rules, provided certain conditions are met.

This change gives statutory effect to the extra-statutory practice authorised in paragraph 71175 of the Business Income Manual.

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 57: Overlap profit (calculating a deduction): to allow the taxpayer to disregard 29 February when there is a change of accounting date to a date late in the tax year: clause 220

This change, in subsection clause 220(6), allows the taxpayer to disregard 29 February in calculating a deduction for overlap profit when there is a change of accounting date to a date falling on 31 March to 5 April inclusive.

It is normally the case that, in any year where overlap relief is due, a taxpayer has the same number of days' overlap relief as there are days between his or her accounting date and 5 April.

As a result, at a change of accounting date to 5 April the overlap profit should be relieved in full under the source legislation in section 63A(1) of ICTA. But when 29 February falls in either the overlap period or the basis period given by section 62(2)(b) of ICTA, section 63A(1) of ICTA does not give the correct result. An adjustment is then necessary on cessation under section 63A(3) of ICTA.

Change 57 gives statutory effect to the practice described in paragraph 71155 of the Business Income Manual. Clause 220(6)(a) allows the taxpayer to disregard 29 February in this case and the overlap relief adjustment to be made in full.

Change 55 gives statutory effect to the practice whereby changes of accounting date to dates from 31 March to 4 April inclusive may be treated as if made to 5 April. It would be illogical not to align Change 57 with that Change. So clause 220(6)(b) allows taxpayers to disregard 29 February when the change is to one of those earlier dates.

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 58: Averaging: foreign trades: clause 221

This change allows an individual to claim averaging of profits derived from creative work carried on wholly abroad. Section 65(3) of ICTA may in fact allow a claim but the clause removes any doubt.

Schedule 4A to ICTA applies to profits derived from creative works that are "chargeable to tax under Case I or II of Schedule D". The policy is to exclude profits that are charged under Schedule D Case VI because they arise from activities that do not amount to a trade, profession or vocation.

It will be rare for a UK resident individual to carry on a "creative" trade wholly outside the United Kingdom. But there is no reason why the profits of such a trade should not be averaged. And it would complicate the Bill to make an exception for a foreign trade.

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 59: Averaging: clause 221

This change gives statutory effect to ESC A29 (relief for fluctuating profits). It treats the intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption as farming for the purposes of averaging.

Averaging applies only to farming, market gardening and "creative activities". Farming is the occupation of land for the purposes of husbandry. Tax law has always drawn a distinction between profits resulting from the taxpayer's occupation of land and profits from an activity to which the occupation is merely incidental in the sense that the activity must be carried out somewhere. This is why the intensive rearing of livestock and fish (so-called "factory farming") is not farming. Such creatures do not live on or draw their sustenance from the soil because they are largely kept in buildings or tanks and so the profits from them do not arise from the occupation of land.

But ESC A29 permits the extension of the rules for averaging to the intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption. It does this by extending the definition of farming for these purposes.

Section 362(1) of CAA permits a near-identical extension by defining husbandry to include the intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption, in the context of defining "agricultural land". And section 115(2) of the Inheritance Tax Act 1984 permits a similar extension in the context of defining "agricultural property" provided certain conditions are met.

Clause 221(3) ensures that the averaging rules apply to the intensive rearing of livestock or fish without the need to extend the definition of farming itself in clause 876.

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 60: Averaging: clarify the rule that a claim cannot be made in commencement or cessation year: clause 222

This change ensures that a claim cannot be made in the year in which an individual partner commences or ceases to carry on a qualifying trade in partnership.

Section 96(4)(b) of ICTA provides that no claim is to be made in respect of any tax year "in which the trade is (or by virtue of section 113(1) [of ICTA] is treated as) set up and commenced or permanently discontinued." Section 113 of ICTA applies where there is a complete change in the persons carrying it on. However, it does not apply where there is a partial change, for example, when one partner leaves a firm while the others continue.

Before Self Assessment (when the rule applied only to farmers) the same rule clearly operated for farming carried on by a sole trader and farming carried on by persons in partnership. This is because a claim for averaging could be made only in respect of the profits of a sole trader or of a firm. But under Self Assessment profits are calculated as if the firm were an individual and each partner's share in the profits of the firm is then determined. The rules for determining partners' basis periods are then applied as if they were sole traders.

The intention under Self Assessment is to treat sole traders and individual partners in the same way, so that individual partners cannot make an averaging claim in relation to the year in which they start or cease to carry on a qualifying trade in partnership. It is generally accepted that the legislation achieves this result. But the words of section 96 of ICTA leave some doubt. The references to "his profits from that trade" in subsection (1) and to "a year of assessment in which the trade is .. set up and commenced" in subsection (4)(b) might suggest that these references are to the partnership trade as a whole, rather than to the deemed trade carried on by the individual partner.

Clause 222(4) contains the rule that an averaging claim may not be made in a tax year in which the taxpayer starts or permanently ceases to carry on the qualifying trade. This rule will apply whether the taxpayer is a sole trader or in partnership. So there is no ambiguity in the rule: it is in line with the original intention and with how it is applied in practice.

This change is adverse to some taxpayers in principle. But it is in line with the original legislation before amendment and with the intention of the amended legislation. And it is expected to have no practical effect as it is in line with current practice.

Change 61: Averaging: time limit for a further claim: clause 225

This change makes clear that the full 22 month time limit applies to a further claim for averaging.

Section 96(8) of ICTA provides that a claim must be made "..before the 31st January next following the year of assessment..". If this precludes a claim being made on 31 January the rule falls one day short of the full 22 month time limit for the making of claims.

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). So clause 225 makes it clear that the full 22 month time limit applies.

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

Change 62: Adjustment income: how an election affects later years: clause 239

This change clarifies what happens to the remainder of adjustment income in the years after an election has been made to have the charge increased.

A barrister or advocate may be subject to a charge under Schedule 22 to FA 2002. The charge is spread over ten years in accordance with paragraph 11 of that Schedule. But an election may be made under paragraph 12 of the Schedule to accelerate the charge. In this Bill, the spreading rule is in clause 238. The election is in clause 239.

Example

If there is a charge of £1200 over ten years and an election to have £300 instead of £120 charged in year 4, there is some doubt about the "additional amount" in paragraph 12(4) of Schedule 22 to FA 2002.

• If it is £300, there will be six charges of £90 ([£1200-£300]/10).

• If it is £180, there will be five charges of £102 ([£1200-£180]/10) and a final one of £30.

Policy and logic suggest the first answer but the 2002 legislation seems to suggest the second. Clause 239(4) uses the "additional amount" of £180 to produce six charges of £90.

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 63: Post-cessation receipts: design right: clause 253

This change corrects an anomaly in section 104(3) of ICTA. It ensures that a lump sum received by personal representatives for the assignment of design right is not treated as a post-cessation receipt.

The policy is that a lump sum from the disposal of certain rights should not be treated as a post-cessation receipt. That is the rule in section 103(3)(b) and (bb) of ICTA. Paragraph (bb) was inserted by the Copyright, Designs and Patents Act 1988.

Section 104 of ICTA charges sums "not .. otherwise chargeable to tax" (subsection (2)). Section 104(3) of ICTA provides that, in the case of a lump sum from a patent right etc, the section does not charge sums that would have been chargeable to tax under section 103 of ICTA but for the exemption in section 103(3)(b) of ICTA. As there is no reference to the exemption in section 103(3)(bb) of ICTA a lump sum from a design right could in principle be caught by section 104 of ICTA.

This change ensures that the intended exemption applies.

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 64: Post cessation receipts treated as UK relevant earnings for pension purposes: clause 256

This change gives statutory effect to the practice of treating certain sums received after a trade, profession or vocation has ceased (post-cessation receipts) as relevant earnings for the purposes of making pension contributions.

Sections 103 and 104 of ICTA charge post-cessation receipts under Schedule D Case VI. This charge is rewritten in Chapter 18 of Part 2 of the Bill.

Section 107 of ICTA provides that amounts charged to tax under sections 103 and 104 of ICTA shall be treated as earned income if the profits of the trade, profession or vocation would also have been treated as earned income before the cessation. This treatment is rewritten as clause 256.

If section 107 of ICTA applies to treat an amount as earned income it is Inland Revenue practice to treat that amount as relevant earnings for the purposes of retirement annuity relief or making contributions under personal pension arrangements (sections 623(2) and 644(2) of ICTA).

FA 2004 introduced a new regime for taxing pensions to take effect in April 2006. The equivalent of relevant earnings in that regime is relevant UK earnings as defined in section 189(2)(b) of FA 2004. Without the change in the law introduced by clause 256 the practice described in the previous paragraph would be extended to the new regime. Clause 256 anticipates this by providing that post-cessation receipts treated as earned income are also treated as relevant UK earnings for pension purposes.

Retirement annuity relief and personal pension arrangements are dealt with as a transitional measure in Schedule 2 to the Bill. This is in line with the approach taken to the rewrite of other provisions affected by the new pension regime. The new rules are dealt with in the substantive clause and the old rules which apply until 5 April 2006 are dealt with in the transitionals Schedule.

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 65: Statutory insolvency arrangement - Scotland: clause 259

This change adapts the definition of "statutory insolvency arrangements" in clause 259 to Scotland.

Section 74(1)(j) of ICTA prohibits the deduction in computing the profits of a trade, profession or vocation of any debt other than:

(i)          a bad debt

(ii)          a debt or part of a debt release by a creditor wholly and exclusively for the purposes of his trade, profession or vocation as part of a relevant arrangement or compromise; and

(iii)     a doubtful debt to the extent estimated to be bad.

Section 74(1)(j) of ICTA is rewritten in clause 35. Clause 35 replaces the term "relevant arrangement or compromise" with "statutory insolvency arrangement".

Section 74(2)(a) of ICTA defines "relevant arrangement or compromise" as a voluntary arrangement under the Insolvency Act 1986 (covering individual voluntary arrangements in England and Wales) or the Insolvency (Northern Ireland) Order 1989 (covering individual voluntary arrangements in Northern Ireland).

The omission of any reference to Scottish insolvency legislation was an oversight when section 74(2) of ICTA was inserted by section 144(2) of FA 1994. The nearest equivalent in Scotland to the Insolvency Act 1986 and the Insolvency (Northern Ireland) Order 1989 is the Bankruptcy (Scotland) Act 1985 which covers voluntary arrangements in Scotland supervised by the courts or by independent practitioners. So clause 259 defines "statutory insolvency arrangement" by reference to the Bankruptcy (Scotland) Act 1985 as well as by reference to the corresponding legislation in England and Wales and in Northern Ireland cited in section 74(2) of ICTA.

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 66: Priority of the charge on trade profits: the "Crown Option" and clauses 261, 366 and 575

This change gives priority to the charge on trade profits if an item of income is both a trade receipt and potentially within the receipts of an overseas property business in Part 3, or within a charge to tax in Part 4 or 5 of this Bill.

In the source legislation taxable income is allocated to different Schedules. The charges under these Schedules are mutually exclusive.

In addition, a small number of charges (non-schedular charges) are imposed outside the schedular system.

The scope of Schedule D is set out in section 18 of ICTA. The effect of that section (and the relevant case law) is that Schedule D is the residual Schedule. If income meets the conditions to be taxed under Schedule D and the conditions to be taxed under ITEPA 2003 or another Schedule of ICTA it will be taxed under the alternative and not under Schedule D.

But there is no order of priority between Cases I to V of Schedule D. In the event of income falling within more than one of those Cases it has long been accepted that the Inland Revenue has the option to choose under which case the income should be taxed. This "Crown option" was not legislated until 1996 when section 28A(7B) was inserted into TMA 1970. This was done, not so much to provide explicit statutory authority for the option, but to explain how it should operate under Self Assessment.

In 2001 section 28A(7B) of TMA was replaced by section 9D of TMA. It provides that if a self-assessment return is made and alternative methods are allowed for bringing amounts into charge the Inland Revenue may determine which alternative is used. The decision of the Inland Revenue is final and conclusive.

Section 9D(2) of TMA provides that the cases where the Tax Acts allow for alternative methods for bringing amounts into charge are under either:

• Schedule D Case I or II; or

• Schedule D Case III, IV or V.

The Inland Revenue's guidelines for making the determination are published in paragraph 14035 of the Business Income Manual (BIM 14035). The income will be taxed under Schedule D Case I or II and not under Schedule D Case III, IV or V.

This Bill deals with the Crown Option by providing for an order of priority between the Parts if income is capable of being taxed under more than one Part.

Clause 261 provides that if income is capable of being taxed under Part 3 of this Bill in respect of an overseas property business and under Chapter 2 of Part 2 of this Bill it is taxed under Part 2. ICTA taxes the profits arising from an overseas property business under Schedule D Case V so clause 261 gives effect to the Crown Option in respect of trades carried on wholly or partly in the United Kingdom (and to section 65A(1)(b) of ICTA in respect of trades carried on wholly abroad).

Clause 366(1) gives priority to Chapter 2 of Part 2 of this Bill if income falls within both Part 2 and Part 4 of this Bill. This gives effect to the Crown Option in respect of income within Part 4 of this Bill that is taxed in ICTA under Schedule D Cases III, IV or V. It goes beyond the Crown Option in that it gives Part 2 of this Bill priority over income that would be taxed under Schedule F or as a non-schedular charge. It applies the same approach to trades carried on wholly abroad as is applied to trades carried on wholly or partly in the United Kingdom. This is consistent with the law (see section 65(3) of ICTA) and practice that the profits of both types of trade should be calculated on the same basis as far as possible.

In the case of income taxed under Schedule F the statutory authority for this approach is given by section 95(1) of ICTA (applied to trades carried on wholly abroad by section 65(3) of ICTA) .

In the case of non-schedular charges it is unlikely that there would be any overlap for income tax payers. But in theory it is possible that, for example, stock dividends (Chapter 5 of Part 4 of this Bill) and gains from contracts for life assurance (Chapter 10 of Part 4 of this Bill) may rank as trade receipts. Taxing such income under Part 2 of this Bill accords with the policy and practice of taking trade receipts into account in calculating trade profits and not otherwise.

Part 2 of this Bill provides for a charge on the profits of professions and vocations as well as a charge on the profits of trades. So clause 366(1) goes beyond the ambit of ICTA by giving priority to Part 2 of this Bill if the source legislation gives priority to income taxed as a trade receipt or under Schedule D Case I. For example, section 56(2) of ICTA (rewritten as clause 551 (transactions in deposits)) excludes income taxed as a trade receipt from the charge under Schedule D Case VI. Paragraph 1(2)(a) of Schedule 5AA to ICTA (rewritten as clause 555 (disposals of futures and options involving guaranteed returns)) excludes income taxed under Schedule D Case I or V from the charge under Schedule D Case VI. Taxing such income under Part 2 of this Bill accords with the policy of taking receipts into account in calculating Schedule D Case I or II profits, although the point is most unlikely to arise in practice in relation to a profession.

Clause 575 gives priority to Part 2 of this Bill if income falls both within Chapter 2 of Part 2 (trade receipts) of this Bill and Part 5 of this Bill. In this case the only possible overlap is with income that could be taxed under Schedule D Cases III and V. So the order of priority gives effect to the Crown Option.

The order of priority in clauses 366(1) and 575 allows sections 9D, 12AE(2) and 31(3) of TMA to be repealed.