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 67: Territorial scope of charge to tax: land in Ireland: clause 269

This change concerns income from land in the Republic of Ireland arising to a person whose other foreign income is assessed on the remittance basis.

The change makes it clear that businesses and transactions for generating income from land in the Republic of Ireland form part of an overseas property business of a person to whom the remittance basis applies.

The basic rule is that income arising from property in the Republic of Ireland is assessable on the basis of the amount arising (see section 68(1) of ICTA). This rule applies "notwithstanding anything in section 65 [of ICTA]". Section 65(5) of ICTA provides for the remittance basis to apply to foreign income.

Section 65(4) of ICTA provides that section 65A of ICTA (overseas property businesses) does not apply in relation to persons to whom the remittance basis applies.

It is not clear how the rules in sections 65A and 68(1) of ICTA interact. Section 68(1) of ICTA does not refer to section 65A of ICTA. If it was Parliament's intention that Irish income was to be assessable on the arising basis but not in accordance with section 65A of ICTA, it might be expected that section 68(1) of ICTA would apply notwithstanding sections 65 and 65A of ICTA.

So far as Irish income is concerned, the rule in section 65(4) and (5) of ICTA that the income of a person to whom the remittance basis applies is not to be assessed on the arising basis but on the remittance basis is not to be read literally. Section 68(1) of ICTA secures that income arising in the Republic of Ireland is assessed on the arising basis even if it arises to a person to whom the remittance basis applies.

It is likely that Parliament intended the reference to section 65A in section 65(4) to be read in this light. In other words the overseas property business rules were not to apply in relation to the income of a person to whom the remittance basis applies that was actually charged on the remittance basis.

Clause 269 makes it clear that the overseas property business rules are to be used in calculating a person's income from Irish property even if the remittance basis applies to the other foreign income of that person.

In theory this change may allow a taxpayer to set a loss sustained in letting one Irish property against profits arising from letting another.

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 68: Sums payable instead of rent, or as consideration for the variation or waiver of a term of a lease, for periods of 50 years or less: clauses 276, 279 and 281

This change clarifies the application of the lease premium rules to sums paid instead of rent, or for the variation or waiver of a term of a lease, if the period for which the sum is paid, or the variation or waiver has effect, is 50 years or less but the duration of the lease is more than 50 years.

Clause 279 is based on section 34(4) of ICTA. If under the terms of a lease a tenant is to pay a sum instead of rent, section 34(4) of ICTA treats the lease as requiring the payment of a premium for the purposes of section 34 of ICTA.

Section 34(4) of ICTA is intended to prevent a landlord avoiding a charge to income tax on rent by including in the terms of a lease provision for a lump sum to be paid instead of rent.

Section 34(1) of ICTA applies only if the duration of the lease does not exceed 50 years. Section 34(4) of ICTA does not say explicitly that it applies to leases not exceeding 50 years or that it applies irrespective of the duration of the lease. But section 34(4)(a) of ICTA provides that, in computing the profits of the Schedule A business of which section 34(4) of ICTA treats the sum payable instead of rent as a receipt, any period other than that in relation to which the sum is paid should be disregarded in arriving at the duration of the lease.

There is more than one way to interpret the relationship between section 34(4)(a) of ICTA and the restriction in section 34(1) of ICTA that the duration of the lease should not exceed 50 years.

Section 34(1) of ICTA could be interpreted as limiting the application of section 34(4) of ICTA to leases with a duration of not more than 50 years. This would allow a landlord to avoid income tax on rent for any period up to 50 years by receiving that rent in the form of a lump sum if it is in respect of a lease for more than 50 years.

This is not the way the legislation has been interpreted and applied in practice over many years. Ever since the legislation was first enacted in FA 1963 the Inland Revenue has interpreted section 34(4) of ICTA as applying to the receipt of a sum instead of rent for a period not exceeding 50 years regardless of the duration of the lease. As a result, the person by whom the sum is paid may be treated as paying rent for the purposes of relief under section 37(4) of ICTA in computing the profits of a Schedule A business or under section 87 of ICTA in computing the profits of a trade, profession or vocation.

Clause 279(1)(b) follows the Inland Revenue interpretation by applying clause 279 if a sum is paid instead of rent for a period of 50 years or less regardless of the duration of the lease. Because this is not explicit in section 34(4) of ICTA it may be a change in the law.

A similar point arises on clause 281, based on section 34(5) of ICTA. If a tenant is to pay a sum as consideration for the variation or waiver of any of the terms of a lease, section 34(5) of ICTA treats the lease as requiring the payment of a premium.

Section 34(5) of ICTA is intended to prevent a landlord avoiding a charge to income tax on rent, or on a premium treated as rent under section 34(1) of ICTA, by altering the terms of a lease in return for the payment of a lump sum. For example, a lease on a shop might contain a condition that the property is not to be used for retail trade; the landlord then waives this condition in return for a separate consideration. Without section 34(5) of ICTA, the additional consideration would not be a premium for the purposes of section 34 of ICTA.

As in section 34(4) of ICTA, section 34(5) of ICTA does not say explicitly that it applies to leases not exceeding 50 years or that it applies irrespective of the duration of the lease. But section 34(5)(a) of ICTA provides that in computing the profits of the Schedule A business of which section 34(5) of ICTA treats the sum payable as consideration as a receipt, any period other than that for which the variation or waiver has effect should be disregarded in arriving at the duration of the lease.

As in section 34(4) of ICTA, there is more than one way to interpret the relationship between section 34(5)(a) of ICTA and the restriction in section 34(1) of ICTA that the duration of the lease should not exceed 50 years.

Section 34(1) of ICTA could be interpreted as limiting the application of section 34(5) of ICTA to leases with a duration of not more than 50 years. This would allow a landlord to avoid income tax on rent for any period up to 50 years by receiving a payment for the waiver or variation of the term of a lease if it is in respect of a lease for more than 50 years.

As in the case of section 34(4)(a) of ICTA, this is not the way the legislation has been interpreted and applied in practice. Ever since the legislation was first enacted in FA 1963 the Inland Revenue has interpreted section 34(5) of ICTA as applying to the receipt of a sum as consideration for the variation or waiver of a term of a lease for a period not exceeding 50 years regardless of the duration of the lease. As a result, the person by whom the sum is paid may be treated as paying rent for the purposes of relief under section 37(4) or section 87 of ICTA.

Clause 281(1)(c) follows the Inland Revenue interpretation by applying clause 281 if a sum is paid for the waiver or variation of the term of a lease for a period of 50 years or less regardless of the duration of the lease. Because this is not explicit in section 34(5) of ICTA, it may be a change in the law.

If, as a result of this change, an amount is brought into account as a receipt in respect of a sum payable under the terms of a lease instead of rent, or as consideration for the variation or waiver of a term of a lease, the tenant may become entitled to relief under clauses 287 to 295 if the tenant carries on a property business or under clauses 60 to 65 if he or she carries on a trade, profession or vocation.

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 69: Identifying the profits involved where an amount is to be taken into account as a receipt in calculating the profits of a property business: clauses 277, 279, 280, 281, 282, 284 and 285

This change relates to the provisions requiring an amount in respect of a premium or other sum payable in connection with a lease to be taken into account as a receipt in calculating the profits of a property business.

Section 34 of ICTA provides that if a premium is payable under the terms subject to which a lease is granted, the landlord is treated as receiving an amount by way of rent. Section 34(4) of ICTA provides that if, under the terms subject to which a lease is granted, a sum becomes payable by the tenant instead of rent or as consideration for the surrender of the lease, the lease is deemed for the purposes of section 34 of ICTA to have required the payment of a premium to the landlord. Section 34(5) of ICTA makes similar provision in the case of a sum payable by the tenant as consideration for the variation or waiver of any of the terms of the lease.

Section 34(7A) of ICTA provides that an amount treated as rent under section 37 of ICTA "shall be taken into account in computing the profits of the Schedule A business in question for the chargeable period in which it is treated as received". Section 34(1), (4)(b) and (5)(b) of ICTA specify when the rent is deemed to be received.

(A) Under section 34(6) of ICTA, if the premium - or the sum treated as a premium by sections 37(4) or (5) of ICTA - is payable to a person other than the landlord, that person is

taken to have received as income an amount equal to the amount which would otherwise fall to be treated as rent and to be chargeable to tax as if he had received it in consequence of having, on his own account, entered into a transaction falling to be treated as mentioned in paragraph 1(2) of Schedule A.

Paragraph 1(2) of Schedule A in section 15(1) of ICTA provides that certain transactions are to taken to be entered into in the course of a Schedule A business. So the effect of section 34(6) of ICTA is to treat the person to whom the premium or other sum is payable as carrying on a Schedule A business and receiving an amount of income as a receipt of that business.

The receipt must be taken into account in computing the profits of the Schedule A business. But there is no provision specifying the profits involved. Section 34(7A) of ICTA does not apply to such receipts as it only applies to amounts treated under section 34 of ICTA as rent.

In practice, premiums or other sums payable to a person other than a landlord are taken into account in computing the profits of the Schedule A business for the same chargeable period as if they had been payable to the landlord and the landlord had been treated as receiving rent. So clauses 277(4), 279(4), 280(4) and 281(4) require an amount to be brought into account as a receipt in calculating the profits of a property business for a specified tax year whether the premium or other sum was payable to the landlord or to another person.

This change has no implications for the amount of income liable to tax or who is liable for tax on it. In principle it affects when tax is paid but is expected to have no practical effect as it is in line with current practice.

(B) Section 34(7A) of ICTA provides that an amount treated as rent under section 34 of ICTA is to be taken into account in computing the profits of the Schedule A business for the chargeable period in which it is treated as received.

Section 34(1), (4)(b) and (5)(b) of ICTA specify when the rent is deemed to be received. But it is only necessary to know when the rent is deemed to be received in order to apply the rule in section 34(7A) of ICTA. So in rewriting section 34(1) of ICTA, clause 277(4) requires an amount to be brought into account as a receipt in calculating the profits of the property business for the tax year in which the lease is granted. And in the same way, clauses 279(4), 280 (4) and 281 (4) refer to the tax year in which the sum becomes payable.

A similar point arises in sections 35 and 36 of ICTA.

Section 35(2A) of ICTA provides that an amount treated under section 35 of ICTA as income received by the person by whom the lease was assigned

(a)     is treated as received when the consideration .. becomes payable, and

(b)     shall be taken into account in computing the profits of the Schedule A business in question for the chargeable period in which it is treated as received.

Similar provision is made by section 36(4A) of ICTA in relation to receipts where the terms subject to which an estate or interest in land is sold provide that it is to be reconveyed or for the grant of a lease out of the estate or interest in land.

Again, it is only necessary to know when the receipt is received in order to apply the rule in section 34(7A) of ICTA. So in rewriting section 35 of ICTA, clause 282(4) requires an amount to be brought into account as a receipt in calculating the profits of the property business for the tax year in which the consideration for the assignment becomes payable. And in the same way, clauses 284(4) and 285(5) refer to the profits of the property business for the tax year in which the estate or interest is sold.

This change has no implications in principle or in practice for the amount of tax paid, who pays or when.

Change 70: Lease premiums etc: no receipt in respect of sum payable for variation or waiver of term of lease if sum due to someone other than the landlord or a person connected with landlord: clause 281

This change prevents an amount being treated as a receipt of the landlord's property business, where a sum is payable by the tenant as consideration for the variation or waiver of a term of a lease to somebody other than the landlord or a person connected with the landlord.

Section 34(5) of ICTA provides:

Where, as a consideration for the variation or waiver of any of the terms of a lease, a sum becomes payable by the tenant otherwise than by way of rent, the lease shall be deemed for the purposes of this section to have required the payment of a premium to the landlord (in addition to any other premium) of the amount of that sum ..

The effect of this is that the landlord is treated under section 34(1) of ICTA as receiving an amount by way of rent.

Section 34(6) of ICTA provides that if a payment falling within section 34(1), (4) or (5) of ICTA is due to a person other than the landlord, no amount is to be treated as a receipt of any Schedule A business carried on by the landlord. It also provides that the other person is to be:

taken to have received as income an amount equal to the amount which would otherwise fall to be treated as rent and to be chargeable to tax as if he had received it in consequence of having, on his own account, entered into a transaction falling to be treated as mentioned in paragraph 1(2) of Schedule A.

The effect of this is that the other person is treated as carrying on a Schedule A business and the amount that would have been treated as rent, if the sum had been payable to the landlord, is treated as a receipt of that business.

But section 34(7) of ICTA provides that section 34(6) of ICTA shall not apply in relation to any payment within section 37(5) of ICTA unless it is due to a person who is connected with the landlord. This means that section 34(6) of ICTA does not apply to a payment falling within section 34(5) of ICTA payable to a person who is not the landlord and is not connected with the landlord.

The position for such a payment is governed by section 34(5) of ICTA. Under section 34(5) of ICTA the lease is treated for the purposes of section 34 of ICTA as requiring the payment of a premium to the landlord, regardless of the person to whom it is paid. It follows that the landlord will be treated under section 34(1) of ICTA as receiving an amount by way of rent, even if the sum is payable to somebody who is not connected with the landlord.

The intention appears to be that in such a case nobody should be treated as receiving an amount by way of rent or income. This is how section 34(6) of ICTA is operated in practice. So clause 281(1)(b) requires that in order for clause 281to apply the sum payable as consideration for the variation or waiver of a term of a lease must be due to the landlord or a person connected with the landlord.

If, as a result of this change, no amount is brought into account as a receipt in calculating the profits of the landlord's property business in respect of a sum payable by a tenant as consideration for the variation or waiver of the terms of a lease to a person other than the landlord, or a person connected with the landlord, the tenant will not be entitled to any relief under clauses 287 to 295 (if the tenant carries on a property business) or under clauses 60 to 65 (if he or she carries on a trade).

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 71: Applying the additional calculation rule to receipts in respect of sums payable for variation or waiver of term of lease: clauses 281, 287, 288, 289 and 294

This change applies the provisions of Chapter 4 of Part 3 of this Bill for reducing the amount of certain receipts under that Chapter to receipts in respect of sums payable as consideration for the variation or waiver of a term of a lease.

Under section 34(1), (5), (6) and (7) of ICTA if a sum becomes payable by a tenant as consideration for the variation or waiver of any of the terms of a lease, the landlord is treated as receiving a proportion of that sum as rent or, if the sum is payable to a person connected with the landlord that person is treated as receiving the same amount as a receipt of a Schedule A business. (See Change 70.)

When certain conditions are met, section 37(1) to (3) of ICTA provides that the amount treated as received under section 34 or 35 of ICTA is to be replaced by a small amount calculated under section 37 of ICTA. One of the conditions is that there must be an amount treated as a receipt of a Schedule A business by virtue of section 34 or 35 of ICTA in respect of "the head lease". Another of the conditions is in section 37(2)(b) of ICTA, which provides that the amount to be reduced under section 37 of ICTA must be an amount treated as received under section 34 of ICTA in respect of the grant of a lease out of the headlease or under section 35 of ICTA in respect of the assignment of the headlease.

Section 37(1) to (3) of ICTA does not appear to allow a reduction in an amount treated as received under section 34 of ICTA in respect of a sum payable by the tenant as consideration for the variation or waiver of a term of a lease because such an amount is not received in respect of the "grant" of a lease as required by section 37(2)(b) of ICTA. But relief under section 37(2) and (3) of ICTA is, in practice, allowed in respect of amounts treated as received under section 34 of ICTA in respect of sums paid as consideration for the variation or waiver of a term of a lease.

Section 37(1) to (3) of ICTA is rewritten in clauses 287 to 290 in which it is referred to as "the additional calculation rule". So:

• clause 281(6) provides that, if the additional calculation rule applies, the amount given by the formula in clause 281(5) is to be reduced by the amount calculated in accordance with clause 288;

• clause 287(1) includes receipts under clause 281 in the list of receipts in relation to which the additional calculation rule applies; and

• clauses 288(2) (which sets out the additional calculation rule) and 289(2) (which adapts the additional calculation rule where the sublease does not extend to the whole of the leased premises) both refer to clause 281.

Clause 295 restricts total relief to the amount of the taxed receipt after any deductions under clause 61. So if, as a result of this change, a tenant receives relief in respect of a sum payable as consideration for the variation or waiver of a term of a lease, this may reduce the amount of relief available to a subsequent tenant.

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 72: Receipts in respect of sales with right to reconveyance and sale and leaseback transactions: clauses 284 and 285

This change introduces a requirement that, for an amount to be treated as a receipt in respect of a sale with a right to a reconveyance or a sale and lease back transaction, the period between the sale and the earliest date of reconveyance or leaseback must be 50 years or less.

Section 36(1) of ICTA provides:

Where the terms subject to which an estate or interest in land is sold provide that it shall be, or may be required to be, reconveyed at a future date to the vendor or a person connected with him, the following amount shall be deemed to have been received as income by the vendor and to have been received by him in consequence of his having entered into a transaction falling to be treated as mentioned in paragraph 1(2) of Schedule A..

Section 36(1) of ICTA further provides that the amount that the vendor is treated as having received is the amount by which the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed. But if the earliest date at which it would fall to be reconveyed is two years or more after the sale, the amount of the excess is reduced by 1/50th for each complete year (other than the first) in the period between the sale and that date. This means that if the period beginning with the sale and ending with the earliest date on which the estate or interest fall to be reconveyed is 51 years or more, the amount that the vendor is treated as having received is zero. But the vendor will only discover this after carrying out the calculation required by section 36(1) of ICTA.

It is not appropriate to require the vendor to take a zero receipt into account in calculating the profits of a property business. Nor does there appear to be any reason why the period for sale and reconveyance should be 51 years, while sections 34(1) and 35 of ICTA require that the duration of the lease must not exceed 50 years. So in rewriting section 36 of ICTA, clause 284(1)(b) requires that in order for clause 284 to apply the period between the sale and the earliest date on which the estate or interest in land would fall to be reconveyed must be 50 years or less. This makes it unnecessary for the vendor to calculate the amount and find that it was zero.

A similar point arises in relation to clause 285. Section 36(3) of ICTA provides that, where the terms of the sale provide for the grant of a lease directly or indirectly out of the estate or interest to the vendor or a person connected with him, section 36 of ICTA applies as if the grant of the lease were a reconveyance of the estate or interest. Again, the effect of section 36(1) and (3) of ICTA is that the amount treated as received by the vendor will be zero if the period beginning with the sale and ending with the earliest date on which under the terms of the sale the lease would fall to be granted exceeds 51 years.

As in the case of sales with a right to a reconveyance, there does not appear to be any reason why this period should be 51 years, rather than 50 years. So clause 285(1)(b) requires that in order for clause 285 to apply the period between the sale and the earliest date at which the lease would fall to be granted must be 50 years or less.

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 73: Limiting the reductions in receipts under clause 288 and the deductions for expenses under clause 292: clauses 287, 288, 289, 290, 291, 292 and 295

This change concerns the way section 37(9) of ICTA is rewritten.

Section 37(9) of ICTA provides:

An amount or part of an amount shall not be deducted under this section more than once from any sum, or from more than one sum, and shall not in any case be so deducted if it has been otherwise allowed as a deduction in computing the income of any person for tax purposes.

The effect that section 37(9) has on the rest of section 37 of ICTA is not entirely clear. There are no references to it in the rest of the section. It is simply added at the end of the section. And the wording of section 37(9) of ICTA does not fit in well with the rest of the section.

It appears that when section 37(9) of ICTA refers to "an amount or part of an amount", it must be referring to the amount, or any part of the amount, chargeable on the superior interest, as defined in section 37(1) of ICTA because it is this amount which determines the extent to which relief is given under section 37(2) and (4) of ICTA.

But the amount or part amount is not, strictly speaking, deducted under section 37 of ICTA at all:

• in the case of a later chargeable amount, section 37(2) and (3) of ICTA substitutes a reduced amount for the amount of the later chargeable amount calculated under section 34 or 35 of ICTA; and

• under section 37(4) of ICTA a tenant is treated as paying rent, corresponding to the amount of rent the landlord is treated as receiving under section 34 or 35 of ICTA.

So while the calculation of the reduced amount of the later chargeable amount and the amount of notional rent paid depend on a part of the amount chargeable on the superior interest, no amount is "deducted" under section 37 of ICTA.

In construing section 37(9) of ICTA it is relevant to consider the rationale underlying the rest of section 37 of ICTA.

Under section 34(1) of ICTA, where there is a premium in respect of a lease and a premium in respect of a sublease granted out of that lease, the landlord under the lease and the landlord under the sublease (the tenant under the lease) will both be treated as receiving an additional amount of rent. Part or all of the premium in respect of the sublease will represent value already taxed as income in the hands of the landlord.

The purpose of section 37(2) and (3) of ICTA is to reduce the amount treated as paid under section 34(1) of ICTA in respect of the premium for the sublease by reference to the amount treated as paid under section 34(1) of ICTA in respect of the premium for the lease. It follows from this that the total amount of the reductions should be limited to the amount treated as received as rent under section 34(1) of ICTA in respect of the premium for the lease. This limit is provided by section 37(9) of ICTA .

The rationale underlying section 37(4) of ICTA is that if an amount is treated under section 34 or 35 of ICTA as rent in the hands of the recipient, the person by whom it is paid (the tenant) should also be treated as paying rent. So it is logical that the amount that the recipient is treated as receiving should be the same as the amount that the tenant is treated as paying. Generally this will be achieved by section 37(4) of ICTA, but there are circumstances in which the amount the tenant is treated as paying under section 37(4) of ICTA could exceed the amount the landlord or other person is treated as receiving under section 34 or 35 of ICTA.

It appears that the purpose of section 37(9) of ICTA is to limit the reductions in later chargeable amounts under section 37(2) and (3) of ICTA, and the amounts the tenant is treated as paying as rent under section 37(4) of ICTA, by reference to the amount chargeable on the superior interest to an amount equal to that amount. So clause 295, which is based on section 37(9) of ICTA, is worded as a limit.

Section 37(9) of ICTA is difficult to construe because it does not say how it interrelates with the rest of section 37 of ICTA. Clauses 287 to 290 attempt to make the relationship clear. So:

• clause 290(1) defines the "unused amount" of the taxed receipt, which under section 37(9) of ICTA is the part of the amount chargeable on the superior interest that has not been "deducted";

• clauses 287(5) and 288(3) ensure that there cannot be a reduction by reference to a taxed receipt ("the amount chargeable on the superior interest") in calculating the amount of a receipt if the taxed receipt does not have an unused amount. In the terminology of section 37(9) of ICTA, this would be if the whole of the amount chargeable on the superior interest had already been "deducted"; and

• clause 289(4) ensures that the reduction required under clause 288 by reference to a taxed receipt cannot exceed the unused amount. In the terminology of section 37(9) of ICTA, this ensures that "deductions" exceeding the amount chargeable on the superior interest cannot be made.

Clause 291(4) imposes a similar limit on deductions for expenses under clause 292. Clauses 291 and 292 are based on section 37(4) of ICTA.

Clause 295 restricts total relief to the amount of the taxed receipt. A tenant is entitled to relief only if the taxed receipt by reference to which the relief could be given has an "unused amount". So by reducing the unused amount of the taxed receipt, the relief which each tenant receives by reference to a taxed receipt may reduce the amount of relief to which a later tenant is entitled.