Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
Internet Publications
Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
12

29
Interest
For the purpose of calculating the profits of a trade, interest is an item of a
revenue nature, whatever the nature of the loan.
30
Animals kept for trade purposes
(1)
Animals or other living creatures kept for the purposes of a trade are treated as
5
trading stock if they are not kept wholly or mainly—
(a)
for the work they do in connection with the carrying on of the trade,
(b)
for public exhibition, or
(c)
for racing or other competitive purposes.
(2)
But they are not treated as trading stock if they are part of a herd in relation to
10
which a herd basis election has effect (see Chapter 8).
(3)
This section applies to shares in animals or other living creatures as it applies
to the creatures themselves.
(4)
This section does not apply to professions or vocations.
31
Relationship between rules prohibiting and allowing deductions
15
(1)
Any relevant permissive rule in this Part—
(a)
has priority over any relevant prohibitive rule in this Part, but
(b)
is subject to sections 48 (car or motor cycle hire) and 55 (crime-related
payments).
(2)
In this section “any relevant permissive rule in this Part” means any provision
20
of—
(a)
Chapter 5 (apart from sections 60 to 67),
(b)
Chapter 11, or
(c)
Chapter 13,

which allows a deduction in calculating the profits of a trade.
25
(3)
In this section “any relevant prohibitive rule in this Part”, in relation to any
deduction, means any provision of this Part (apart from sections 48 and 55)
which might otherwise be read as—
(a)
prohibiting the deduction, or
(b)
restricting the amount of the deduction.
30
Chapter 4
Trade profits: rules restricting deductions
Introduction
32
Professions and vocations
The provisions of this Chapter apply to professions and vocations as they
35
apply to trades.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
13

Capital expenditure
33
Capital expenditure
In calculating the profits of a trade, no deduction is allowed for items of a
capital nature.
Wholly and exclusively and losses rules
5
34
Expenses not wholly and exclusively for trade and unconnected losses
(1)
In calculating the profits of a trade, no deduction is allowed for—
(a)
expenses not incurred wholly and exclusively for the purposes of the
trade, or
(b)
losses not connected with or arising out of the trade.
10
(2)
If an expense is incurred for more than one purpose, this section does not
prohibit a deduction for any identifiable part or identifiable proportion of the
expense which is incurred wholly and exclusively for the purposes of the trade.
Bad and doubtful debts
35
Bad and doubtful debts
15
(1)
In calculating the profits of a trade, no deduction is allowed for a debt owed to
the person carrying on the trade, except so far as—
(a)
the debt is bad,
(b)
the debt is estimated to be bad, or
(c)
the debt is released wholly and exclusively for the purposes of the trade
20
as part of a statutory insolvency arrangement.
(2)
If the debtor is bankrupt or insolvent, the whole of the debt is estimated to be
bad for the purposes of subsection (1)(b), except so far as any amount may
reasonably be expected to be received on the debt.
Unpaid remuneration
25
36
Unpaid remuneration
(1)
This section applies if, in calculating the profits of a trade of a period of
account—
(a)
an amount is charged in the accounts for the period in respect of
employees’ remuneration, and
30
(b)
a deduction for the remuneration would otherwise be allowable for the
period.
(2)
No deduction is allowed for the remuneration for the period of account unless
it is paid before the end of the period of 9 months immediately following the
end of the period of account.
35
(3)
If the remuneration is paid after the end of that 9 month period, a deduction for
it is allowed for the period of account in which it is paid.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
14

37
Unpaid remuneration: supplementary
(1)
For the purposes of section 36 an amount charged in the accounts in respect of
employees’ remuneration includes an amount for which provision is made in
the accounts with a view to its becoming employees’ remuneration.
(2)
For the purposes of section 36 it does not matter whether an amount is charged
5
for—
(a)
particular employments, or
(b)
employments generally.
(3)
If the profits of the trade are calculated before the end of the 9 month period
mentioned in section 36(2)—
10
(a)
it must be assumed, in making the calculation, that any remuneration
which is unpaid when the calculation is made will not be paid before
the end of that period, but
(b)
if the remuneration is subsequently paid before the end of that period,
nothing in this subsection prevents the calculation being revised and
15
any tax return being amended accordingly.
(4)
For the purposes of this section and section 36 remuneration is paid when it—
(a)
is treated as received by an employee for the purposes of ITEPA 2003
by section 18, 19, 31 or 32 of that Act (receipt of money and non-money
earnings), or
20
(b)
would be so treated if it were not exempt income.
(5)
In this section and section 36—
“employee” includes an office-holder and “employment” therefore
includes an office, and
“remuneration” means an amount which is or is treated as earnings for the
25
purposes of ITEPA 2003.
Employee benefit contributions
38
Restriction of deductions
(1)
This section applies if, in calculating the profits of a person’s trade of a
period—
30
(a)
the profits of the trade of the period are required to be calculated for
income tax purposes, and
(b)
a deduction would otherwise be allowable for the period for any
employee benefit contributions made or to be made by the person (“the
employer”) (but see subsection (4)).
35
(2)
No deduction is allowed for the contributions for the period except so far as—
(a)
qualifying benefits are provided, or qualifying expenses are paid, out
of the contributions during the period or within 9 months from the end
of it, or
(b)
if the making of the contributions is itself the provision of qualifying
40
benefits, the contributions are made during the period or within 9
months from the end of it.
(3)
An amount disallowed under subsection (2) is allowed as a deduction for a
subsequent period so far as—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
15

(a)
qualifying benefits are provided out of the contributions before the end
of the subsequent period, or
(b)
if the making of the contributions is itself the provision of qualifying
benefits, the contributions are made before the end of the subsequent
period.
5
(4)
This section does not apply to any deduction that is allowable for—
(a)
anything given as consideration for goods or services provided in the
course of a trade or profession,
(b)
contributions under a registered pension scheme or under a
superannuation fund to which section 615(3) of ICTA applies,
10
(c)
contributions under a qualifying overseas pension scheme in respect of
an individual who is a relevant migrant member of the pension scheme
in relation to the contributions, or
(d)
contributions under an accident benefit scheme.

For the purposes of paragraph (c) “qualifying overseas pension scheme” and
15
“relevant migrant member” have the same meaning as in Schedule 33 to FA
2004 (see paragraphs 4 to 6 of that Schedule).
(5)
See also—
section 39 (making of “employee benefit contributions”),
section 40 (provision of qualifying benefits),
20
section 41 (timing and amount of certain qualifying benefits),
section 42 (provision or payment out of employee benefit contributions),
section 43 (profits calculated before end of 9 month period), and
section 44 (interpretation of sections 38 to 44).
39
Making of “employee benefit contributions”
25
(1)
For the purposes of section 38 the employer makes an “employee benefit
contribution” if—
(a)
the employer pays money or transfers an asset to another person (“the
third party”), and
(b)
the third party is entitled or required, under the terms of an employee
30
benefit scheme, to hold or use the money or asset for or in connection
with the provision of benefits to, or in respect of, present or former
employees of the employer.
(2)
For this purpose “employee benefit scheme” means a trust, scheme or other
arrangement for the benefit of persons who are, or include, present or former
35
employees of the employer.
40
Provision of qualifying benefits
(1)
For the purposes of section 38 qualifying benefits are provided if there is—
(a)
a payment of money, or
(b)
a transfer of assets,
40

which meets condition A, B, C or D.
(2)
Condition A is that the payment or transfer gives rise both to an employment
income tax charge and to an NIC charge.
(3)
Condition B is that the payment or transfer would give rise to both charges if—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
16

(a)
the duties of the employment in respect of which the payment or
transfer was made were performed in the United Kingdom, and
(b)
the person in respect of whose employment the payment or transfer
was made met at all relevant times the conditions as to residence or
presence in Great Britain or Northern Ireland prescribed under section
5
1(6) of the Contributions and Benefits Act.
(4)
Condition C is that the payment or transfer is made in connection with the
termination of the recipient’s employment with the employer.
(5)
Condition D is that the payment or transfer is made under an employer-
financed retirement benefits scheme.
10
(6)
None of the conditions is met if the payment or transfer is by way of loan.
(7)
In this section—
“the Contributions and Benefits Act” means—
(a)
the Social Security Contributions and Benefits Act 1992 (c. 4), or
(b)
the Social Security Contributions and Benefits (Northern
15
Ireland) Act 1992 (c. 7),
“employment income tax charge” means a charge to tax under ITEPA
2003 (whether on the recipient or on someone else), and
“NIC charge” means a liability to pay national insurance contributions
under section 6 (Class 1 contributions), section 10 (Class 1A
20
contributions) or section 10A (Class 1B contributions) of the
Contributions and Benefits Act.
41
Timing and amount of certain qualifying benefits
(1)
If the provision of a qualifying benefit—
(a)
takes the form of a payment of money, and
25
(b)
is not made under an employer-financed retirement benefits scheme,

the benefit is provided for the purposes of section 38 when the money is treated
as received for the purposes of Chapter 4 of Part 2 of ITEPA 2003 (applying the
rules in section 18 of that Act (receipt of money earnings)).
(2)
If the provision of a qualifying benefit takes the form of a transfer of an asset,
30
the amount provided for the purposes of section 38 is the total of—
(a)
the amount (if any) spent on the asset by the third party, and
(b)
in a case where the asset was transferred to the third party by the
employer, the amount of the deduction that would be allowable as
mentioned in subsection (1) of that section in respect of the transfer.
35
(3)
But if the amount given by subsection (2) is more than the amount that—
(a)
is charged to tax under ITEPA 2003 in respect of the transfer, or
(b)
would be so charged if condition B in section 40 were met,

the deduction allowable under section 38(2) or (3) is limited to that lower
amount.
40
42
Provision or payment out of employee benefit contributions
(1)
For the purposes of section 38(2)(a)—
(a)
any qualifying benefits provided, or
(b)
any qualifying expenses paid,

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
17


by the third party after the receipt by the third party of employee benefit
contributions are treated as being provided or paid out of the contributions.
(2)
This operates up to the total amount of the contributions reduced by the
amount of any benefits or expenses previously provided or paid as mentioned
in section 38(2)(a).
5
(3)
For the purposes of section 38(3)(a) any qualifying benefits provided by the
third party after the receipt by the third party of employee benefit
contributions are treated as being provided out of the contributions.
(4)
This operates up to the total amount of the contributions reduced by the
amount of any benefits or expenses previously provided or paid as mentioned
10
in section 38(2)(a) or (3)(a).
(5)
For the purposes of this section no account is taken of any other amount
received or paid by the third party.
43
Profits calculated before end of 9 month period
(1)
This section applies if the profits of the trade are calculated before the end of
15
the 9 month period mentioned in section 38(2).
(2)
It must be assumed, in making the calculation, that any benefits, expenses or
contributions which are not provided, paid or made when the calculation is
made will not be provided, paid or made before the end of that period.
(3)
But if the benefits, expenses or contributions are subsequently provided, paid
20
or made before the end of that period, nothing in this section prevents the
calculation being revised and any tax return being amended accordingly.
44
Interpretation of sections 38 to 44
(1)
In this section and sections 38 to 43—
“accident benefit scheme” means an employee benefit scheme under
25
which benefits may be provided only by reason of a person’s
disablement, or death, caused by an accident occurring during the
person’s service as an employee of the employer,
“employee benefit contribution” is to be read in accordance with section
39(1),
30
“employee benefit scheme” has the meaning given by section 39(2),
“the employer” is to be read in accordance with section 38(1),
“employer-financed retirement benefits scheme” has the same meaning as
in Chapter 2 of Part 6 of ITEPA 2003 (see section 393A of that Act),
“qualifying benefits” is to be read in accordance with section 40,
35
“qualifying expenses” includes any expenses of the third party (other than
the provision of benefits to employees of the employer)—
(a)
which are incurred in operating the employee benefit scheme,
and
(b)
which, if incurred by the employer, would be deductible in
40
calculating for income tax purposes the employer’s profits for
any period, and
“the third party” is to be read in accordance with section 39(1).

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 4 — Trade profits: rules restricting deductions
18

(2)
A reference in this section and sections 38 to 43 to a person’s employee includes
the holder of an office under that person, and “employment” is to be read
accordingly.
Business entertainment and gifts
45
Business entertainment and gifts: general rule
5
(1)
The general rule is that no deduction is allowed in calculating the profits of a
trade for expenses incurred in providing entertainment or gifts in connection
with the trade.
(2)
A deduction for expenses which are incurred—
(a)
in paying sums to or on behalf of an employee of the person carrying
10
on the trade (“the trader”), or
(b)
in putting sums at the disposal of an employee of the trader,

is prohibited by the general rule if (and only if) the sums are paid, or put at the
employee’s disposal, exclusively for meeting expenses incurred or to be
incurred by the employee in providing the entertainment or gift.
15
(3)
The general rule is subject to exceptions—
for entertainment (see section 46), and
for gifts (see section 47).
(4)
For the purposes of this section and those two sections—
(a)
“employee”, in relation to a company, includes a director of the
20
company and a person engaged in the management of the company,
(b)
“entertainment” includes hospitality of any kind, and
(c)
the expenses incurred in providing entertainment or a gift include
expenses incurred in providing anything incidental to the provision of
entertainment or a gift.
25
46
Business entertainment: exceptions
(1)
The prohibition in section 45 on deducting expenses incurred in providing
entertainment does not apply in either of cases A and B.
(2)
Case A is where—
(a)
the entertainment is of a kind which it is the trader’s trade to provide,
30
and
(b)
the entertainment is provided in the ordinary course of the trade either
for payment or free of charge in order to advertise to the public
generally.
(3)
Case B is where the entertainment is provided for employees of the trader
35
unless—
(a)
the entertainment is also provided for others, and
(b)
the provision of the entertainment for the employees is incidental to its
provision for the others.
47
Business gifts: exceptions
40
(1)
The prohibition in section 45 on deducting expenses incurred in providing gifts
does not apply in any of cases A, B, C and D.