Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 13 — Deductions from profits: unremittable amounts
88


must be determined by the General or Special Commissioners in the same way
as an appeal.
(2)
If the same General Commissioners have jurisdiction in relation to each of the
persons whose trade, profession or vocation is concerned (including any
company within the charge to corporation tax), the question must be
5
determined by those Commissioners.
(3)
But this does not apply if all parties concerned agree that the question should
be determined by the Special Commissioners.
(4)
In any other case, the question must be determined by the Special
Commissioners.
10
Chapter 13
Deductions from profits: unremittable amounts
187
Professions and vocations
The provisions of this Chapter apply to professions and vocations as they
apply to trades.
15
188
Application of Chapter
(1)
This Chapter applies if—
(a)
an amount received by, or owed to, a person carrying on a trade (“the
trader”) is brought into account as a receipt in calculating the profits of
the trade,
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(b)
the amount is paid or owed in a territory outside the United Kingdom,
and
(c)
some or all of the amount is unremittable.
(2)
An amount received is unremittable if it cannot be transferred to the United
Kingdom merely because of foreign exchange restrictions.
25
(3)
An amount owed is unremittable if it cannot be paid in the United Kingdom
and—
(a)
it temporarily cannot be paid in the territory in which it is owed merely
because of foreign exchange restrictions, or
(b)
it can be paid in that territory but, if it were paid there, the amount paid
30
would not be transferable to the United Kingdom merely because of
foreign exchange restrictions.
(4)
“Foreign exchange restrictions” are restrictions imposed by any of the
following—
(a)
the laws of the territory where the amount is paid or owed,
35
(b)
executive action of its government, and
(c)
the impossibility of obtaining there currency that could be transferred
to the United Kingdom.
189
Relief for unremittable amounts
(1)
If—
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(a)
the trader has profits from the trade in a period of account, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 13 — Deductions from profits: unremittable amounts
89

(b)
an unremittable amount has been brought into account as a receipt for
that period,

a deduction of the amount is allowed from those profits (but see subsection
(5)).
(2)
If the trader has profits from the trade in a period of account and the total of—
5
(a)
any unremittable amounts brought into account as receipts for that
period, and
(b)
any amount carried forward under this subsection or subsection (3)
from the previous period of account,

exceeds the amount of those profits, the excess may be carried forward to the
10
next period of account.
(3)
If the trader does not have profits from the trade in a period of account and an
unremittable amount has been brought into account as a receipt for that period,
the total of—
(a)
any unremittable amounts brought into account as receipts for that
15
period, and
(b)
any amount carried forward under this subsection or subsection (2)
from the previous period of account,

may be carried forward to the next period of account.
(4)
If an amount is carried forward under this section to a period of account in
20
which the trader has profits from the trade, a deduction of the amount is
allowed from those profits (but see subsection (5)).
(5)
The total amount deducted under this section from the profits from a trade in
a period of account must not exceed the amount of the profits.
190
Restrictions on relief
25
(1)
No deduction is allowed under section 189 in relation to an amount so far as—
(a)
it is used to finance expenditure or investment outside the United
Kingdom, or
(b)
it is applied outside the United Kingdom in another way.
(2)
No deduction is allowed under section 189 in relation to an amount owed so
30
far as a deduction is allowed in respect of it under section 35 (bad and doubtful
debts).
(3)
No deduction is allowed under section 189 in relation to an amount owed so
far as a payment under a contract of insurance has been received in relation to
it.
35
(4)
No deduction is allowed under section 189 in relation to an amount brought
into account in calculating profits if relief under section 842 (unremittable
income) may be claimed in relation to that amount.
191
Withdrawal of relief
(1)
This section applies if—
40
(a)
some or all of an unremittable amount has been deducted from profits
under section 189, and
(b)
any of the following events occurs.
(2)
The events are that—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 14 — Disposal and acquisition of know-how
90

(a)
the amount or part of it ceases to be unremittable,
(b)
the amount or part of it is used to finance expenditure or investment
outside the United Kingdom,
(c)
the amount or part of it is applied outside the United Kingdom in
another way,
5
(d)
the amount or part of it is exchanged for, or discharged by, an amount
that is not unremittable,
(e)
a deduction is allowed in respect of the amount or part of it under
section 35 (bad and doubtful debts), and
(f)
if the amount is an amount owed, a payment under a contract of
10
insurance is received in relation to the amount or part of it.
(3)
The amount or the part of it in question is brought into account as a receipt in
calculating the profits of the trade for the period of account in which the event
occurs, but only so far as—
(a)
it has been deducted from profits under section 189, and
15
(b)
it has not already been brought into account as a receipt in calculating
the profits of the trade as a result of this section.
(4)
If the event is the receipt of a payment under a contract of insurance, the
amount brought into account as a receipt must not exceed the amount of the
payment.
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Chapter 14
Disposal and acquisition of know-how
192
Meaning of “know-how” etc.
(1)
In this Chapter “know-how” means any industrial information or techniques
likely to assist in—
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(a)
manufacturing or processing goods or materials,
(b)
working a source of mineral deposits (including searching for,
discovering or testing mineral deposits or obtaining access to them), or
(c)
carrying out any agricultural, forestry or fishing operations.
(2)
For this purpose—
30
“mineral deposits” includes any natural deposits capable of being lifted or
extracted from the earth and for this purpose geothermal energy is
treated as a natural deposit, and
“source of mineral deposits” includes a mine, an oil well and a source of
geothermal energy.
35
(3)
For the purposes of this Chapter any consideration received for giving, or
wholly or partly fulfilling, an undertaking which—
(a)
is given in connection with a disposal of know-how, and
(b)
restricts, or is designed to restrict, any person’s activities in any way,

is treated as consideration received for the disposal of the know-how.
40
(4)
It does not matter whether or not the undertaking is legally enforceable.
(5)
For the purposes of this Chapter references to a sale of know-how include an
exchange of know-how and any provision of this Chapter referring to a sale
has effect with the necessary modifications.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 14 — Disposal and acquisition of know-how
91

(6)
Those modifications include, in particular, reading references to the proceeds
of sale and to the price as including the consideration for the exchange.
193
Disposal of know-how if trade continues to be carried on
(1)
This section applies if—
(a)
a person carrying on a trade receives consideration for the disposal of
5
know-how which has been used in the trade,
(b)
the person continues to carry on the trade after the disposal, and
(c)
neither section 194 (disposal of know-how as part of disposal of all or
part of a trade) nor section 195 (seller controlled by buyer etc.) applies.
(2)
The amount or value of the consideration is treated for all purposes as a trading
10
receipt, except so far as it is brought into account under section 462 of CAA
2001 (disposal values).
(3)
If the know-how is sold together with other property, the net proceeds of the
sale of the know-how are treated as being so much of the net proceeds of the
sale of all the property as, on a just and reasonable apportionment, is
15
attributable to the know-how.
(4)
For this purpose all property sold as a result of one bargain is treated as sold
together even though—
(a)
separate prices are, or purport to be, agreed for separate items of that
property, or
20
(b)
there are, or purport to be, separate sales of separate items of that
property.
(5)
Any question about the way in which a sum is to be apportioned under this
section must be determined in accordance with section 563(2) to (6) of CAA
2001 (procedure for determining certain questions affecting two or more
25
persons) if it materially affects two or more taxpayers.
(6)
For this purpose a question materially affects two or more taxpayers if at the
time when the question falls to be determined it appears that the determination
is material to the liability to tax (for whatever period) of two or more persons.
194
Disposal of know-how as part of disposal of all or part of a trade
30
(1)
This section applies if —
(a)
a person carrying on a trade receives consideration for the disposal of
know-how which has been used in the trade, and
(b)
the know-how is disposed of as part of the disposal of all or part of the
trade.
35
(2)
If the person disposing of the know-how is within the charge to income tax, the
consideration is treated for income tax purposes as a capital receipt for
goodwill.
(3)
If the person acquiring the know-how—
(a)
is within the charge to income tax, and
40
(b)
provided the consideration,

the consideration is treated for income tax purposes as a capital payment for
goodwill.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
92

(4)
But the consideration is not treated for income tax purposes as a capital
payment for goodwill if, before the acquisition, the trade was carried on wholly
outside the United Kingdom.
(5)
If the person disposing of the know-how is within the charge to income tax—
(a)
that person, and
5
(b)
the person acquiring the know-how (whether or not within the charge
to income tax),

may jointly elect for this section not to apply (but see section 195).
(6)
The election must be made within two years of the disposal.
(7)
If—
10
(a)
an election is made under subsection (3) of section 531 of ICTA
(corresponding corporation tax provision), and
(b)
the person making the acquisition mentioned in that subsection is
within the charge to income tax,

the persons making the election under that subsection are treated as also
15
making an election under this section (even though the person disposing of the
know-how is not within the charge to income tax).
195
Seller controlled by buyer etc.
(1)
This section applies if a disposal of know-how is by way of sale and—
(a)
the seller is a body of persons over which the buyer has control,
20
(b)
the buyer is a body of persons over which the seller has control, or
(c)
both the seller and the buyer are bodies of persons and another person
has control over both of them.
(2)
In such a case—
(a)
section 193 does not apply, and
25
(b)
no election may be made under section 194.
(3)
For the purposes of this section “body of persons” includes a firm.
Chapter 15
Basis periods
Introduction
30
196
Professions and vocations
The provisions of this Chapter apply to professions and vocations as they
apply to trades.
Accounting date
197
Meaning of “accounting date”
35
(1)
In this Chapter “accounting date”, in relation to a tax year, means—
(a)
the date in the tax year to which accounts are drawn up, or
(b)
if there are two or more such dates, the latest of them.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
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(2)
This is subject to—
(a)
section 211(2) (middle date treated as accounting date), and
(b)
section 214(3) (date treated as accounting date if date changed in tax
year in which there is no accounting date).
The normal rules
5
198
General rule
(1)
The general rule is that the basis period for a tax year is the period of 12 months
ending with the accounting date in that tax year.
(2)
This applies unless a different basis period is given by one of the following
sections—
10
section 199 (first tax year),
section 200 (second tax year),
section 201 (tax year in which there is no accounting date),
section 202 (final tax year),
section 209 or 210 (first accounting date shortly before end of tax year),
15
section 212 (tax year in which middle date treated as accounting date),
section 215 (change of accounting date in third tax year), and
section 216 (change of accounting date in later tax year).
199
First tax year
(1)
The basis period for the tax year in which a person starts to carry on a trade—
20
(a)
begins with the date on which the person starts to carry on the trade,
and
(b)
ends with 5th April in the tax year.
(2)
But if a person starts and permanently ceases to carry on a trade in the same tax
year, the basis period for the tax year is that given by section 202(2).
25
200
Second tax year
(1)
The basis period for the second tax year in which a person carries on a trade is
determined as follows.
(2)
If in that tax year—
(a)
the accounting date falls less than 12 months after the date on which the
30
person starts to carry on the trade, and
(b)
the person does not permanently cease to carry on the trade,

the basis period is the period of 12 months beginning with the date on which
the person starts to carry on the trade.
(3)
If in that tax year—
35
(a)
the accounting date falls 12 months or more after the date on which the
person starts to carry on the trade, and
(b)
the person does not permanently cease to carry on the trade,

the basis period is that given by the general rule in section 198.
(4)
If in that tax year—
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(a)
there is no accounting date, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
94

(b)
the person does not permanently cease to carry on the trade,

the basis period is the same as the tax year.
(5)
If in that tax year the person permanently ceases to carry on the trade, the basis
period is that given by section 202(1).
201
Tax year in which there is no accounting date
5
(1)
If a person carries on a trade in a tax year and—
(a)
there is no accounting date in the tax year, and
(b)
the person does not start or permanently cease to carry on the trade in
the tax year,

the basis period for the tax year is the period of 12 months beginning
10
immediately after the end of the basis period for the previous tax year.
(2)
But this is subject to—
(a)
section 200 (second tax year), and
(b)
sections 215 and 216 (change of accounting date in third tax year or later
tax year).
15
202
Final tax year
(1)
The basis period for the tax year in which a person permanently ceases to carry
on a trade—
(a)
begins immediately after the end of the basis period for the previous tax
year, and
20
(b)
ends with the date on which the person permanently ceases to carry on
the trade.
(2)
But if a person starts and permanently ceases to carry on a trade in the same tax
year, the basis period—
(a)
begins with the date on which the person starts to carry on the trade,
25
and
(b)
ends with the date on which the person permanently ceases to carry on
the trade.
Apportionment of profits
203
Apportionment etc. of profits to basis periods
30
(1)
This section applies if the basis period for a tax year does not coincide with a
period of account.
(2)
Any of the following steps may be taken if they are necessary in order to arrive
at the profits or losses of the basis period—
(a)
apportioning the profits or losses of a period of account to the parts of
35
that period falling in different basis periods, and
(b)
adding the profits or losses of a period of account (or part of a period)
to profits or losses of other periods of account (or parts).
(3)
The steps must be taken by reference to the number of days in the periods
concerned.
40