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Finance (No.2) Bill


Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 1 — Income tax

341

 

Spreading of adjustment income

2     (1)  

The adjustment income shall be spread in accordance with the following

rules.

      (2)  

In each of the first three tax years beginning with that in which the whole

amount of the adjustment income would otherwise be chargeable to tax, an

5

amount equal to whichever is the less of—

(a)   

one-third of the original amount of the adjustment income, and

(b)   

one-sixth of the profits of the business for that tax year,

           

is treated as arising and charged to tax.

      (3)  

In the fourth and fifth tax years, if the whole of the adjustment income has

10

not been charged to tax in previous tax years, an amount equal to whichever

is the least of—

(a)   

the amount remaining untaxed,

(b)   

one-third of the original amount of the adjustment income, and

(c)   

one-sixth of the profits of the business for that tax year,

15

           

is treated as arising and charged to tax.

      (4)  

In the sixth tax year so much (if any) of the adjustment income as has not

previously been charged to tax is treated as arising and is charged to tax.

      (5)  

For the purposes of this paragraph “the profits of the business” means the

profits of the business as calculated for income tax purposes leaving out of

20

account—

(a)   

any adjustment expenses under Chapter 17 of Part 2 of ITTIOIA

2005, and

(b)   

any allowances or charges under CAA 2001.

      (6)  

This paragraph has effect subject to—

25

(a)   

paragraph 3 (effect of cessation of business), and

(b)   

paragraph 4 (election to accelerate charge).

Effect of cessation of business

3         

If before the whole of the adjustment income has been charged to tax the

person permanently ceases to carry on the business in question, paragraph

30

2 continues to apply but with the omission of the alternative limit in sub-

paragraph (2)(b) and (3)(c) referring to the profits of the business.

Election to accelerate charge

4     (1)  

A person who under paragraph 2 is liable to tax for a tax year on an amount

of adjustment income may elect for an additional amount to be treated as

35

arising in that tax year.

      (2)  

The election must be made on or before the first anniversary of the normal

self-assessment filing date for the tax year.

      (3)  

The election must specify the amount to be treated as income arising in the

tax year (which may be any amount up to the whole of the adjustment

40

income not previously charged to tax).

      (4)  

If an election is made, paragraph 2 applies in relation to any subsequent tax

year as if the original amount of adjustment income (as reduced by the

 

 

Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 1 — Income tax

342

 

previous application of this sub-paragraph) were reduced by the additional

amount treated as arising in the tax year for which the election is made.

Liability of personal representatives

5     (1)  

This paragraph applies in the case of the death of a person who would

otherwise have been liable to tax under this Part of this Schedule on

5

adjustment income.

      (2)  

The tax under this Part of this Schedule for which the person would

otherwise have been liable—

(a)   

shall be assessed and charged on the personal representatives, and

(b)   

is a debt due from and payable out of the deceased’s estate.

10

      (3)  

The personal representatives may make any election under this Part of this

Schedule that the deceased might have made.

Meaning of “business”

6          

In this Part of this Schedule “business” means—

(a)   

a trade, profession or vocation, or

15

(b)   

a UK property business or overseas property business.

Application of provisions to partnerships

7     (1)  

This paragraph applies where the business is carried on by the person in

partnership.

      (2)  

The amounts chargeable to tax under this Part of this Schedule for any tax

20

year are calculated as if the partnership were an individual resident in the

United Kingdom.

      (3)  

The person’s share of the amount charged to tax is determined—

(a)   

for the first tax year, according to the profit-sharing arrangements for

the twelve months ending immediately before the date on which the

25

change of accounting practice was adopted;

(b)   

for any subsequent tax year, according to the profit-sharing

arrangements for the twelve months immediately following the

twelve months used to determine the person’s share for the previous

year.

30

           

An election under paragraph 4 (election to accelerate charge) in relation to a

tax year must be made jointly by all the persons who have been members of

the partnership in the relevant twelve month period and are chargeable to

income tax.

      (4)  

If paragraph 3 applies (effect of cessation of business), each partner’s share

35

of any amount charged to tax on or after the cessation is determined as

follows—

(a)   

if the cessation occurs on the date on which the change of accounting

approach was adopted, according to the profit-sharing

arrangements for the twelve months ending immediately before that

40

date;

(b)   

if the cessation occurs after that date, but on or before the first

anniversary of that date, according to the profit-sharing

 

 

Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 2 — Corporation tax

343

 

arrangements for the period between that date and the date of

cessation;

(c)   

if the cessation occurs after the first anniversary of the date on which

the change of accounting approach was adopted, according to the

profit-sharing arrangements for the period between the immediately

5

preceding anniversary of that date and the date of cessation.

           

An election under paragraph 4 after the cessation must be made by each

former partner separately.

      (5)  

For the purposes of this paragraph “profit-sharing arrangements” means the

rights of the partners to share in the profits of the business for the period in

10

question.

      (6)  

In the case of a business carried on by a limited liability partnership the

operation of this Part of this Schedule is not affected by the partnership’s

ceasing to be one carrying on a trade, profession or other business with a

view to profit.

15

Cases where spreading already available

8          

This Part of this Schedule does not apply to adjustment income to which

section 238 of that Act applies (spreading on ending of special provision for

barristers and advocates in early years of practice).

Part 2

20

Corporation tax

Application of this Part of this Schedule

9     (1)  

This Part of this Schedule applies where—

(a)   

there is a change of accounting approach from one period of account

to the next in calculating the profits of a business for corporation tax

25

purposes,

(b)   

the later period of account ends on or after 22nd June 2005 and the

basis on which the profits for that period are calculated is in

accordance with UK GAAP (including SSAP 9 and Application Note

G as interpreted by UITF 40), and

30

(c)   

the earlier period of account ended before that date and the basis on

which profits for that period were calculated was in accordance with

UK GAAP (including SSAP 9 and Application Note G, but not as

interpreted by UITF 40),

           

and has effect in relation to any positive adjustment under section 64 of and

35

Schedule 22 to FA 2002 attributable to the change of basis from that

mentioned in paragraph (c) to that mentioned in paragraph (b).

      (2)  

In relation to a period for which accounts are drawn up in accordance with

international accounting standards, the references in sub-paragraph (1) to

requirements of UK GAAP shall be read as references to the corresponding

40

requirements of international accounting standards.

      (3)  

In this paragraph—

“SSAP 9” means Statement of Standard Accounting Practice No.9 on

Long-term contracts, issued by the Accounting Standards Board;

 

 

Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 2 — Corporation tax

344

 

“Application Note G” means Application Note G to Financial

Reporting Standard 5 issued by the Accounting Standards Board in

November 2003;

“UITF 40” means Abstract No.40 on Revenue recognition and service

contracts, issued by the Urgent Issues Task Force of the Accounting

5

Standards Board on 10th March 2005.

      (4)  

Any reference in this Part of this Schedule to the date on which the change

of accounting approach was adopted is to the first day of the first period of

account for which it was adopted.

      (5)  

To determine the amount of positive adjustment attributable to the change

10

of basis mentioned in the closing words of sub-paragraph (1), assume that

there was no other change of accounting approach.

Spreading of adjustment

10    (1)  

The adjustment shall be spread in accordance with the following rules.

      (2)  

In each of the first three accounting periods beginning with that in which the

15

whole of the adjustment would otherwise be charged to tax, an amount

equal to whichever is the less of—

(a)   

one-third of the amount of the original adjustment, and

(b)   

one-sixth of the profits of the business for that period,

           

is treated as arising and charged to tax.

20

      (3)  

In the fourth and fifth accounting periods, if the whole of the adjustment has

not been charged to tax in the previous periods, an amount equal to

whichever is the least of—

(a)   

the amount remaining untaxed,

(b)   

one-third of the amount of the original adjustment, and

25

(c)   

one-sixth of the profits of the business for that period,

           

is treated as arising and charged to tax.

      (4)  

In the sixth accounting period so much (if any) of the adjustment as has not

previously been charged to tax is treated as arising and is charged to tax.

      (5)  

For the purposes of this paragraph “the profits of the business” means the

30

profits of the business as calculated for corporation tax purposes leaving out

of account—

(a)   

any adjustment under Schedule 22 to FA 2002, and

(b)   

any allowances or charges under CAA 2001.

      (6)  

This paragraph has effect subject to—

35

(a)   

paragraph 11 (accounting periods of less than twelve months),

(b)   

paragraph 12 (effect of other events bringing accounting period to an

end), and

(c)   

paragraph 13 (election to accelerate charge).

Accounting periods of less than twelve months 

40

11    (1)  

This paragraph applies where by reason of—

(a)   

a change of accounting date,

(b)   

the company entering administration (see section 12(7ZA) of ICTA),

or

 

 

Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 2 — Corporation tax

345

 

(c)   

an insurance business transfer scheme (see section 12(7A) and (7B) of

that Act),

           

an accounting period to which paragraph 10 applies is a period of less than

twelve months (a “short period”).

      (2)  

In relation to a short period the references in that paragraph to one-third of

5

the amount of the original adjustment shall be read as references to the

proportion of that amount that the period bears to twelve months.

      (3)  

Where any of the accounting periods of the company falling within the

period of six years following the change of accounting approach is a short

period—

10

(a)   

the rule in paragraph 10(3) applies in relation to every accounting

period after the third and before that in which the sixth anniversary

of the change of accounting approach falls, and

(b)   

the rule in paragraph 10(4) applies in relation to the accounting

period in which that anniversary falls.

15

Effect of other events bringing accounting period to an end

12    (1)  

If before the whole of the adjustment has been charged to tax an accounting

period of the company ends by reason of—

(a)   

the company ceasing to be within the charge to corporation tax,

(b)   

the commencement of winding-up proceedings in respect of the

20

company (see section 12(7) of ICTA),

           

the rule in paragraph 10(4) applies in relation to that accounting period.

      (2)  

If the company permanently ceases to carry on the business in question

(without there being any event within sub-paragraph (1) above), paragraph

10 continues to apply but with the omission of the alternative limit in sub-

25

paragraph (2)(b) and (3)(c) referring to the profits of the business.

Election to accelerate charge

13    (1)  

A company that under paragraph 10 is liable to tax for an accounting period

on any amount may elect for an additional amount to be treated as arising in

that period.

30

      (2)  

The election must be made on or before the first anniversary of the filing date

for the company’s company tax return for the accounting period for which

the election is made.

      (3)  

The election must specify the amount to be treated as arising in the

accounting period (which may be any amount up to the whole of the

35

adjustment not previously charged to tax).

      (4)  

If an election is made, paragraph 10 applies in relation to any subsequent

accounting period as if the amount of the original adjustment (as reduced by

any previous application of this sub-paragraph) were reduced by the

additional amount treated as arising in the accounting period for which the

40

election is made.

Meaning of “business” etc

14    (1)  

In this Part of this Schedule “business” means—

(a)   

a trade or vocation, or

 

 

Finance (No.2) Bill
Schedule 15 — Accountancy change: spreading of adjustment
Part 2 — Corporation tax

346

 

(b)   

a Schedule A business or overseas property business.

Application of provisions to partnerships

15    (1)  

This paragraph applies where the business is carried on by the company in

partnership.

      (2)  

The amounts chargeable to tax under this Part of this Schedule are calculated

5

as if the partnership were a company resident in the United Kingdom.

      (3)  

The company’s share of any such amount is determined by reference to the

profit-sharing arrangements for the previous accounting period.

           

An election under paragraph 13 (election to accelerate charge) must be made

jointly by all the persons who have been members of the partnership in the

10

previous accounting period and are chargeable to corporation tax.

      (4)  

If paragraph 12(2) applies (effect of cessation of business), each partner’s

share of any amount charged to tax on or after the cessation is determined as

follows—

(a)   

if the cessation occurs on the date on which the change of accounting

15

approach was adopted, according to the profit-sharing

arrangements for the twelve months ending immediately before that

date;

(b)   

if the cessation occurs after that date, but on or before the first

anniversary of that date, according to the profit-sharing

20

arrangements for the period between that date and the date of

cessation;

(c)   

if the cessation occurs after the first anniversary of the date on which

the change of accounting approach was adopted, according to the

profit-sharing arrangements for the period between the immediately

25

preceding anniversary of that date and the date of cessation.

           

An election under paragraph 13 after the cessation must be made by each

former partner separately.

      (5)  

For the purposes of this paragraph “profit-sharing arrangements” means the

rights of the partners to share in the profits of the business for the period in

30

question.

      (6)  

A change in the persons carrying on a business does not constitute the

permanent cessation of the business for the purposes of this Part of this

Schedule so long as a person carrying on the business immediately before

the change continues to carry on the business immediately after the change.

35

      (7)  

In the case of a business carried on by a limited liability partnership the

operation of this Part of this Schedule is not affected by the partnership’s

ceasing to be one carrying on a trade, profession or other business with a

view to profit.

      (8)  

Nothing in this paragraph shall be read as affecting the operation of—

40

(a)   

paragraph 19 of Schedule 9 to FA 1996 (loan relationships), or

(b)   

paragraph 49 of Schedule 26 to FA 2002 (derivative contracts),

           

(under which certain debits and credits are not to be brought into account as

if the partnership were a company).

 

 

 
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