Clause 55: Bad debts

228.     This clause is based on the rule restricting relief for some debts in section 88D of ICTA. It also rewrites the relief in section 89 of ICTA for debts proved irrecoverable after a trade is treated as having ceased. See Change 8 in Annex 1. The corresponding rule for income tax is in section 35 of ITTOIA.

229.     Subsection (2)(a) refers to a deduction “by way of impairment loss”. That expression is not defined for the purpose of this clause. But clause 476(1) defines “impairment loss” for the purposes of the loan relationships legislation as “a debit in respect of the impairment of a financial asset”. “Impairment” includes “uncollectability”.

230.     Subsection (2)(b) deals with debts released as part of a “statutory insolvency arrangement”, which is defined in section 834(1) of ICTA.

231.     Subsection (3) provides a definition that clarifies the scope of the clause. All money debts (see clause 303) arising in a trade that produce an impairment loss are within the loan relationships rules (see clause 479). Even if a money trade debt is released as part of a statutory insolvency arrangement any loss on the debt is within the extended meaning of “impairment” in clause 476(1).

232.     There is a corresponding rule for income from holding an office in clause 970.

Clause 56: Car or motor cycle hire

233.     This clause restricts the amount that a company can deduct in respect of the cost of hiring certain cars or motor cycles with a retail price (when new) of more than £12,000. The restriction increases in line with the retail price. The clause is based on sections 578A and 578B of ICTA. The corresponding rule for income tax is in section 48 of ITTOIA.

234.     Section 578B(1) of ICTA says that for the purposes of section 578A of ICTA “car” includes a motor cycle. So this clause and clause 57 refer to a “car or motor cycle” throughout.

235.     Section 578A(4) of ICTA provides for amounts in respect of hire charges brought into account as a receipt of the trade under section 94 of ICTA (see clause 94 of this Bill) to be reduced in the same proportion as the deduction in respect of those charges is reduced under section 578A(3) of ICTA. Subsection (4) of this clause extends the same treatment to amounts in respect of hire charges taxed as a post-cessation receipt under clause 193 (debts released after cessation). See Change 9 in Annex 1.

Clause 57: Car or motor cycle hire: supplementary

236.     This clause defines various terms and is based on section 578B of ICTA. The corresponding rule for income tax is in section 49 of ITTOIA.

237.     Section 578B(2) of ICTA defines “qualifying hire car” for the purposes of section 578A of ICTA as a car hired under a hire-purchase agreement subject to an option to purchase which is exercisable for a nominal amount.

238.     Not all hire-purchase agreements require the hirer to exercise an option at the end of the hire period. Under some types of agreement, ownership of the vehicle passes automatically to the hirer at the end of the hire period. So subsection (2)(a) of this clause extends the definition of “qualifying hire car or motor cycle” to include a car or motor cycle where ownership passes without the exercise of an option to purchase. See Change 10 in Annex 1.

Clause 58: Hiring cars (but not motor cycles) with low CO2 emissions before 1 April 2013

239.     This clause excludes certain cars hired before 1 April 2013 under a contract entered into before that date from the restriction in clause 56. It is based on section 578A(2A) and (2B) of ICTA and section 60 of FA 2002. The corresponding rule for income tax is in section 50 of ITTOIA.

240.     Subsection (2) defines low emissions by reference to section 45D of CAA. A transitional rule in Schedule 1 to the Bill provides that, for a car hired on or before 31 March 2008, the carbon emissions limit in section 45D(4) of CAA remains 120 grams instead of the new limit of 110 grams.

Clause 59: Patent royalties

241.     This clause prohibits a deduction for patent royalties. It is based on section 74(1)(p) of ICTA.

242.     For most patent royalties this rule is overridden by the rules of the intangible fixed assets regime (rewritten in Part 8 of this Bill) which provide relief for trades as well as other commercial activities (see, in particular, clause 728(5) and Chapter 6 of Part 8 of this Bill). But for a minority of cases, this clause will remain relevant and will continue to prevent a deduction. That includes, for example, cases where the royalty is in respect of an intangible asset that is not a fixed asset of the payer’s trade.

Clause 60: Expenditure on integral features

243.     This clause draws attention to the rule in section 33A(3) of CAA. There is a signpost to that rule in section 74(1)(da) of ICTA. That subsection is repealed. The signpost is not formally rewritten but it is replaced in this clause (and in the property income clause 263).

Chapter 5: Trade profits: rules allowing deductions

Overview

244.     This Chapter contains provisions allowing various deductions in calculating the profits of a trade.

Clause 61: Pre-trading expenses

245.     This clause gives relief for expenses incurred before a trade starts. It is based on section 401 of ICTA. The corresponding rule for income tax is in section 57 of ITTOIA.

246.     Subsection (1) sets the scene. Consistent with other rules in this Part, it refers to the “date” on which (instead of the “time” when) a company starts to trade.

Clause 62: Tenants under taxed leases: introduction

247.     This clause provides for the following five clauses to apply where a tenant, under a taxed lease, uses land for the purposes of a trade. It is based on section 87(1), (2), (8) and (9A) of ICTA. The corresponding provision for income tax is in section 60 of ITTOIA.

248.     Chapter 4 of Part 4 (profits of property businesses: lease premiums etc) contains provisions (in clauses 217 to 222) treating certain premiums, and other amounts, relating to a lease (“the taxed lease”) as giving rise to receipts of a property business (of amount X). Chapter 4 of Part 4 also provides that in certain cases a tenant under the taxed lease obtains relief in respect of all, or part, of X:

• by reducing the amount of another property business receipt (clauses 227 to 230), or

• by being treated as an expense of a property business (clauses 231 to 234).

249.     Clauses 62 to 67 provide for certain cases in which a tenant under the taxed lease obtains relief as a trading expense in respect of all, or part, of X.

250.     Subsection (1) extends relief to cases in which X arose in relation to a lease of land outside the United Kingdom. See Change 11 in Annex 1. This is in accordance with the policy of treating UK and overseas property businesses in the same way as far as possible.

251.     The amount which a tenant can deduct in respect of rent which it is treated as paying under section 87(2) of ICTA is qualified by:

• the general rules as to deductions not allowable in computing the profits of a trade in section 74(1) of ICTA; and

• rules prohibiting or restricting the deduction of specific expenditure elsewhere in ICTA.

252.     In this Bill, the rules restricting deductions are in Chapter 4 of this Part and section 74(1)(a) of ICTA is rewritten in that Chapter in clause 54. Subsection (3) preserves the interaction of section 87(2) of ICTA and the general and specific rules restricting deductions in ICTA by providing that a deduction for an expense which a tenant is treated as incurring under clause 63 is subject to the application of any provision of Chapter 4 of this Part.

Clause 63: Tenants occupying land for purposes of trade treated as incurring expenses

253.     This clause treats a tenant under a lease, in respect of which an amount is brought into account by the landlord, (a “taxed lease”) as incurring an expense for each day on which the property held under the lease is occupied for the purposes of the tenant’s trade. It is based on section 87(2), (3) and (9) of ICTA. The corresponding rule for income tax is in section 61 of ITTOIA.

254.     Clauses 217 to 222 provide for a company to bring an amount into account as a receipt of a property business in cases where the company has granted a short-term lease at a premium (or in certain other cases).

255.     Sections 277 to 282 of ITTOIA make corresponding provision for a person to bring an amount into account as a receipt of a property business for income tax.

256.     Subsection (1) treats a tenant which, for a qualifying day, occupies land for the purposes of a trade as incurring an expense. This corresponds to the treatment of the landlord who has been, or would have been (see clause 227(4)), treated as receiving a receipt (“taxed receipt”) of the landlord’s property business.

257.     The formula in subsection (4) calculates the expense for each qualifying day by spreading an amount in respect of the taxed receipt evenly over the receipt period of that receipt. Defining “A” in that formula as “the unreduced amount of the taxed receipt” makes clear that the amount of the expense which the tenant is treated as incurring for each qualifying day is calculated by reference to the amount of the taxed receipt before any reductions or deductions.

258.     Subsection (5) modifies that formula for a qualifying day on which the tenant occupies only part of the land subject to the taxed lease for the purposes of a trade. The subsection requires the fraction of the land which is occupied by the tenant for the purposes of the trade to be calculated “on a just and reasonable basis”, where section 87(3) of ICTA requires a “just apportionment”. See Change 12 in Annex 1.

Clause 64: Limit on deductions if tenant entitled to mineral extraction allowance

259.     This clause prevents a double deduction where a tenant is entitled under section 403 of CAA to an allowance in respect of qualifying expenditure on acquiring a mineral asset. It is based on section 87(7) of ICTA. The corresponding rule for income tax is in section 62 of ITTOIA.

Clause 65: Tenants dealing with land as property employed for purposes of trade

260.     This clause applies to a tenant which, while not occupying a property, uses the property for the purposes of a trade - for example a company which lets premises held under a taxed lease to a person who sells only goods supplied by that company. It is based on section 87(4) and (6) of ICTA. The corresponding rule for income tax is in section 63 of ITTOIA.

261.     Subsection (2) treats the tenant as if it occupied the property, or part of it, for the purposes of relief under clause 63.

262.     Subsection (3) prevents the tenant obtaining relief under clause 63 to the extent that relief for the same day is allowed in calculating the profits of the tenant’s property business under clause 232.

Clause 66: Restrictions on section 63 expenses: lease premium receipts

263.     This clause restricts the expenses that clause 65 treats a tenant as incurring, under clause 63, by reference to the unreduced amount of a taxed receipt under a taxed lease if:

• a sublease has been granted out of the taxed lease; and

• in respect of the sublease, the unreduced amount of the taxed receipt reduces an amount which is brought into account as a receipt under Chapter 4 of Part 4 of this Bill or the corresponding provisions in ITTOIA (the “lease premium receipt”).

This clause is based on sections 87(5) and 87A of ICTA. The corresponding rule for income tax is in section 64 of ITTOIA.

264.     The restriction in this clause extends to cases where the unreduced amount of the taxed receipt reduces a lease premium receipt of an overseas property business. See Change 11 in Annex 1.

265.     Clause 63 treats the tenant as incurring an expense for each qualifying day in the receipt period of the taxed receipt relating to the taxed lease. The expense is calculated by reference to the unreduced amount of the taxed receipt.

266.     If, in respect of the sublease, the unreduced amount of the taxed receipt is used to reduce:

• under clause 228, the amount brought into account as a lease premium receipt under Chapter 4 of Part 4 of this Bill; or

• under section 288 of ITTOIA, the amount brought into account as a lease premium receipt under Chapter 4 of Part 3 of ITTOIA,

this clause makes a corresponding reduction to the amount of the expense which clause 63 treats as incurred by the tenant for a qualifying day in the receipt period of the lease premium receipt.

267.     Subsections (3) to (5) treat the tenant as incurring an expense for a qualifying day of the amount, if any, by which the “daily amount” of the taxed receipt exceeds:

• the “daily reduction” of the lease premium receipt; or

• if the qualifying day falls within the receipt period of more than one lease premium receipt, the “total of the daily reductions” of those lease premium receipts.

268.     This corresponds to the treatment in clause 233 of cases where lease premium receipts, with overlapping receipt periods, are reduced by reference to the unreduced amount of a single taxed receipt. See Change 13 in Annex 1.

269.     Subsection (6) contains formulas for calculating the “daily amount” of a taxed receipt and the “daily reduction” of a lease premium receipt. The subsection provides that the “daily reduction” only takes account of the taxed receipt in question. This corresponds to the treatment in clause 233 of cases where more than one taxed receipt reduces a single lease premium receipt. See Change 13 in Annex 1.

Clause 67: Restrictions on section 63 expenses: lease of part of premises

270.     This clause adapts clause 63 if clause 66 applies but the sublease does not extend to the whole of the premises subject to the taxed lease. It is based on sections 87(5) and 87A of ICTA. The corresponding rule for income tax is in section 65 of ITTOIA.

271.     Subsection (4) deals with the case where, for a qualifying day, there is more than one lease premium receipt, relating to subleases that do not extend to the whole of the premises, that has been reduced by the taxed receipt. This corresponds to the treatment in clause 234(5) of expenses under clauses 232 and 233 where more than one lease premium receipt falls to be reduced by reference to the same taxed receipt. See Change 13 in Annex 1.

272.     Subsection (5) adapts the formulas in clauses 63(4) and 66(6) by multiplying the unreduced amount of the taxed receipt in those formulas (“A”) by the fraction of the premises to which the sublease relates.

273.     Subsection (6) requires the fraction in subsection (5) to be calculated “on a just and reasonable basis”, where section 87(5) of ICTA, which applies section 37(6) of ICTA, is not explicit about the necessary basis of apportionment. See Change 12 in Annex 1.

Clause 68: Replacement and alteration of trade tools

274.     This clause allows a deduction for the cost of replacing or altering trade tools if the only reason a deduction would not be allowed is that the expenditure is of a capital nature. It is based on that part of section 74(1)(d) of ICTA which relates to deductions in respect of the replacement (“supply”) or alteration of implements, utensils or other articles employed for the purposes of the trade. The corresponding rule for income tax is in section 68 of ITTOIA.

275.     Expenditure on repairing trade premises or tools is revenue under the normal rules. And following the Special Commissioners decision in Jenners Princes Street Edinburgh Ltd v CIR (1998), SpC000166 ³, it is generally accepted that the reference in section 74(1)(d) of ICTA to expenditure “beyond the sum actually expended” does not prohibit the deduction of a provision for repairs if the cost of the repairs would be allowable. So that part of section 74(1)(d) of ICTA which deals with repairs is redundant and is not rewritten.

Clause 69: Payments for restrictive undertakings

276.     This clause allows a company to deduct certain amounts paid to employees for restrictive undertakings. Such amounts might not otherwise be deductible to the extent that they are capital in nature or fall foul of the “wholly and exclusively” rule. The clause is based on section 73(2) of FA 1988. The corresponding rule for income tax is in section 69 of ITTOIA.

277.     Section 73(2) of FA 1988 applies only to amounts brought into charge on the employee as earnings under section 225 of ITEPA. The former cross-refers to the latter where the definition of the amounts concerned is set out:

In this section “restrictive undertaking” means an undertaking which restricts the individual’s conduct or activities.

For this purpose it does not matter whether or not the undertaking is legally enforceable or is qualified.

278.     Subsection (1) provides for the deduction. In so doing it focuses on the key element for the rule to apply: the fact of payment.

279.     Subsection (2) provides a timing rule. The deduction allowed by section 73 of FA 1988 is taken in the accounting period in which the payment is made and no deduction is allowed in any other period. Similar words are used in clauses 77 and 88. This ensures that the timing rules for deductions in this Chapter which depend on payment are explicit and consistent.

Clause 70: Employees seconded to charities and educational establishments

280.     This clause allows a company carrying on a trade to deduct the cost of an employee seconded to a charity or educational establishment in calculating the trade profits. It is based on section 86 of ICTA. The corresponding rule for income tax is in section 70 of ITTOIA.

281.     Section 86 of ICTA allows a company which seconds an employee to a charity or educational establishment to deduct the cost of employing the seconded person to the extent that those costs would have been deductible if the employee continued to be employed for the purposes of the employer’s trade. This clause allows the employer to deduct all costs attributable to the seconded employee during the period of the secondment, regardless of whether those costs would have been allowed if the employee had not been seconded. See Change 14 in Annex 1.

Clause 71: Educational establishments

282.     This clause defines “educational establishment” for the purposes of clause 70. It is based on section 86 of ICTA. The corresponding rule for income tax is in section 71 of ITTOIA.

283.     Section 86(4)(c) of ICTA refers to an independent school registered under section 465 of the Education Act 1996. Section 465 of the Education Act 1996 was repealed by the Education Act 2002. So subsection (1)(c) of this clause refers instead to an independent school registered under section 161 of the 2002 Act.

284.     Schedule 1 to this Bill makes corresponding amendments to section 71 of ITTOIA.

Clause 72: Payroll deduction schemes: contributions to agents’ expenses

285.     This clause allows an employer a deduction for expenses incurred in operating a payroll deduction scheme. It is based on section 86A of ICTA. The corresponding rule for income tax is in section 72 of ITTOIA.

286.     The main rules for payroll deduction schemes are found in Part 12 of ITEPA. Under such a scheme an employer deducts charitable donations from employees’ salaries and pays them to an agent, who distributes them to the employees’ chosen charities.

287.     The agent’s administrative costs may be deducted from the donations. But many employers voluntarily pay the costs themselves so that the employees’ full donations can go to the chosen charities.

288.     Normally, payments made voluntarily to meet someone else’s expenses are not made wholly and exclusively for the purposes of a trade and therefore would not be deductible. Employers might get relief for donations to charitable agencies under the Gift Aid scheme. But there are restrictions on the operation of that scheme and relief would not be available if the agent was not itself a charity.

289.     This clause gives relief for the expenses as a trading deduction.

290.     The clause does not rewrite the reference to “profession or vocation” in Schedule D Case II. See Change 2 in Annex 1.

Clause 73: Counselling and other outplacement services

291.     This clause allows a deduction for certain expenses of counselling provided for employees. It is based on sections 589A and 589B of ICTA. The corresponding rule for income tax is in section 73 of ITTOIA.

292.     Subsection (3) cross-refers to ITEPA for the conditions that need to be met for the deduction to be allowed (section 310 of ITEPA exempts the employee from tax in respect of counselling received).

Clause 74: Retraining courses

293.     This clause allows a deduction for certain expenses of retraining provided for employees. It is based on section 588 of ICTA. The corresponding rule for income tax is in section 74 of ITTOIA.

294.     Subsection (2) cross-refers to ITEPA for the conditions that need to be met for the deduction to be allowed (section 311 of ITEPA exempts the employee from tax in respect of qualifying retraining courses).

295.     The clause does not rewrite section 588(3)(b) of ICTA. That provision makes a deduction in calculating the employer’s trade profits conditional on the employee’s exemption under section 311 of ITEPA in respect of the expenditure in question. This condition is not consistent with the similar provision rewritten in clause 73 and does not serve any material purpose. See Change 16 in Annex 1.

Clause 75: Retraining courses: recovery of tax

296.     This clause allows the recovery of tax when a deduction under clause 74 proves to have been wrongly allowed. It is based on section 588 of ICTA. The corresponding rule for income tax is in section 75 of ITTOIA.

297.     Subsection (2), like clause 74(2) of this Bill, cross-refers to the relevant provisions in ITEPA to refer to the conditions that have not been met.

Clauses 76 to 81: Redundancy payments etc

Overview

298.     These six clauses are based on the trading income rules relating to redundancy payments in sections 90, 579 and 580 of ICTA. The rules that deal with the employee’s liability are in section 309 of ITEPA. The corresponding rules for income tax are in sections 76 to 80 of ITTOIA.

299.     The trading income rules were introduced to reverse the decisions in CIR v Anglo Brewing Co Ltd (1925), 12 TC 803 and Godden v A Wilson’s Stores (Holdings) Ltd (1962), 40 TC 161. In those cases the courts held that certain payments to employees on the closing down of a trade were not deductible in arriving at trading profits. In neither case was the payment made in accordance with a pre-existing obligation.

300.     In 1999 HMRC announced (Tax Bulletin 39G, February 1999) that they would be guided by the decision in Commissioner of Inland Revenue v Cosmotron Manufacturing Co Ltd (1997), 70 TC 292 ⁴.

301.     In that Hong Kong case the Privy Council decided that redundancy payments made under a pre-existing obligation are deductible. Although that decision is merely persuasive in the United Kingdom, HMRC do not argue that payments made under a pre-existing obligation (including a statutory obligation) are covered by the Anglo Brewing and Wilson’s Stores decisions. The announcement in Tax Bulletin means that it may not be necessary to give the employer a statutory right to a deduction in calculating trading profits. But these clauses put the matter beyond doubt.