Clause 76: Redundancy payments and approved contractual payments

302.     This clause sets out the circumstances in which the following three clauses apply and explains the terms used in the main provisions. It is based on section 579 of ICTA. The corresponding rule for income tax is in section 76 of ITTOIA.

303.     The clauses retain the label “redundancy payment” (from section 579 of ICTA) and the expression “additional payment” (from section 90 of ICTA). This clause also introduces the label “approved contractual payment” to describe the payments that may replace redundancy payments in some cases.

Clause 77: Payments in respect of employment wholly in employer’s trade

304.     This clause sets out the main rule governing redundancy payments made by an employer. It is based on section 579 of ICTA. The corresponding rule for income tax is in section 77 of ITTOIA.

305.     If a payment is otherwise allowable (possibly as a result of the Cosmotron decision - see the overview for this group of clauses), this clause does not interfere with the accountancy treatment of the payment. In that case, the normal accounting basis applies.

306.     The deduction allowed by section 579 of ICTA is for “a redundancy payment .. made”. It is clear that a deduction is allowed only if a payment has been made. It follows that the deduction is to be taken in the accounting period in which the payment is made and that no deduction is allowed in any other period.

307.     Section 579(2)(b) of ICTA sets out the rule that applies if a redundancy payment is made after the discontinuance of the employer’s trade. The rule applies if the company ceases to carry on a trade or to be within the charge to corporation tax (see clause 41 of this Bill).

308.     In the case of a trade carried on by a company in partnership, section 114(1)(c) of ICTA deals with a change of membership of a partnership. The profits of the trade are calculated as if there is a transfer of the trade from one deemed company to another, unless a particular company carries on the trade before and after the change. Such a transfer means that the first deemed company ceases to carry on the trade. This brings it within the rule in section 579(2)(b) of ICTA.

309.     Subsection (5) of the clause sets out the partnership rule.

310.     Subsection (6) has a timing rule expressed in words similar to those used in clauses 69 and 88 of this Bill. This ensures that the timing rules for deductions in Chapter 5 of Part 3 of this Bill which depend on payment are explicit and consistent. This special timing rule applies if the payment is allowable only as a result of this clause.

Clause 78: Payments in respect of employment in more than one capacity

311.     This clause deals with the case where the employee is employed in more than one capacity. It is based on section 579 of ICTA. The corresponding rule for income tax is in section 78 of ITTOIA. The clause covers the case where there is a non-trade element in the employment and makes clear what part of the payment is allowed as a deduction in calculating trade profits.

312.     Section 579(5) of ICTA does not specify the basis on which to apportion the payment. This clause adopts the “just and reasonable” apportionment that is used consistently in this Bill. See Change 12 in Annex 1.

Clause 79: Additional payments

313.     This clause deals with any voluntary payments that an employer makes in addition to the statutory (or approved) payments dealt with in clause 77. It is based on section 90 of ICTA. The corresponding rule for income tax is in section 79 of ITTOIA.

314.     Unlike the payments in clause 77, these additional payments are allowable only if the sole reason for their disallowance is the cessation of the trade.

315.     The clause applies to payments in connection with the cessation of part of a trade in the same way as it applies to payments in connection with the cessation of a whole trade. See Change 17 in Annex 1.

Clause 80: Application of section 79 in cases involving partnerships

316.     This clause clarifies what happens on a change of partnership. It is based on sections 90 and 114 of ICTA. The corresponding rule for income tax is in section 79A of ITTOIA (inserted by Schedule 1 to this Bill).

317.     Section 90(3) of ICTA refers to the “discontinuance” of a trade. That word has to be interpreted in the light of sections 114 and 337 of ICTA: the trade is not treated as discontinued unless there is a complete change in the companies carrying it on.

318.     A redundancy payment is not disallowable solely on account of a partial change of companies carrying on a trade. This clause puts it beyond doubt that a partial change of companies carrying on a trade does not count as a cessation.

Clause 81: Payments made by the Government

319.     This clause sets out what happens if it is not the employer who makes the redundancy payment to the employee. It is based on section 579 of ICTA. The corresponding rule for income tax is in section 80 of ITTOIA.

320.     In some cases the Government makes the payment and is reimbursed by the employer. This clause ensures that the employer is allowed a trading deduction.

321.     The references in ICTA to section 166 of the Employment Rights Act 1996 and Article 201 of the Employment Rights (Northern Ireland) Order 1996 (SI 1996/1919 (NI 16)) are corrected to section 167 and Article 202.

322.     Subsection (1)(b) reflects the effect of the devolution settlements. See Change 15 in Annex 1.

Clause 82: Contributions to local enterprise organisations or urban regeneration companies

323.     This is the first of five clauses that allow deductions for contributions to local enterprise agencies, training and enterprise councils, local enterprise companies in Scotland, business links and urban regeneration companies. The clauses are based on sections 79, 79A and 79B of ICTA. The corresponding rules for income tax are in sections 82 to 86 of ITTOIA.

324.     Contributions to these bodies are generally donations and are likely to be made for benevolent reasons, rather than wholly and exclusively for the purposes of the trade (see clause 54 of this Bill).

325.     Subsection (3) is an anti-avoidance rule. It prevents a company using the clause to obtain a deduction for non-trade expenditure, such as funding the training of a member of a shareholder’s family, by passing funds through one of these bodies. The source legislation disallows any deduction if there is a benefit to the company (or a connected person). This clause merely restricts the deduction by the value of the benefit. See Change 18 in Annex 1.

326.     Subsections (5) and (6) set out what happens if the company (or a connected person) receives a benefit in connection with the contribution. The charge on the benefit applies if the benefit is received by a person “connected with” the company. That expression is explained in clause 1316.

327.     Subsection (6)(b) deals with the case where the recipient’s trade has ceased before the benefit is received. It treats the benefit explicitly as a post-cessation receipt. See Change 19 in Annex 1.

328.     Subsection (7) makes clear the extent of the disallowance under subsection (3) or charge under subsection (6).

329.     The subsection limits the “disqualifying benefit” in accordance with HMRC practice. See Change 18 in Annex 1.

Clause 83: Meaning of “local enterprise organisation”

330.     This clause lists some of the organisations that qualify for deductions to be allowed under clause 82. It is based on the definitions in sections 79(4) and 79A(5) of ICTA. The corresponding rule for income tax is in section 83 of ITTOIA.

331.     Subsection (2) deals with local enterprise agencies. These agencies may take a number of forms and do not have an approval procedure for any other purpose. So the tax legislation specifies that they must be approved for this purpose.

332.     The subsection introduces the expression “relevant national authority”. The expression is used also in clauses 84 and 85.

333.     The subsection reflects the effect of the devolution settlements. See Change 15 in Annex 1. The National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672) devolves the functions of the Secretary of State under section 79 of ICTA to the National Assembly for Wales. So the “relevant national authority” may be the Assembly. But the Order does not refer to section 79A of ICTA. So the equivalent functions in subsections (3) and (5) of this clause are still exercised only by the Secretary of State.

334.     Subsections (3) to (5) deal with other bodies to which clause 82 applies. These other bodies have to be set up in a particular way for other reasons and the tax legislation merely follows the existing procedures.

Clause 84: Approval of local enterprise agencies

335.     This clause and clause 85 set out the detailed rules that apply for the approval of local enterprise agencies and the withdrawal of such approval. They are based on section 79 of ICTA. The corresponding rule for income tax is in section 84 of ITTOIA.

336.     The clause sets out the basic procedure for approving a local enterprise agency. The references to “relevant national authority” are explained in clause 83(2).

Clause 85: Supplementary provisions with respect to approvals

337.     This clause and clause 84 set out the detailed rules that apply for the approval of local enterprise agencies and the withdrawal of such approval. They are based on section 79 of ICTA. The corresponding rule for income tax is in section 85 of ITTOIA.

338.     The references to “relevant national authority” in this clause are explained in clause 83(2).

Clause 86: Meaning of “urban regeneration company”

339.     This clause sets out the detailed rules that apply for the designation of urban regeneration companies. It is based on section 79B of ICTA. The corresponding rule for income tax is in section 86 of ITTOIA.

Clause 87: Expenses of research and development

340.     This clause gives relief for the cost of research and development undertaken by or on behalf of a company carrying on a trade. It is based on section 82A of ICTA. The corresponding rule for income tax is in section 87 of ITTOIA.

Clause 88: Payments to research associations, universities etc

341.     This clause gives relief for payments by a company carrying on a trade to various bodies engaged in scientific research. It is based on section 82B of ICTA. The corresponding rule for income tax is in section 88 of ITTOIA.

342.     The amendments to section 82B of ICTA in section 15 of F(No 2)A 2005 have effect in relation to sums paid to an association within subsection (1)(a) of this clause during any accounting period of the association beginning on or after a day to be appointed by the Treasury under section 13(6) of F(No 2)A 2005.

343.     Section 82B(1) of ICTA allows a deduction for “the sum paid”. So subsection (2) allows a deduction for the accounting period in which the payment is made. The wording is similar to that used in clauses 69 and 77. This ensures that the timing rules for deductions in Chapter 5 of this Part of this Bill which depend on payment are explicit and consistent.

344.     Section 82B(4) of ICTA provides that “the Board” shall refer any question as to whether, or to what extent, activities constitute scientific research for the purposes of section 82B to the Secretary of State. Section 832(1) of ICTA defines “the Board” as “the Commissioners of Inland Revenue”.

345.     In practice, the function in section 82B of ICTA is exercised by an officer of Revenue and Customs. So subsection (6) of this clause provides that any question as to what constitutes scientific research must be referred to the Secretary of State by “an officer of Revenue and Customs”. This Change corresponds to Part B of Change 149 in ITTOIA (as amended by CRCA) and so brings the income tax and corporation tax codes back into line. See Change 1 in Annex 1.

Clause 89: Expenses connected with patents

346.     This clause allows a deduction for expenses connected with patents. It is based on section 83 of ICTA. The corresponding rule for income tax is in section 89 of ITTOIA.

347.     The clause sets out the expenses that are allowable. The deduction is on the basis of expenses incurred. This relaxes any requirement in the source legislation that fees have to be paid before a deduction can be made. See Change 20 in Annex 1.

348.     For most expenses connected with patents 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 Chapter 6 of that Part). But, for a minority of cases, this clause remains relevant and allows a deduction.

Clause 90: Expenses connected with designs or trade marks

349.     This clause allows a deduction for expenses connected with designs or trade marks. It is based on section 83 of ICTA. The corresponding rule for income tax is in section 90 of ITTOIA.

350.     The clause sets out the expenses that are allowable. The deduction is on the basis of expenses incurred. This relaxes any requirement in the source legislation that fees have to be paid before a deduction can be made. See Change 20 in Annex 1.

351.     For most expenses connected with designs or trade marks 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 Chapter 6 of that Part). But, for a minority of cases, this clause remains relevant and allows a deduction.

Clause 91: Payments to Export Credits Guarantee Department

352.     This clause allows a company carrying on a trade to deduct the cost of certain payments to the Export Credits Guarantee Department (“ECGD”). It is based on section 88 of ICTA. The corresponding rule for income tax is in section 91 of ITTOIA.

353.     Section 88 of ICTA refers to payments made under arrangements made by the Secretary of State in pursuance of section 11 of the Export Guarantees and Overseas Investment Act 1978. This clause refers instead to arrangements made under section 2 of the Export and Investment Guarantees Act 1991 which replaced the 1978 Act.

354.     Section 13(1) of the Export and Investment Guarantees Act 1991 delegates the functions of the Secretary of State under section 2 of the 1991 Act to the ECGD. So the reference to the Secretary of State in section 88 of ICTA is not rewritten in this clause.

355.     Section 88 of ICTA allows a trader to deduct “sums paid” to the ECGD. This clause instead allows a deduction for any “sum payable” by the trader. See Change 21 in Annex 1.

Clause 92: Levies etc under FISMA 2000

356.     This clause provides for the inclusion, in a calculation of trading profits, of certain payments arising from FISMA. It is based on section 76A of ICTA. The corresponding rule for income tax is in section 155 of ITTOIA.

357.     Subsection (1) applies the clause to any company that pays a “levy” and removes three minor restrictions.

• Section 76A of ICTA applies only to an “authorised person”. This clause removes that restriction.

• The clause does not reproduce the restriction in section 76A(2)(e) of ICTA for some “costs”.

• A trading company that also has investment business may qualify for a deduction under this clause which is denied by section 76A(1)(b) of ICTA.

See Change 22 in Annex 1.

358.     Subsection (1) provides for a deduction. Most FISMA levies would be allowable expenses under the basic trade profit calculation rules. The purpose of this provision is to deal with the exceptional case where deduction of a levy would otherwise be prevented by a prohibitive rule.

359.     The expenses allowable are determined by reference to FISMA. Subsections (2) and (3) provide the links with FISMA.

360.     There is a similar rule about FISMA repayments in clause 104.

Chapter 6: Trade profits: receipts

Overview

361.     This Chapter contains provisions on how various receipts are to be treated in calculating the profits of a trade.

Clause 93: Capital receipts

362.     This clause is the mirror image of clause 53 (capital expenditure). It is new. The corresponding rule for income tax is in section 96 of ITTOIA.

363.     Subsection (1) sets out the general rule that items of a capital nature are not to be treated as receipts of a trade.

364.     It is a long-established principle that capital receipts are ignored in calculating tax on income.

365.     Subsection (2) disapplies the general rule in subsection (1) where there is statutory provision for a capital sum to be taken into account as a receipt in calculating the profits of a trade. See, for example, clause 103 (sums recovered under insurance policies etc) and the rules in Part 5 (loan relationships), Part 7 (derivative contracts) and Part 8 (intangible fixed assets).

Clause 94: Debts incurred and later released

366.     If an amount owed by a company is released, this clause treats the amount released as a trading receipt. The clause is based on section 94 of ICTA. The corresponding rule for income tax is in section 97 of ITTOIA.

367.     Subsection (1)(c) sets out the exception that applies if the debt is released as part of a “statutory insolvency arrangement”, which is defined in section 834(1) of ICTA.

368.     The source legislation treats the sum as a receipt “in the period in which the release is effected”. The clause makes it clear that the period in question is an accounting period. If the company is no longer carrying on the trade when the debt is released, the amount released is charged to tax as a post-cessation receipt (see clause 193 of this Bill).

Clause 95: Acquisition of trade: receipts from transferor’s trade

369.     This clause sets out what happens if a successor to a trade receives a sum that arose from the trade when it was carried on by the predecessor. It is based on section 106 of ICTA. The corresponding rule for income tax is in section 98 of ITTOIA.

370.     If a sum arises from a trade that has ceased, the usual rule is that the sum is a post-cessation receipt (see Chapter 15 of this Part). But, if the right to receive the sum is transferred with the trade to a company which takes over the trade, this clause applies instead.

371.     Subsection (1) refers to a “person” ceasing to carry on a trade. That person may be one of the partners in a firm. If a firm ceases to carry on a trade, all its partners must also cease. So the clause applies in either case.

372.     Subsection (2) treats the sum as a receipt of the successor’s trade. It is not charged on the predecessor. The source legislation treats the sum as a receipt “in the period in which it is received”. The clause makes it clear that the period in question is an accounting period.

373.     Different rules apply if the right to receive sums is transferred to a person who does not take over the trade (see clause 194 of this Bill).

Clause 96: Reverse premiums

374.     This is the first of a group of five clauses based on section 54 of, and Schedule 6 to, FA 1999. This legislation was introduced following the decision of the Privy Council in Commissioner of Inland Revenue v Wattie and another (1998), 72 TC 639 ⁵. An inducement (a “reverse premium”) paid to a tenant to take a lease of land is taxed as income in the hands of the tenant. The corresponding rules for income tax are in sections 99 to 103 of ITTOIA.

375.     Subsection (2) introduces the term “the recipient”, which is used throughout this group of clauses.

376.     Subsection (3) identifies the transaction which gives rise to a reverse premium.

377.     Subsection (4) refers to an interest in land being “granted”. This distinguishes such a transaction from one in which an interest is assigned. The general rule is that a charge to tax on a reverse premium arises on the grant of an interest in land but not on its assignment. But assignment can give rise to a charge if the assignor is connected with the grantor.

378.     The meaning of “reverse premium” in this clause is applied for the purpose of clause 250 by subsection (6) of that clause.

379.     Schedule 2 to this Bill rewrites the transitional provision in section 54(2) of FA 1999. These clauses do not apply to pre-1999 reverse premiums.

Clause 97: Excluded cases

380.     This clause brings together the various exclusions from the charge on reverse premiums. It is based on paragraphs 5 and 7 of Schedule 6 to FA 1999. The corresponding rule for income tax is in section 100 of ITTOIA.

381.     Subsection (2) rewrites the rule in paragraph 6 of Schedule 6 to FA 1999 as it was before it was repealed by ITTOIA. It is possible for a company to receive a reverse premium in connection with a property transaction entered into by an individual involving the individual’s only or main residence. The income tax relief is rewritten in section 100(2) of ITTOIA. It was not intended that ITTOIA should withdraw this relief from a company. So this subsection restores the position as it was before ITTOIA. See Change 23 in Annex 1.

Clause 98: Tax treatment of reverse premiums

382.     This clause treats a reverse premium as a revenue receipt, rather than a capital item. It is based on paragraph 2 of Schedule 6 to FA 1999. The corresponding rule for income tax is in section 101 of ITTOIA.

383.     If the transaction giving rise to the reverse premium is at arm’s length there is no statutory timing rule; the normal accountancy treatment applies. If the transaction is not at arm’s length, there is a timing rule in clause 99.

Clause 99: Arrangements not at arm’s length

384.     If a property transaction is not at arm’s length there is a special timing rule. This clause provides that the whole of the reverse premium is taxed when the property transaction is entered into. It is based on paragraph 3 of Schedule 6 to FA 1999. The corresponding rule for income tax is in section 102 of ITTOIA.

385.     Subsection (1) refers to “connected persons”. That expression is defined for the purpose of this clause in clause 100.

386.     Subsection (5) deals with the case where the recipient enters into a property transaction for the purposes of a trade but the trade has not yet started. In that case, the reverse premium is brought into account when the trade starts.