Clause 100: Connected persons and property arrangements

387.     This clause sets out the special meaning of “connected persons” that applies for the group of clauses on reverse premiums. The basic definition is in clause 1316, which imports the definition of “connected persons” in section 839 of ICTA. The clause is based on paragraph 8 of Schedule 6 to FA 1999. The corresponding rule for income tax is in section 103 of ITTOIA.

Clause 101: Distribution of assets of mutual concerns

388.     This clause deals with the consequences for a trader of receiving a distribution from a mutual concern that is a corporate body. It is based on section 491 of ICTA. The corresponding rule for income tax is in section 104 of ITTOIA.

389.     Subsection (1) sets out the circumstances in which a distribution may give rise to a tax charge. It refers to a distribution out of assets that “represent profits” of the concern. This is not quite the same as “assets of a body corporate, other than assets representing capital”, as identified in section 491(1) of ICTA. The difference is that the clause excludes assets that represent capital gains of the concern. See Change 24 in Annex 1.

390.     Subsection (2) is the general rule: the distribution is treated as a receipt of the trade.

391.     Subsection (3) deals with the case where the distribution is received after the trade has ceased. The clause treats the distribution explicitly as a post-cessation receipt. See Change 19 in Annex 1.

392.     In this Part the rules apply to the company carrying on a trade rather than to the trade itself. So section 337(1)(a) of ICTA is not needed to treat a trade as ceasing when there is a change of company carrying it on. Subsection (3) of this clause reproduces the combined effect of section 491(3)(b) and (4) of ICTA.

393.     Subsection (5) is a special rule that applies if the right to receive a distribution is transferred other than at arm’s length. Market value is substituted for the actual amount received.

394.     The clause omits the references to mutual insurance and industrial and provident societies in section 491(9) and (11) of ICTA. Those examples were intended to help readers but there is no comprehensive definition of “mutual business”. The subsections were intended to deal with particular doubts which were common when the provision was enacted in 1964. Those doubts do not exist today.

Clause 102: Industrial development grants

395.     This clause deals with the treatment of certain grants under the Industrial Development Act 1982 or the corresponding provision in Northern Ireland. It is based on section 93 of ICTA. The corresponding rule for income tax is in section 105 of ITTOIA.

396.     This clause does not rewrite the references in section 93(2)(a) of ICTA to section 7 or 8 of the Industry Act 1972 or in section 93(2)(b) to section 1 of the Industries Development Act (Northern Ireland) 1966 and section 4 of the Industries Development Act (Northern Ireland) 1971. These enactments were repealed or replaced in 1982 and there are no outstanding instalments under the old enactments.

397.     Section 93(3) of ICTA disapplies section 93(1) of ICTA in the case of grants towards the payment of all or part of a corporation tax liability made under Article 7 of the Industrial Development (Northern Ireland) Order 1982. Grants in respect of corporation tax liabilities cannot be made under any of the enactments listed in subsection (1) of this clause other than Article 7 of the Industrial Development (Northern Ireland) Order 1982. So subsection (2) excludes all grants in respect of corporation tax liabilities.

Clause 103: Sums recovered under insurance policies etc

398.     This clause concerns insurance recoveries. It is based on section 74(1)(l) of ICTA. The corresponding rule for income tax is in section 106 of ITTOIA.

399.     Section 74(1)(l) of ICTA prohibits the deduction in computing a trader’s profits of “any sum recoverable under an insurance or contract of indemnity”. This is regardless of whether the sum is revenue or capital in nature.

400.     When a sum is recovered under an insurance policy or contract of indemnity in an accounting period other than the accounting period in which the event in respect of which it is received occurs, section 74(1)(l) of ICTA requires any deduction made in respect of that event to be adjusted to reflect the recovery.

401.     This clause provides instead that a capital sum recovered by a trader under an insurance policy or a contract of indemnity is brought into account as a receipt in calculating the profits of the trade to the extent that the loss or expense has been deducted in calculating those profits. This means that the timing of the receipt will follow the accountancy treatment. See Change 25 in Annex 1.

402.     No special provision is needed for sums of a revenue nature.

Clause 104: Repayments under FISMA 2000

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

404.     Subsection (2) provides for a repayment under FISMA to be treated as a trade receipt. Most FISMA repayments would be charged to tax under the basic trade profit calculation rules. The purpose of this provision is to deal with the exceptional case where the FISMA repayment would not otherwise be a trade receipt.

405.     The receipts chargeable are determined by reference to FISMA. Subsections (3) and (4) provide the links with FISMA.

406.     There is a similar rule about FISMA levies etc in clause 92.

Chapter 7: Trade profits: gifts to charities etc

Clause 105: Gifts of trading stock to charities etc

407.     This clause sets out the main rule for gifts of trading stock. It is based on sections 83A and 84 of ICTA, which give relief for gifts to charities and educational establishments respectively. The corresponding rule for income tax is in section 108 of ITTOIA.

408.     When a company disposes of trading stock other than in the course of a trade the general rule is that the market value of the stock is taken into account in calculating the profits of the trade (see Chapter 10 of this Part of this Bill). This clause sets out an exception to this general rule and applies if the company disposes of trading stock by way of gift to a charity etc.

409.     There is a test for gifts to educational establishments in section 84(1)(a) of ICTA concerning the use to which the gift is put in the business of the educational establishment. There is no equivalent test in the rules for the relief for gifts to charities, in section 83A of ICTA. This clause does not reproduce the condition in section 84(1)(a) of ICTA. See Change 26 in Annex 1.

410.     Subsection (1) combines the ICTA reliefs for gifts to charities and gifts to educational establishments. It includes the extension of the relief to registered clubs in Part 3 of Schedule 18 to FA 2002. The relief covers gifts “for the purposes of” charities etc. See Change 27 in Annex 1.

411.     The clause does not require a claim by the company. In this respect, the clause is different from section 84(3) of ICTA (but not from section 83A). See Change 28 in Annex 1.

412.     Subsection (4) does not reproduce the references to the British Museum and the Natural History Museum. These bodies are charities within subsection (1)(a) of the clause.

Clause 106: Meaning of “designated educational establishment”

413.     This clause defines “designated educational establishment” for the purpose of clause 105. It is based on section 84 of ICTA. The corresponding rule for income tax is in section 110 of ITTOIA.

414.     Section 84(6) of ICTA provides that “the Board” shall refer any question as to whether a particular establishment is a designated educational establishment for the purposes of the section to the Secretary of State or the Department of Education for Northern Ireland. Section 832(1) of ICTA defines “the Board” as “the Commissioners of Inland Revenue” (to be taken as a reference to the Commissioners for Her Majesty’s Revenue and Customs, in accordance with section 50(1) of CRCA).

415.     In practice, the function in section 84 of ICTA is exercised by an officer of Revenue and Customs. So subsection (3) of this clause provides that any question as to whether a particular establishment is a designated educational establishment must be referred to the Secretary of State by “an officer of Revenue and Customs”. See Change 1 in Annex 1.

416.     The National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672) devolves the functions of the Secretary of State under section 84 of ICTA to the Welsh Ministers. So this clause refers to the Welsh Ministers (and the Assembly).

Clause 107: Gifts of medical supplies and equipment

417.     This clause sets out the main rule for gifts of medical supplies and equipment. It is based on section 55 of FA 2002. It also gives a trading deduction for expenses connected with such gifts.

418.     As in clause 105, this clause overrides the rule in Chapter 10 of this Part of this Bill that the market value of a gift should be treated as a trade receipt.

419.     Subsection (3) is the special rule that the costs of getting the medical supplies and equipment to the recipient are allowed as a deduction.

420.     Subsection (5) is based on section 55(6) of FA 2002. The power of the Treasury to exclude certain medical supplies and equipment has not been used.

421.     There is no corresponding rule for income tax. So section 55 of FA 2002 is repealed by Schedule 1 to this Bill. See Change 29 in Annex 1.

Clause 108: Receipt of benefits by donor or connected person

422.     This clause sets out what happens if a company receives a benefit in connection with a gift of trading stock or plant and machinery. It is based on sections 83A and 84 of ICTA and section 55 of FA 2002. The corresponding rule for income tax is in section 109 of ITTOIA.

423.     Subsection (1) applies the clause if a benefit is received by the company or a connected person. Clause 82 of this Bill (contributions to local enterprise organisations or urban regeneration companies) uses the same approach. The benefit must be in connection with a gift for which relief has been given under clause 105, clause 107 or the corresponding capital allowances rule.

424.     Subsection (2) extends the recovery charge to a benefit attributable to the costs associated with making a gift of medical supplies and equipment.

425.     If the donor is still carrying on the trade when the benefit is received the value of the benefit is treated as a trading receipt.

426.     If the donor has ceased to carry on the trade when the benefit is received the value of the benefit is treated as a post-cessation receipt. This treatment replaces the general charge under Schedule D Case VI. See Change 19 in Annex 1.

Chapter 8: Trade profits: herd basis rules

Overview

427.     This Chapter gives the rules for what is commonly known as the “herd basis”. It is based on Schedule 5 to ICTA. The corresponding rules for income tax are in Chapter 8 of Part 2 of ITTOIA.

428.     The object of the herd basis is to treat a herd of animals in a similar fashion to a capital asset. Without the election the individual animals in the herd would be treated as separate items of trading stock. With the election:

• there is no tax allowance for the initial cost of, or any subsequent increase in the size of, the herd;

• the net cost of replacing animals in the herd is allowable;

• any profit or loss on the sale of a single animal or a small number of animals from the herd without replacement is included in the profits of the trade; and

• if the whole, or a substantial part, of the herd is sold and not replaced the resulting profit or loss is not included in the profits of the trade.

429.     An election can be made only in respect of animals kept for their produce.

Clause 109: Election for application of herd basis rules

430.     This clause allows a taxpayer to elect for the “herd basis rules” to apply and introduces some basic concepts. It is based on paragraphs 1, 2, 3 and 9 of Schedule 5 to ICTA. The corresponding rules for income tax are in section 111 of ITTOIA.

431.     Subsection (1) allows a company or firm of which a company is a member to make a “herd basis election” if it keeps, or has kept, a “production herd”. “Production herd” is defined in clause 110(1)(c). The effect of a “herd basis election” is that the “herd basis rules” apply. These rules are set out in clauses 112 to 121. The time limits for making the election are set out in clauses 122 to 124.

Clause 110: Meaning of “animal”, “herd”, “production herd” etc

432.     This clause provides various definitions used in the Chapter. It is based on paragraphs 8 and 9 of Schedule 5 to ICTA. The corresponding rules for income tax are in section 112 of ITTOIA.

433.     This clause would be the natural home for the rule in paragraphs 7 and 9(5) of Schedule 5 to ICTA that prevents the herd basis rules applying to working animals. Paragraphs 7 and 9(5) of Schedule 5 to ICTA exclude certain animals from being part of a production herd. These are animals kept for the work they do in connection with the trade or those kept for public exhibition, or racing or other competitive purposes. This rule is unnecessary because animals in a production herd must be kept wholly or mainly for the sake of their produce. So the exclusions are not rewritten.

434.     Subsection (1)(a) rewrites the definition of “animal” in paragraph 9 of Schedule 5 to ICTA. Most of the definitions in paragraph 9 of Schedule 5 to ICTA refer to “animals and other living creatures”. The main reason for the reference to “other living creatures” is to make clear that the Schedule applies to birds.

435.     Subsection (1)(c) rewrites the definition of “production herd” in paragraph 8(5) of Schedule 5 to ICTA. Herd basis elections are made by reference to classes of production herd. See clause 122. Clause 111(2) identifies when different production herds are treated as being of the same class.

436.     Subsection (6) makes clear that an immature animal can be treated as added to the herd when it becomes mature. There is a definition of maturity for female animals in clause 111(5).

Clause 111: Other interpretative provisions

437.     This clause provides further definitions. It is based on paragraphs 3, 8 and 9 of Schedule 5 to ICTA. The corresponding rules for income tax are section 113 of ITTOIA.

438.     Subsection (2)(a) applies if production herds of animals of different species are kept for the same product; for example, a herd of cows and a herd of goats both kept for milk production. Each herd satisfies the definition of production herd. Subsection (2)(a) prevents them being treated as of the same class.

439.     Subsection (2)(b) prevents animals of the same species being treated as of the same class if they are kept for different products; for example, one herd of cows kept for milk production and another herd of cows kept for its calves.

440.     Subsection (6) clarifies what is meant by “a substantial part of the herd”. This is a question of fact depending on the circumstances. But 20% of the herd is always regarded as substantial. This change clarifies this practice. This change reproduces Change 32 in ITTOIA. See Change 30 in Annex 1.

441.     The following clauses refer to “a substantial part of the herd”.

• Clause 116(1) (sale of animals from the herd);

• Clause 117(1) (sale of whole or substantial part of herd);

• Clause 118(4) and (5) (acquisition of new herd begun within five years of sale);

• Clause 120(1) (replacement of part sold within five years of sale); and

• Clause 124(1) (slaughter under disease control order).

Clause 112: Initial cost of herd and value of herd

442.     This clause sets out the treatment of the initial cost, and value, of the herd. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 114 of ITTOIA.

Clause 113: Addition of animals to herd

443.     This clause sets out the treatment of additions to the herd. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 115 of ITTOIA.

444.     Subsection (1) makes clear that there is a difference between additions, to which this clause applies, and replacements dealt with in clause 114.

445.     Subsection (2) prevents a deduction for the cost of the additional animal. It is a similar rule to clause 112(1).

Clause 114: Replacement of animals in herd

446.     This clause sets out the treatment if an animal in the herd is replaced. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 116 of ITTOIA.

447.     Subsection (1) introduces the terms “old animal” to describe an animal leaving the herd and “new animal” to describe the animal that replaces it. The circumstances in which an animal is treated as sold and the meaning of “sale proceeds” are extended by the definitions in clause 111(3) and (4).

448.     Subsection (4) deals with the deduction due for the replacement animal. The basic principle in paragraph 3(4)(b) of Schedule 5 to ICTA is that the cost of the second animal is deducted as a trading expense. But paragraph 3(4)(b) of Schedule 5 to ICTA provides for an exception - “in so far as that cost consists of such costs as are allowable apart from the provisions of this Schedule as deductions in computing profits of farming under Case I of Schedule D”.

449.     It is not clear from ICTA what these costs are. In fact the exception is aimed at the case where the replacement animal comes from trading stock. Here the costs of breeding or acquiring it and, if relevant, rearing it to maturity have already been allowed. The farmer is not allowed a double deduction for costs that have already been allowed.

450.     This clause does not reproduce that part of paragraph 3(4)(b) of Schedule 5 to ICTA which refers to the cost of the new animal being subject to paragraph 3(6) of Schedule 5 to ICTA. This reference appears to be an error made in the 1988 consolidation of ICTA. It is generally accepted that it is the rule in paragraph 3(4)(a), and not paragraph 3(4)(b), of Schedule 5 to ICTA which should be qualified by paragraph 3(6) of Schedule 5 to ICTA.

Clause 115: Amount of receipt if old animal slaughtered under disease control order

451.     This clause limits the amount of the receipt taxed under clause 114 if the old animal is slaughtered under a disease control order. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 117 of ITTOIA.

452.     Paragraph 3(6) of Schedule 5 to ICTA restricts the amount of the receipt to “the amount allowable as a deduction”. It is not immediately clear what this amount is. This clause makes clear that it is the amount allowable as a deduction in respect of the new animal. This is called “the equivalent amount for the new animal”.

453.     Subsections (4) and (5) define “the equivalent amount for the new animal”. Subsection (4) deals with the case in which the replacement animal comes from the farmer’s trading stock. Subsection (5) deals with all other cases.

Clause 116: Sale of animals from herd

454.     This clause sets out the rules that apply if an animal is sold from the herd and not replaced. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 118 of ITTOIA.

Clause 117: Sale of whole or substantial part of herd

455.     This is the first of three clauses that set out the rules relating to the sale of all or a substantial part of the herd within 12 months. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 119 of ITTOIA.

456.     The clause merges the rules in paragraph 3(7) to (9) of Schedule 5 to ICTA. This Change reproduces Change 33 in ITTOIA. See Change 31 in Annex 1.

Clause 118: Acquisition of new herd begun within 5 years of sale

457.     This clause sets out the rules that apply if, following the sale of the herd (either all at once or within 12 months), the farmer begins to acquire a new herd within five years. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 120 of ITTOIA.

458.     Subsection (4) applies if the number of animals in the new herd is smaller than the number of animals in the old herd but the difference is not substantial. See Change 31 in Annex 1.

459.     Subsection (7) clarifies what is meant by a “substantial difference”. See Change 30 in Annex 1.

Clause 119: Section 118: sale for reasons outside farmer’s control

460.     This clause limits the amount taxed as a trade receipt under clause 118 if the sale is for reasons outside the farmer’s control and the replacement animal is of a worse quality. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 121 of ITTOIA.

461.     The clause is similar to clause 115 although it is not limited, as that clause is, to disposals under a disease control order. The source legislation for both clauses refers to the amount of the trading receipt being restricted to “the amount allowable as a deduction”. It is not immediately clear what this amount is.

462.     Subsection (2) makes clear that it is the amount allowable as a deduction in respect of the new animal. The clause calls this “the equivalent amount for the new animal”.

463.     Subsections (3) and (4) define “the equivalent amount for the new animal”. Subsection (3) deals with the case in which the replacement animal comes from the farmer’s trading stock. Subsection (4) deals with all other cases.

Clause 120: Replacement of part sold begun within 5 years of sale

464.     This clause sets out the rules that apply if, following the sale of a substantial part of a herd (either all at once or within a year), the farmer begins to replace it within five years. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 122 of ITTOIA.

Clause 121: Section 120: sale for reasons outside farmer’s control

465.     This clause limits the amount taxed as a trade receipt under clause 120 if the sale is for reasons outside the farmer’s control and the new animal is of a worse quality. It is based on paragraph 3 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 123 of ITTOIA.

466.     The clause is similar to clause 115 although it is not limited, as that clause is, to disposals under a disease control order. The source legislation for both clauses refers to the amount of the trading receipt being restricted to “the amount allowable as a deduction”. It is not immediately clear what this amount is.

467.     Subsection (2) makes clear that it is the amount allowable as a deduction in respect of the new animal. The clause calls this “the equivalent amount for the new animal”.

468.     Subsections (3) and (4) define “the equivalent amount for the new animal”. Subsection (3) deals with the case in which the replacement animal comes from the farmer’s trading stock. Subsection (4) deals with all other cases.