Clause 122: Herd basis elections

469.     This clause sets out the rules for the making of herd basis elections. It is based on paragraph 2 of Schedule 5 to ICTA. The corresponding rules for income tax are in section 124 of ITTOIA.

470.     Paragraph 2 of Schedule 5 to ICTA requires that the election must be made “in writing” and to an officer of Revenue and Customs. The general rules in Part 7 of Schedule 18 to FA 1998 that apply to claims and elections mean it is not necessary to repeat these requirements.

471.     Subsection (2) sets out the time limits for making the election. The election is made by the farmer. The farmer can be a company or a firm in which one of the partners is a company. The time limits are different depending on whether the farmer is a company or a firm.

472.     If the farmer is a firm the same time limit applies whether the partners are all income tax payers, all corporation tax payers or a combination of the two. Because of the possible involvement of income tax payers the time limit is set by reference to income tax years. The time limit in clause 122(2)(b) is the same as that in section 124(2)(a) of ITTOIA.

473.     The different time limits for a company or a firm are reflected in the other two clauses that deal with herd basis elections, clauses 123 and 124. Those clauses identify the difference by referring to the “accounting period” (company) or the “period of account” (firm).

474.     Subsection (4) expands on subsection (1), which provides that an election must specify the class of production herd to which it relates. This means separate elections must be made for each class of production herd and that an election may not relate to more than one class of production herd. Separate elections may be made for different classes.

475.     Subsection (7) identifies the period for which the herd basis election has effect. This depends on whether the farmer is a company (accounting period) or firm (period of account).

476.     Subsection (8) deals with the case in which the farmer is a firm and there is a change in the partners in the firm. Paragraph 2 of Schedule 5 to ICTA refers to “the farmer making the election”. If the farming trade is carried on in partnership, the “farmer” means the firm. If there is a change in the members of a firm, the question arises whether there is a new “farmer”. Subsection (8) makes clear that there is.

Clause 123: Five year gap in which no production herd kept

477.     This clause deals with the case where there is a period of at least five years when the farmer does not keep a production herd of the particular class for which a herd basis election has been made. It is based on paragraph 4 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 125 of ITTOIA.

478.     Subsection (2) explains the consequences for the herd basis rules if the farmer starts to keep another production herd of the same class after the end of the five year period. Subsection (2) enacts an extra-statutory practice. See Change 32 in Annex 1. This Change reproduces Change 36 in ITTOIA.

Clause 124: Slaughter under disease control order

479.     This clause sets out the rules for making an election outside the normal time limits following slaughter under a disease control order. It is based on paragraph 6 of Schedule 5 to ICTA. The corresponding rules for income tax are in section 126 of ITTOIA.

Clause 125: Preventing abuse of the herd basis rules

480.     This clause provides anti-avoidance rules that may apply if a farmer transfers the whole or part of a production herd in a transaction that is not an open market sale. It is based on paragraph 5 of Schedule 5 to ICTA. The corresponding rules for income tax are in section 127 of ITTOIA.

481.     Clause 164(3) in Chapter 11 of this Part (trade profits: valuation of stock) makes clear that this section takes priority over the provisions of that Chapter.

Clause 126: Information if election made

482.     This clause allows an officer of Revenue and Customs to obtain information about the animals kept for the purposes of the trade. It is based on paragraph 10 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 128 of ITTOIA.

Clause 127: Further assessment etc if herd basis rules apply

483.     This clause enables effect to be given to a herd basis election made after an assessment has become final, either by amendment or by repayment of tax. It is based on paragraph 11 of Schedule 5 to ICTA. The corresponding rule for income tax is in section 129 of ITTOIA.

Chapter 9: Trade profits: other specific trades

Overview

484.     This Chapter contains special rules for the taxation of particular trades.

Clause 128: Taxation of amounts taken to reserves

485.     This clause contains a special rule for the treatment of securities held by a company carrying on a banking or insurance business, or a business of dealing in securities, and on which profits and losses are calculated by reference to the “fair value” of the securities rather than on a realisation basis. It is based on section 472A of ICTA. The corresponding rule for income tax is in section 149 of ITTOIA.

486.     Financial assets can be dealt with in a number of ways for accounting purposes.

487.     Where a company dealing in securities uses United Kingdom generally accepted accountancy practice (“UK GAAP”), profits and losses calculated by reference to the fair value of securities treated as trading assets are taken to profit and loss account. “Fair value” is an accounting term, the meaning of which is broadly equivalent to market value. UK GAAP is defined in section 50(4) of FA 2004.

488.     Where a company dealing in securities prepares accounts in accordance with international accounting standards, the securities would usually fall to be accounted for as at fair value, in accordance with paragraph 9 of International Accounting Standard 39 (“IAS 39”), and any profits and losses calculated by reference to the fair value of securities taken to the profit and loss account. But the company may instead account for certain securities as “available for sale” if they do not meet the conditions for being treated as at fair value through profit or loss. In such a case profits and losses calculated by reference to the fair value of securities are taken initially to a statement of changes in equity.

489.     Since 2005, UK GAAP in this area follows IAS 39. Under UK GAAP the profits and losses on “available for sale” assets are taken to the statement of total recognised gains and losses.

490.     Clause 46 of this Bill provides that the calculation of profits or losses from a trade must be based on accounts drawn up in accordance with generally accepted accountancy practice, subject to any adjustment authorised by law. Implicit in this rule is that the profits must appear in the profit and loss account. There is no tax law (apart from this clause) which allows profits on equity securities taken to any form of reserve to be treated for corporation tax purposes as if they were taken to profit and loss account.

491.     Subsection (3)(b) provides that subsection (2) does not apply to “an amount recognised for accounting purposes by way of correction of a fundamental error”. This refers to the requirement in International Accounting Standard 8 (Accounting Policies, Changes in Accounting Estimates and Errors) that the correction of a fundamental error should be treated as a prior period adjustment. “For accounting purposes” is defined in section 832(1) of ICTA as “for the purposes of accounts drawn up in accordance with generally accepted accounting practice”.

492.     Section 472A(4)(a) of ICTA defines “securities” to include rights, interests or options treated as shares for the purposes of sections 126 to 136 of TCGA by virtue of sections 135(5) or 136(5) of TCGA. Sections 135(5) and 136(5) of TCGA define “shares” in the case of a company with no share capital as “any interests in the company possessed by members of the company.” So subsection (4)(c) of this clause defines “securities” to include such interests.

Clause 129: Conversion etc of securities held as circulating capital

493.     This clause provides for relief on the conversion or exchange of securities held as part of the circulating capital of a company dealing in securities. It is based on section 473 of ICTA. The corresponding rule for income tax is in section 150 of ITTOIA.

494.     Section 473(1) of ICTA applies to securities to which a company carrying on a banking or insurance business, or a business of dealing in securities, is beneficially entitled, the profits from the sale of which would “form part of the trading profits of that business”. This clause does not stipulate that the company must be beneficially entitled to the securities in question. See Change 33 in Annex 1.

495.     Subsection (3) excludes securities brought into account at “fair value” in calculating the profits for the period in which the relevant transaction takes place. These are instead dealt with in clause 128.

496.     Section 137(1) of TCGA provides that sections 135 and 136 of TCGA do not apply to an exchange of shares unless the exchange is:

effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax.

497.     Subsection (7) of this clause adapts the rule in section 137(1) of TCGA to include the avoidance of income tax. This covers, for example, a scheme or arrangement the purpose of which is the avoidance of income tax by a director of, or participator in, the company rather than the avoidance of corporation tax by the company itself.

Clause 130: Traders receiving distributions etc

498.     This clause provides that distributions of a UK resident company, and payments “representative of” such distributions, are brought into account in calculating the profits of a trade if those distributions and payments are receipts or expenses of the trade on first principles. It is based on section 95 of ICTA. The corresponding rule for income tax is in section 366(1) of ITTOIA.

499.     A payment “representative of” a distribution may arise, for example, if shares are on loan at the dividend date. The dividend is received by the person to whom the shares are lent. A payment made by that person to compensate the lender for the dividend which would have been received if the shares had not been lent “represents” that dividend.

500.     Section 95 of ICTA operates by bringing the distribution or representative payment into account in calculating the profits of a company which is a dealer in relation to that distribution or payment. That company holds the shares in respect of which the distribution is received (or the payment made) as assets on current account rather than as investments.

501.     Subsections (1) and (2) focus on the nature of the receipt rather than on the recipient. Similarly, subsections (3) and (4) focus on the nature of the payment. See Change 34 in Annex 1.

502.     Clause 1285 of this Bill is the general rule that no liability to corporation tax arises on dividends or other distributions of a UK resident company. Subsection (2) of this clause disapplies clause 1285 in the case of a UK distribution or a payment representing such a distribution.

503.     Clause 1305 of this Bill is the general rule that no deduction is allowed in respect of a dividend or other distribution. Schedule 23A to ICTA contains special rules for the treatment of amounts representative of dividends on UK shares. In accordance with paragraph 2(2)(b) of Schedule 23A, a payment representative of a UK dividend is treated, in relation to the company by which it is paid, as if it were a dividend on its own shares.

504.     Subsections (3) and (4) override clause 1305. So a payment representative of a UK distribution is to be taken into account in calculating the corporation tax profits of the company making the payment.

505.     Subsection (3) applies to a payment which would be allowed but for clause 1305. A payment in respect of which a deduction is disallowed under paragraph 7A of Schedule 23A of ICTA is not within subsection (3). So it is not necessary to rewrite section 95(1C) ICTA in this clause.

Clause 131: Incidental costs of issuing qualifying shares

506.     This clause allows a deduction to building societies for the incidental costs of issuing shares. It is based on section 477B of ICTA.

507.     Most shares issued by building societies fall with the loan relationship rules in Parts 6 and 7 of this Bill. This is because they are excluded from the definition of “share” in clause 476(1) of this Bill. The result is that most of the incidental costs associated with the issue of the shares are relieved under clause 307 of this Bill.

508.     But it is possible for some building society shares not to qualify as loan relationships. And, even if they do, some incidental costs may not fall within clause 307. So this clause deals with the costs that are not relieved under the loan relationship rules.

Clause 132: Dividends etc granted by industrial and provident societies

509.     This clause ensures that a “divi” paid by an industrial and provident society is allowed as a trading deduction. It is based on section 486 of ICTA.

510.     The main rules about industrial and provident societies are in Chapter 5 of Part 6 of this Bill (loan relationships).

511.     A definition of “registered industrial and provident society” is inserted into section 834(1) of ICTA (see Schedule 1).

512.     Subsection (1) sets out the sort of society to which the clause applies. An example is an agricultural co-operative that sells (or buys) on behalf its farming members.

513.     Subsection (2) is the trading income rule. In practice it is likely that the payments with which the clause is concerned would be allowable under the normal trading income rule. But this clause puts the matter beyond doubt.

514.     The source legislation refers to the calculation of any profits “for the purpose of any provision of the Tax Acts relating to profits chargeable under Case I of Schedule D”. It is probable that the quoted words, read with sections 21A and 21C of ICTA, apply the rule for the purpose of a calculation of Schedule A profits. But, in the context of a property business, a “divi” is not paid “on account of the recipient’s transactions with the society”. So in practice the rule does not apply to a property business and the clause refers simply to calculating the profits of the trade.

515.     Subsection (5) is a signpost to the rule (inserted into ICTA by Schedule 1) that the “divi” is not a distribution.

Clause 133: Annual payments paid by a credit union

516.     This clause denies a trading deduction for an annual payment made by a credit union. It is based on section 487 of ICTA.

517.     Most credit unions do not carry on a trade for tax purposes. This is the consequence of clause 40. But it is possible that some of the activities of a credit union fall outside the scope of the rule in that clause. In that case, a calculation of the profits of the trade is required.

518.     It is also possible that a credit union carries on a property business. So clause 210(2) applies the trading income rule to property businesses.

Clause 134: Purchase or sale of woodlands

519.     This clause applies to a person carrying on a trade of dealing in land who buys and sells land on which trees are growing. It is based on section 99 of ICTA. The corresponding rule for income tax is in section 156 of ITTOIA.

520.     Any profit on the sale of the trees and underwood is tax-free because of the exemption for the occupation of commercial woodlands. See clause 37 of this Bill. Subsection (2) prevents the dealer in land obtaining a trade deduction for that part of the cost of the land that is attributable to the cost of the trees.

521.     The legislation rewritten by subsection (2) only applies to woodlands purchased under a contract entered into on or after 1 May 1963. This limitation is preserved in Schedule 2 (transitions and savings). The corresponding provision for income tax is paragraph 42 of Schedule 2 to ITTOIA.

Clause 135: Relief in respect of mineral royalties

522.     This clause gives relief if trade receipts include mineral royalties. It is based on section 122 of ICTA. The corresponding rule for income tax is in section 157 of ITTOIA.

523.     Most mineral royalties are taxed under Chapter 7 of Part 4 of this Bill. That Chapter rewrites the charge under Schedule D Case VI if rents are received from a concern listed in section 55 of ICTA. That list includes mines and quarries. In nearly all cases the rents are taxed under Chapter 7 of Part 4 of this Bill as they are not received in respect of a trade. But it is possible that the receipt of the rent will be incidental to a trade. In that case clause 287 of this Bill provides that the rent is taxed under Part 3 of this Bill. This is only likely to happen if the rent is received by a property developer in respect of land held as trading stock.

524.     The mineral royalties are halved. The relief is rewritten under the italicised heading “dealers in land” because they are the traders who are most likely to benefit from the relief. But the relief is not confined to dealers in land.

Clause 136: Lease premiums etc: reduction of receipts

525.     This clause prevents a person, carrying on a trade of dealing in land, from being taxed on all or part of a lease premium, or of certain other amounts received in respect of a lease, both as a receipt of the trade under this Part and as a receipt of a property business under Part 4 of this Bill. It is based on section 99(2) and (3) of ICTA. The corresponding rule for income tax is in section 158 of ITTOIA.

Clause 137: Mineral exploration and access

526.     This clause deals with intangible drilling costs of production wells in the oil and gas industry. It is based on section 91C of ICTA. The corresponding rule for income tax is in section 161 of ITTOIA.

527.     Intangible costs are those which do not result in the acquisition or creation of machinery or plant. An example would be the cost of hiring a drilling rig. Production wells are wells that are drilled after the presence of oil in an area has been established and which are used to extract the oil.

528.     Before the enactment of section 91C of ICTA, a deduction was allowed for the intangible drilling costs of the second and subsequent production wells in any area. This reflected a Special Commissioners decision in 1920 that this expenditure is of a revenue nature. This clause disallows a deduction for such costs. It does this by denying a deduction for expenditure which, if it had been carried out while exploring for oil, would not have been allowed as a deduction.

529.     These costs are capital expenditure and qualify for mineral extraction capital allowances (see Part 5 of CAA).

Clause 138: Payments by companies liable to pool betting duty

530.     This clause gives a special deduction to companies which pay pool betting duty. It is based on those parts of section 126 of FA 1990 and section 121 of FA 1991 which relate to the calculation of the profits of traders. The corresponding rule for income tax is in section 162 of ITTOIA.

531.     In 1990, following the Hillsborough disaster, pool betting duty was reduced on condition that the money saved be paid to the Football Trust 1990 to implement Lord Justice Taylor’s recommendations on safety and comfort at football grounds. In 1991 the duty was reduced again, this time on condition that the money be paid to the Foundation for Sport and the Arts, a charitable trust which supports athletic sports and games and promotes the arts. The reductions were initially for a limited period, but have so far been maintained.

532.     Subsection (1) sets out the circumstances in which the clause applies. It introduces the expression “qualifying payment”.

533.     Subsection (2) defines a “qualifying payment” to which the clause applies. It does not specify that payments in consequence of the 1990 reduction in pool betting duty must be paid for football safety and comfort, and that payments in consequence of the 1991 reduction must be paid to the Foundation for Sport and the Arts. Instead the clause applies to a payment for either purpose in consequence of any reduction in pool betting duty. See Change 35 in Annex 1.

534.     The clause retains a general description of the payments, without identifying the bodies which were the targets of the original legislation. It is clear that payments made as a consequence of a reduction in pool betting duty to either body would qualify for relief under the clause.

535.     The source legislation is restricted to the 1990 and 1991 reductions in pool betting duty. This clause applies to payments made in consequence of any reduction in the duty. See Change 36 in Annex 1.

536.     Subsection (3) is the rule that allows the payments as a trading deduction. Without this rule the payments might be disallowed because they are not made wholly and exclusively for the purposes of the company’s trade.

Clause 139: Deduction for deemed employment payment

537.     This clause sets out the trading income rules that were originally part of the “IR35” scheme for the taxation of workers supplied by an intermediary. It is based on paragraph 17 of Schedule 12 to FA 2000. The corresponding rule for income tax is in section 163 of ITTOIA.

538.     The worker is treated as receiving a “deemed employment payment” and is taxed accordingly (see Chapter 8 of Part 2 of ITEPA). This clause ensures that an equivalent amount is allowed as a trading deduction in calculating the profits of the intermediary.

539.     Subsection (3) is a timing rule. Generally, the deemed employment payment is treated as made at the end of the tax year (see section 50(3) of ITEPA). In some circumstances the payment is treated as made earlier (see section 57 of ITEPA). In either case, the trading deduction is given for the period of account in which the payment is treated as made.

540.     Subsection (4) is the rule that prevents any double deduction. It caters for the possibility that the payment may qualify as a trading deduction on first principles and also qualify as a trading deduction in a period of account different from that specified in subsection (3).

Clause 140: Special rules for partnerships

541.     This clause sets out two additional rules that apply if a deduction under clause 139 is to be given in calculating the trading profits of a firm. It is based on paragraph 18 of Schedule 12 to FA 2000. The corresponding rule for income tax is in section 164 of ITTOIA.

542.     Clause 1257 of this Bill explains that “firm” is used in this Bill to refer to persons carrying on a trade in partnership. It includes a limited liability partnership (see clause 1273).

543.     Subsection (2) is the rule that a deduction under clause 139 of this Bill cannot be used to create a loss in a firm. It operates by reference to the firm’s period of account. See Change 37 in Annex 1.

544.     Subsection (3) is the rule that limits the trading deduction to the amount that would have been deductible if the worker had been an employee of the intermediary, plus a margin to cover the expenses of the firm.

545.     In accordance with paragraph 244 of Schedule 6 to ITEPA, “deemed Schedule E payment” in paragraph 18 of Schedule 12 to FA 2000 is replaced by “deemed employment payment”. Similarly, in the same paragraph, “Schedule E” is replaced by “the employment income Parts of the Income Tax (Earnings and Pensions) Act 2003”.

546.     But the specific statutory references, such as those to “paragraph 7” (of Schedule 12 to FA 2000), are covered by the general rule in paragraph 5 of Schedule 7 to ITEPA. That general rule is that any reference to a repealed provision is to be read as a reference to the rewritten provision.

547.     Paragraph 7 of Schedule 12 to FA 2000 has been repealed and rewritten as section 54(1) of ITEPA. So the reference to that paragraph in paragraph 18 of Schedule 12 is to be read as a reference to section 54(1) of ITEPA. This clause updates the references to paragraph 7.