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Clause 141: Deduction for deemed employment payments
548. This clause gives a trading deduction if a managed service company (“MSC”) makes a “deemed employment payment” to a worker under section 61D of ITEPA. It is based on paragraph 10 of Schedule 3 to FA 2007. The corresponding rule for income tax is in section 164A of ITTOIA.
549. The worker is treated as receiving a “deemed employment payment” and is taxed accordingly (see Chapter 9 of Part 2 of ITEPA). This clause ensures that an equivalent amount (and no more) is allowed as a trading deduction in calculating the profits of the MSC.
550. Subsection (5) 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 142: Deduction for site preparation expenditure
551. This clause sets out the rules for expenditure on preparing a site so that it can be used for waste disposal. It is the first of four clauses that deal with waste disposal. They are based on sections 91B and 91BA of ICTA. The corresponding rules for income tax are in sections 165 to 168 of ITTOIA.
552. This clause covers expenditure which is not deductible because it is capital and which is not eligible for capital allowances; in other words, expenditure that would otherwise go unrelieved for corporation tax purposes.
553. Subsection (1) introduces the concept of waste materials being deposited on a “waste disposal site”, an expression defined in clause 144.
554. Subsection (2) is the link to clause 143, which calculates the amount of expenditure that is allowed as deduction.
555. A deduction under section 91B of ICTA is allowed only if the company makes a claim (in such form as the Commissioners for HMRC may direct) and submits such plans and other documents (if any) as the Commissioners may require. This clause drops the requirement for a claim. See Change 38 in Annex 1.
556. Schedule 2 to this Bill rewrites the transitional provision in section 91BA(1) of ICTA. Expenditure cannot be “inherited” if the site changed hands before March 2000.
557. Subsection (4) treats the company’s trade as the same as that of its predecessor. This is necessary because the activities taken over may amount to less than the whole of the predecessor’s trade (see subsection (3)(a)).
Clause 143: Allocation of site preparation expenditure
558. This clause spreads site preparation expenditure over the useful life of the site. It is based on section 91B of ICTA. The corresponding rule for income tax is in section 166 of ITTOIA.
559. Some waste disposal sites, notably in the nuclear waste industry, have preparation expenditure dating from before 6 April 1989. So this clause preserves the rules for the pre-1989 expenditure.
Clause 144: Site preparation expenditure: supplementary
560. This clause contains the definitions of the expressions used in the waste disposal clauses and sets out the rules for pre-trading expenditure. It is based on sections 91A, 91B and 91BA of ICTA. The corresponding rule for income tax is in section 167 of ITTOIA.
561. Although the definitions are expressed to apply “for the purposes of clauses 142 and 143”, the definition of “waste disposal licence” is also used to define a “site restoration payment” in clause 145(5).
562. In subsection (1)(b) the corresponding Northern Ireland provision is Part 2 of the Waste and Contaminated Land (Northern Ireland) Order 1997 (SI 1997/2778 (N.I.19)).
563. Subsection (1)(c) identifies more specifically the provisions described in section 167(1)(c) of ITTOIA. It reflects the amendments to section 91A(6) of ICTA made by:
- the Pollution Prevention and Control (England and Wales) Regulations (SI 2000/1973);
- the Pollution Prevention and Control (Scotland) Regulations (SI 2000/323); and
- paragraph 3 of Schedule 11 to the Pollution Prevention and Control Regulations (Northern Ireland) 2003 (SR 2003/46).
Clause 145: Site restoration payments
564. This clause deals with payments for the restoration of a site after it has been used for waste disposal. It is based on section 91A of ICTA. The corresponding rule for income tax is in section 168 of ITTOIA.
565. In subsection (6)(a), (c) and (d) the corresponding Northern Ireland provision is Article 40 of the Planning (Northern Ireland) Order 1991 (SI 1991/1220 (N.I. 11)).
Clause 146: Cemeteries and crematoria: introduction
566. This clause, and the following three clauses, contain special rules for companies carrying on a trade of operating a cemetery or crematorium. They are based on section 91 of ICTA. The corresponding rules for income tax are in sections 169 to 172 of ITTOIA.
567. Without special provisions, no allowance would be due for the cost of land sold for interments, memorial gardens attached to crematoria or the surrounding land and buildings because expenditure on such land and buildings is in the nature of capital. The provisions in clauses 146 to 149 recognise that most land and buildings in a cemetery or memorial garden are of little value when the cemetery or memorial garden is full.
568. This clause introduces the provisions in clauses 147 to 149 and defines some of the terms used in those clauses.
569. Section 91(7)(a) of ICTA adapts the rules for cemeteries in section 91 of ICTA to crematoria and treats “land which is devoted wholly to memorial garden plots” as a cemetery, or as land in a cemetery. Subsection (1) of this clause instead includes the carrying on of a crematorium, and the maintenance of “memorial gardens plots” in the trades to which clauses 146 to 149 apply.
570. Section 91(5) of ICTA provides that a change of ownership is ignored in calculating the relief due to the person then carrying on the trade. So subsection (4) of this clause includes expenditure incurred by “a predecessor” of the company carrying on the trade in the definition of ancillary capital expenditure.
Clause 147: Deduction for capital expenditure
571. This clause provides for a deduction for certain capital expenditure incurred by the trader or a predecessor. It is based on section 91 of ICTA. The corresponding rule for income tax is in section 170 of ITTOIA.
572. Section 91 of ICTA refers to “land” in a cemetery or crematorium. Subsection (1) refers instead to “an interest in” such land. This accommodates better the possibility that operators of cemeteries and crematoria might sometimes hold land in leasehold rather than in freehold form.
Clause 148: Allocation of ancillary capital expenditure
573. This clause contains special rules for allocating ancillary capital expenditure to a period of account. It is based on section 91 of ICTA. The corresponding rule for income tax is in section 171 of ITTOIA.
574. See clause 146(4) for the definition of “ancillary capital expenditure”.
Clause 149: Exclusion of expenditure met by subsidies
575. This clause excludes certain expenditure for the purposes of clause 147. It is based on section 91 of ICTA which applies the provisions of section 532 of CAA for the purposes of section 91 of ICTA. The corresponding rule for income tax is in section 172 of ITTOIA.
576. Subsection (3) refers to a grant made under Northern Ireland legislation and declared by the Treasury to correspond to a grant under Part 2 of the Industrial Development Act 1982. The term “Northern Ireland legislation” is defined by Schedule 1 to, and section 24(5) of, the Interpretation Act 1978.
577. The Capital Allowances (Corresponding Northern Ireland Grants) Order 2001 (SI 2001/810) lists various grants made in Northern Ireland and declared by the Treasury to correspond to a grant under Part 2 of the Industrial Development Act 1982 in so far as they are made towards capital expenditure. The Industrial Development Act 1982 has been repealed. But a deduction under clause 147 of this Bill continues to be allowed for expenditure met by a grant corresponding to a grant under Part 2 of the 1982 Act incurred by the trader, or by a predecessor.
Clause 150: Revenue nature of expenditure
578. This clause provides for the trader’s expenditure, on producing or acquiring the original master version of a sound recording, to be treated as expenditure of a revenue nature. It is based on section 48 of FA 2006.
579. Where this clause applies to a sound recording any of the trader’s receipts from it are treated as having a revenue nature.
Clause 151: Allocation of expenditure
580. This clause provides for the allocation of a trader’s expenditure on producing or acquiring the original master version of a sound recording except where that master version is trading stock. It is based on section 49 of FA 2006.
581. Subsection (3) sets out the basis for the allocation and subsection (4) provides for an enhanced allocation in certain cases.
Clause 152: Interpretation of sections 150 and 151
582. This clause provides definitions of terms used in the previous two clauses. It is based on sections 31 and 50 of FA 2006.
Clause 153: Reserves of marketing authorities and certain other statutory bodies
583. This clause, and the following two clauses, contain special rules for the treatment of the statutory reserve funds which must in certain circumstances be maintained by certain statutory authorities. It is based on section 509 of ICTA.
584. This clause allows a qualifying statutory body a deduction in calculating its trade profits for any amount of its trade surplus that it is required to pay into a reserve fund. Any amount withdrawn from the fund is taxed as a trade receipt unless it is a repayment of the levy or paid to the producers or a Government Department.
585. Subsections (1) and (2) identify the statutory bodies to which this clause applies.
586. Subsection (5) provides definitions for the purposes of this clause.
587. The roll of statutes which confer functions that are relevant to these clauses and the population of statutory authorities to which these clauses might apply has declined in recent years. The Cereals Marketing Act 1965 and the Agriculture Act 1967 still confer functions that are relevant for the purposes of these clauses. See, in particular, the powers to make schemes under section 16 of the 1965 Act and section 13 of the 1967 Act.
Clause 154: Conditions to be met by reserve fund
588. This clause contains conditions which must be met by the reserve fund if the relief under clause 153 is to be available. It is based on section 509 of ICTA.
Clause 155: Interpretation of sections 153 and 154
589. This clause provides definitions of constitutional authorities for the purposes of the two previous clauses. It is based on section 509 of ICTA, paragraph 11 of Schedule 12 to the Northern Ireland Act 1998 and section 85 of the Government of Wales Act 2006.
590. Subsections (1) and (2) rewrite the source legislation to reflect the effect of devolution settlements. See Change 15 in Annex 1.
591. The Government of Wales Act 2006 created a new devolution settlement for Wales. It replaced the National Assembly for Wales constituted under the Government of Wales Act 1998 (“the old Assembly”) with a new National Assembly for Wales. Schedule 11 to the 2006 Act provides for functions conferred on the old Assembly (with certain exceptions that are not relevant here) to be transferred to the Welsh Ministers. It is in theory possible that schemes such as are mentioned in section 509(1) of ICTA could have been approved by the old Assembly before its functions were transferred to the Welsh Ministers. A paragraph in Schedule 2, the Schedule of transitionals and savings (reserves of marketing authorities etc), affecting clause 153(5), covers this possibility.
592. Subsection (1) refers to “a Minister within the meaning of the Northern Ireland Act 1988”. This rewrites the reference in section 509(3) of ICTA to a “head of department” read with paragraph 11(1) of Schedule 12 to the Northern Ireland Act 1998.
Chapter 10: Trade profits: changes in trading stock
Overview
593. This Chapter rewrites the rules in Part 2 of Schedule 15 to FA 2008. The rules relate to the corporation tax consequences of taking stock from, or introducing stock to, a trade.
Clause 156: Meaning of “trading stock”
594. This clause provides a definition for the purposes of this Chapter. It is based on paragraph 5 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172A of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
595. Subsection (2) sets out the main difference between this definition and the one used in Chapter 11 of this Part.
Clause 157: Trading stock appropriated by trader
596. This clause sets out the rule for trading stock taken by a trader. It is based on paragraph 6 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172B of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
Clause 158: Trading stock supplied by trader
597. This clause sets out the rule for something that is supplied by a trader for use as trading stock. It is based on paragraph 7 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172C of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
Clause 159: Disposals not made in the course of trade
598. This clause sets out the rule for trading stock disposed of by a trader. It is based on paragraph 8 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172D of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
599. The rule in this clause applies to non-trading disposals to a person other than the trader. If the stock is taken by the trader clause 157 applies instead.
Clause 160: Acquisitions not made in the course of trade
600. This clause sets out the rule for trading stock acquired by a trader. It is based on paragraph 9 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172E of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
601. The rule in this clause applies to non-trading acquisitions from a person other than the trader. If the stock is acquired from the trader clause 158 applies instead.
Clause 161: Transfer pricing rules to take precedence
602. This clause gives priority to the transfer-pricing rules in Schedule 28AA to ICTA. It is based on paragraph 10 of Schedule 15 to FA 2008. The corresponding income tax rule is in section 172F of ITTOIA (inserted by Part 1 of Schedule 15 to FA 2008).
603. The rule in this clause ensures that none of the exemptions in Schedule 28AA to ICTA can be overridden by an adjustment imposed by this Chapter of the Bill.
Chapter 11: Trade profits: valuation of stock on cessation of trade
Overview
604. This Chapter sets out the rules for valuing stock when a company ceases to carry on a trade. The rules for valuing work in progress are not rewritten because, for tax purposes, a company cannot carry on a profession (see Change 2 in Annex 1). If a company has incomplete services when it ceases to carry on a trade they are included in its trading stock (see clause 163(2) of this Bill) and valued in accordance with the rules in this Chapter.
Clause 162: Valuation of trading stock on cessation
605. This clause sets out two general propositions. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 173 of ITTOIA. The first proposition is that a valuation has to be made. The second is that the valuation has to be made in accordance with the rules in this Chapter.
606. Subsection (3) is the rule for trades carried on in partnership. The general rule in ICTA is that a change in the companies carrying on a trade is treated as the cessation of the trade. But, in the case of a trade carried on in partnership, section 114(1) of ICTA provides that there is a cessation for the purpose of calculating the profits of the firm’s trade only if there is a complete change in the companies carrying on the trade.
Clause 163: Meaning of “trading stock”
607. This clause defines trading stock. It is based on sections 100 and 101 of ICTA. The corresponding rule for income tax is in section 174 of ITTOIA.
608. The definition of trading stock applies:
- in clause 151 (sound recordings);
- in clause 185 (adjustment on change of basis); and
- in clause 195 (post-cessation receipts).
609. Section 101(3) of ICTA is invoked by section 100(2) of that Act and is concerned with valuation of incomplete services “at the discontinuance”. So the definition in this clause refers to incomplete services “at the time of the cessation”.
Clause 164: Basis of valuation of trading stock
610. This clause introduces the five clauses that follow. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 175 of ITTOIA.
611. The five clauses (including clause 168 which defines “connected persons”) deal with the valuation of stock that is transferred to another trader. In each case, the requirement in section 100 of ICTA that the transferee carries on a trade is relaxed to include transfers to a person carrying on a profession or vocation. The income tax rules are amended to bring the income tax and corporation tax codes into line. See Change 39 in Annex 1.
612. Subsection (4) of this clause deals with the case where the stock is not transferred to a person carrying on a trade, profession or vocation.
Clause 165: Sale basis of valuation: sale to unconnected person
613. This clause sets out the rule for the common case where the trading stock is transferred to an unconnected trader. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 176 of ITTOIA.
614. The clause leads directly to the use of the sale price of the stock as the basis of valuation. If the transfer is other than by sale, clause 170 explains how the expressions used in this clause are to be interpreted.
Clause 166: Sale basis of valuation: sale to connected person
615. This clause sets out the rule for the case where the stock is transferred to a connected person. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 177 of ITTOIA.
616. The clause preserves the concept of an arm’s length price. This will usually be the same as the open market value (see clause 164(4)) but sometimes there will be a difference.
617. For example, in a capital transfer tax case, IRC v Spencer-Nairn [1991] STC 60, the Court of Session considered the meaning of an arm’s length price and distinguished it from open market value. This was on the basis that the seller in that case had imperfect information. A sale at arm’s length by that seller would not assume that the seller had better information; a sale in the open market would assume perfect information on both sides of the bargain.
618. Furthermore, in the case of an actual sale to a connected trader, there is no need to assume there is a sale. It is enough to treat the sale as made at arm’s length. This leaves open the possibility that the stock is worth something different from open market value to a person who intends to use the stock in the trade.
Clause 167: Sale basis of valuation: election by connected persons
619. This clause allows the seller and purchaser of stock that would otherwise be valued at arm’s length under clause 166 to elect to use instead the price paid for the stock. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 178 of ITTOIA.
620. The election cannot be made unless the arm’s length value of the stock is greater than its “acquisition value” in the hands of the seller.
621. The “acquisition value” of the stock for the company which ceases to trade is effectively book value, but the definition in subsection (5) is more complicated than this. In the case where the net realisable value of stock has fallen below cost in the period leading up to cessation, a new period is deemed to start just before the deemed sale. That allows the new, lower, net realisable value to be used. It may be possible to manipulate net realisable value by selling the stock at an undervalue after the accounting date. So paragraph (a) of the definition assumes that the sale is at an arm’s length value.
622. The election substitutes the price paid for the arm’s length value of the stock. But the price paid must be higher than the acquisition value. Otherwise, the election substitutes the acquisition value for the arm’s length value.
623. This clause does not specify that the election is to be made to “the inspector”. But the general rules about claims and elections in Schedule 18 to FA 1998 require elections to be made in a return or, if that is not possible, to “an officer of Revenue and Customs” in accordance with Schedule 1A to TMA.
Clause 168: Connected persons
624. This clause provides a definition of connected persons for the stock valuation clauses. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 179 of ITTOIA.
625. This clause is one of the exceptions to the general rule in clause 1258 that a firm is not to be regarded for tax purposes as a separate entity. If a firm is connected with the seller or purchaser of its stock, clause 166 (rather than clause 165) applies but the firm may make an election under clause 167.
Clause 169: Cost to buyer of stock valued on sale basis of valuation
626. This clause sets out the rule for the buyer of the stock. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 180 of ITTOIA.
627. In a “sale basis” case, the value given to the trading stock of the company whose trade has ceased is also used to calculate the profits of the buyer of the stock.
628. The reference to ITTOIA caters for the case where the stock is acquired from a person liable to income tax. The valuation under that Act for income tax purposes is used as the cost to the buyer who is liable to corporation tax.
Clause 170: Meaning of “sale” and related expressions
629. The stock valuation clauses refer to a sale of stock. This clause explains how the clauses are to be interpreted if the stock is transferred other than by way of sale. It is based on section 100 of ICTA. The corresponding rule for income tax is in section 181 of ITTOIA.
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