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630. This clause treats any question arising under clauses 164 to 167 as an appeal (to be determined by the tribunal). It is based on section 102 of ICTA. The corresponding rule for income tax is in section 186 of ITTOIA.
631. This Chapter gives statutory effect to ESC C34. The corresponding rules for income tax are in Chapter 13 of Part 2 of ITTOIA. See part (A) of Change 40 in Annex 1. This change reproduces Change 50 in ITTOIA and so brings the income tax and corporation tax codes back into line.
632. The extra-statutory concession provides relief for trade debts that cannot be remitted to the United Kingdom. It is similar in scope to section 584 of ICTA (relief for unremittable overseas income), which is rewritten as Part 18 of this Bill (unremittable income). The corresponding provision for income tax is Chapter 4 of Part 8 of ITTOIA.
633. Section 584 of ICTA provides relief for unremittable income arising outside the United Kingdom, including unremittable trade profits. But relief under section 584 of ICTA does not extend to trade debts owed to, or paid to, the company outside the United Kingdom if the profits of the trade arise in the United Kingdom. This Chapter provides relief for such debts and payments.
634. ESC C34 requires the relief to be claimed. Under this Chapter the relief is allowed as a deduction without the need for a formal claim. See part (B) of Change 40 in Annex 1.
635. The deduction is not mandatory if the qualifying conditions are met. A company can choose whether or not to include the deduction in its tax return. If a deduction is taken the recovery provisions in clause 175 follow automatically.
636. This clause defines the basic concepts. It is based on ESC C34. The corresponding rule for income tax is in section 188 of ITTOIA.
637. The relief applies both to amounts owed to the company and to amounts that have been paid to the company. Relief is allowed if some, or all, of those amounts cannot be remitted to the United Kingdom because of foreign exchange restrictions. The different definitions of unremittable in subsections (2) and (3) reflect the differences between an amount that has been paid and an amount owed.
638. The relief is available to any company, including a company carrying on a financial trade.
639. Subsection (4) provides a definition of foreign exchange restrictions. Local foreign exchange restrictions are not defined in the extra-statutory concession but are clearly a key concept in the operation of the concession. This subsection introduces a definition based on section 584(1)(a) of ICTA. That subsection is rewritten as clause 1274 (unremittable income: introduction) in Part 18. The corresponding provision for income tax is section 841(3) of ITTOIA. By basing the definition on section 584 of ICTA this Bill brings the two reliefs into line.
640. This clause and the rewrite of section 584 of ICTA in Part 18 of this Bill clarify the scope of section 584 of ICTA and the extra-statutory concession in two ways.
641. First, sections 584(1)(a) of ICTA refers to the impossibility of obtaining foreign currency in that territory. It could be argued that this condition is not met if it is possible to obtain foreign currency in the overseas territory regardless of whether that currency may be transferred to the United Kingdom. Clause 1274 of Part 18 of this Bill makes clear that it must not be possible to obtain foreign currency that could be transferred to the United Kingdom.
642. Second, clause 1274 of Part 18 of this Bill makes clear that the reference to foreign currency in section 584(1)(a) of ICTA does not include currency of the overseas country or territory. In relation to sterling the currency of the overseas country or territory clearly is foreign but in this context foreign means foreign to the local territory.
643. Subsection (5) deals with the interaction with the loan relationship rules. Most of the amounts in this Chapter will be within the scope of Chapter 2 of Part 4 of FA 1996 because they are loan relationships (rewritten in Parts 5 and 6 of this Bill). In particular section 100 of FA 1996 treats trade debts as loan relationships (see Chapter 2 of Part 6).
644. Section 80(5) of FA 1996 is a wide-ranging rule which provides that only Chapter 2 of Part 4 of FA 1996 applies to any loan relationship unless there is an express provision to the contrary. Section 80(5) of FA 1996 has been rewritten as clause 464(1). This rule would prevent relief being given under clause 173 or recovered under clause 175. Subsection (5) overrides clause 464(1).
645. This clause sets out how the relief is given. It is based on ESC C34. The corresponding rule for income tax is in section 189 of ITTOIA.
646. The clause has more detail than the extra-statutory concession about the mechanics of the relief. This is necessary to give the certainty required for corporation tax self assessment. Relief can be given only against the profits of the trade that include the unremittable amount. It cannot be used to create or increase a loss. But any excess relief is not lost. It is carried forward and set against future profits of the trade.
647. This clause describes the various circumstances in which relief is not allowed. It is based on ESC C34. The corresponding rule for income tax is in section 190 of ITTOIA.
648. Subsection (1) denies a deduction if the funds are applied outside the United Kingdom.
649. Subsection (2) denies a deduction if the company has received an insurance recovery in respect of the debt. This differs from the approach in the extra-statutory concession. Paragraph 4 of the concession denies relief if any part of the debt is insured. This Bill denies, or recovers, relief only if an insurance recovery is received. See part (C) of Change 40 in Annex 1.
650. Subsection (3) denies a deduction if the company can make a claim under clause 1275 (claim for relief for unremittable income) in Part 18 that the income is unremittable. The corresponding provision for income tax is section 842 of ITTOIA.
651. This restriction will apply only if the profits of the trade that include the unremittable amounts arise outside the United Kingdom, for example, because the profits arise in an overseas branch.
652. This clause sets out the circumstances in which relief is withdrawn and the machinery by which it is withdrawn. It is based on ESC C34. The corresponding rule for income tax is in section 191 of ITTOIA.
653. Subsection (2) lists the events that trigger a withdrawal of the relief. Paragraphs (a) and (e) deal with the straightforward cases in which the amount, or part of it, ceases to be unremittable or is exchanged for an amount that can be remitted. Paragraphs (c), (d), and (f) deal with the events listed in clause 174 that would have prevented relief being given if they had occurred before the deduction was allowed.
654. Paragraph (f) deals with the case of insurance recoveries. It differs from the approach in the extra-statutory concession, which denies any relief if the debt is insured. This Chapter denies or recovers relief only if an insurance recovery is received (see the commentary on clause 174). See part (C) of Change 40 in Annex 1.
655. This follows the approach in section 584 of ICTA when a payment is received from the Exports Credit Guarantee Department. The withdrawal of relief under section 584 of ICTA is rewritten as clause 1276 (unremittable income: withdrawal of relief) in Part 18. The corresponding provision for income tax is section 843 of ITTOIA.
656. Subsection (3) sets out the way the relief is recovered. The amount identified in subsection (2) is treated as a trade receipt for the accounting period in which the event occurs. It is possible that more than one event will apply to the same amount. Subsection (3)(b) ensures the relief is withdrawn only once.
657. Subsection (4) applies if the amount of the insurance recovery is less than the amount that is unremittable. In that case the amount of the recovery is limited to the amount of the insurance recovery.
658. This Chapter sets out the rules for calculating trade profits if a trading company receives a payment for know-how. Payments to non-traders are dealt with by the rules in Chapter 2 of Part 9 of this Bill.
659. Part 8 of this Bill sets out rules for the taxation of gains and losses on companies intangible fixed assets. Those rules take priority over any other tax rules (see clause 906). So the Part 8 rules generally apply instead of the rules in this Chapter. But Chapter 16 of Part 8 ensures that the new rules apply only to assets created or acquired on or after 1 April 2002.
660. The Chapter refers to the disposal of know-how. As Walton J pointed out in John and E Sturges Ltd v Hessel (1975), 51 TC 183 ChD 6 (on page 206):
the mere imparting of know-how cannot be equated with the disposal of a capital asset. Just like the schoolmasters knowledge, it remains the property of the person imparting it as well after as before another is told.
661. This Bill retains disposal because disclosure gives rise to difficulties in identifying the person to whom the disclosure is made (who may not be the person who buys the know-how).
662. This clause sets out the meaning of know-how and explains other concepts used in the Chapter. It is based on sections 531 and 533 of ICTA and section 572 of CAA. The corresponding rule for income tax is in section 192 of ITTOIA.
663. The definition of mineral deposits in subsection (2) is restored to what it was before the enactment of CAA. See Change 41 in Annex 1.
664. Subsections (5) and (6) extend the meaning of sale to include an exchange. This rule is based on section 572 of CAA, which applies to section 531 of ICTA in accordance with section 532 of ICTA.
665. This clause sets out a general rule for the treatment of payments received for the disposal of know-how. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 193 of ITTOIA.
666. Subsections (3) to (6) deal with the case where know-how is disposed of with other assets. The rules are based on sections 562 and 563 of CAA, which apply to section 531 of ICTA in accordance with section 532 of ICTA.
667. This clause sets out the main exception to the general rule in clause 177. It is based on section 531 of ICTA. The corresponding rule for income tax is in section 194 of ITTOIA.
668. Subsection (2) provides that a payment for know-how as part of the disposal of a trade is generally treated as a capital receipt for goodwill. This rule applies only if the person making the disposal is liable to corporation tax. If that person is liable to income tax the rule in section 194 of ITTOIA applies, with the same result.
669. Subsection (5) allows the parties to the transaction to elect for the payment not to be treated as one for goodwill. The effect of an election for the purchaser is that the payment may qualify for capital allowances under Part 7 of CAA. Or, exceptionally, the purchaser may be able to treat the payment as a trading expense. As such an election may affect both parties to the transaction the election has to be made by both.
670. The question whether the election is made under this clause or under section 194(5) of ITTOIA is decided by reference to the position of the person disposing of the know-how. If that person is liable to corporation tax this clause applies; if the person is liable to income tax, ITTOIA applies.
671. 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.
672. Subsection (6) gives the time limit for the election. Most elections in this Bill have to be made not later than two years after the end of the accounting period ... But in this case one of the persons making the election may be chargeable to income tax. So the time limit for an election is based on the date of the disposal.
673. Subsection (7) deals with a disposal by an income tax payer to a corporation tax payer. An election under section 194(5) of ITTOIA is treated as an election under this clause. The corresponding rule for a disposal by a corporation payer to an income tax payer is in section 194(7) of ITTOIA.
674. This clause ensures that if the seller and buyer are under common control:
675. The clause is based on section 531 of ICTA. The corresponding rule for income tax is in section 195 of ITTOIA.
676. For the purposes of this clause, control is defined in section 840 of ICTA (as applied by clause 1316 of this Bill). The ICTA definition of control is identical in effect to that in section 574 of CAA. But, as the relevance of control in this Bill goes wider than this Chapter, the ICTA definition is used here.
677. This clause is one of the exceptions to the general rule in clause 1258 of this Bill 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 know-how the payment for know-how is treated as one for goodwill.
678. This Chapter sets out the rules for dealing with two sorts of changes in the way profits of a trade are calculated.
679. The first sort of change is in the way the accounts are drawn up. The rule is that profits must be calculated on the basis of accounts drawn up in accordance with generally accepted accounting practice (see section 50 of FA 2004 and clause 46 of this Bill).
680. If there is a change in the basis on which accounts are drawn up, some receipts and expenses may fall out of account for tax purposes. This sort of change was dealt with originally in the rules that became section 104(4) to (7) of ICTA. Those rules were replaced by the rules in section 44 of, and Schedule 6 to, FA 1998. The 1998 rules were replaced by section 64 of, and Schedule 22 to, FA 2002.
681. The second sort of change is in the way tax adjustments are made. These are the adjustments required or authorised by law in calculating profits for tax purposes (clause 46). This sort of change was dealt with for the first time by the 2002 legislation.
682. Clause 1267 of this Bill applies the rules to trades carried on in partnership.
683. The corresponding rules for income tax are in Chapter 17 of Part 2 of ITTOIA. The title of that Chapter is adjustment income because there is a charge on such income in section 228(2) of ITTOIA. For corporation tax a positive adjustment is treated as a trade receipt. So the title of this Chapter is more general.
684. This clause sets out the circumstances in which an adjustment may arise. It is based on section 64 of FA 2002. The corresponding rule for income tax is in section 227 of ITTOIA.
685. Section 64 of FA 2002 refers to a change of the basis on which profits are calculated. This might mean any change of basis. But paragraph 3(2) of Schedule 22 to FA 2002 makes clear that it does not include a change which occurs on a change of ownership of a trade.
686. The trading income rules in this Part are generally company-based. So this clause applies when a company changes the basis. That company must be the same before and after the change of basis. So this clause reproduces the effect of paragraph 3(2) of Schedule 22 to FA 2002.
687. An adjustment has to be made if:
688. The difference in wording is to cater for a case in which a decision of the Courts makes it clear that a previously accepted view of the law was wrong. In that case, the old basis accorded with the practice but not the law. The 1998 rules did not cater for this. But the 2002 rules (and the rules in this Chapter) do.
689. The clause refers to a trade. So the rules apply to trades carried on wholly outside the United Kingdom as they apply to trades carried on at least partly in the United Kingdom.
690. This clause sets out the treatment of the adjustment. It is based on paragraphs 4 and 5 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 228 of ITTOIA.
691. If the adjustment is positive it is treated as a trade receipt; if the adjustment is negative it is treated as a trade expense.
692. In both cases the treatment is the same whether the trade is taxable under Case I or Case V of Schedule D in the source legislation. The adjustment is treated as arising on the first day of the first period of account for which the new basis is adopted. This contrasts with the income tax treatment which is that the adjustment arises on the last day of the period (see sections 232 and 233 of ITTOIA).
693. This clause contains the main rules for calculating the adjustment. It is based on paragraph 2 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 231 of ITTOIA. The clause presents the rules as a method statement.
694. In item 3 of each of Step 1 and Step 2 there is a reference to work in progress as an alternative to trading stock. This follows the source legislation and is needed because the extended meaning of trading stock in clause 163 of this Bill does not apply outside Chapter 11.
695. This clause deals with the case where the old basis of calculation allowed a tax deduction but the new basis requires the deduction to be spread over several periods. It is based on paragraph 6 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 234 of ITTOIA.
696. In the absence of this clause there would be a positive adjustment within item 2 of Step 1 of the calculation of the adjustment in clause 182. That would produce the right result overall but the rule would take effect too early. Instead, no adjustment is calculated but no deduction is allowed in future for expenses that have already been taken into account.
697. This clause is a timing rule for an adjustment which results from any of the amounts in subsection (2). It is based on paragraph 7 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 235 of ITTOIA.
698. The amounts in subsection (2) are:
699. The general timing rule is that any adjustment is made at the start of the first period of account on the new basis (see clause 181(2) and (3)). But any adjustment for stock or depreciation is made when the asset is realised or written off.
700. This clause is concerned with a change from the realisation basis to mark to market accounting. It is based on paragraph 8 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 236 of ITTOIA.
701. Mark to market is a basis of accounting used by traders in financial assets. Instead of carrying the assets in the books at cost, financial traders draw up accounts to show the assets at fair value at the accounting date. But for tax purposes the realisation basis may have been used.
702. In the first period in which mark to market is adopted for tax purposes, the opening stock may be valued at a higher (market) value than the closing stock of the previous period. Or a financial asset may have been carried in the accounts at cost but appear as a deduction in a later period at fair value. In either case, there is an adjustment within clause 182.
703. As in clause 184, the adjustment is postponed until the asset is realised.
704. This clause provides for an election to be made if there is a receipt (following a change to mark to market) under clause 185. It is based on paragraph 9 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 237 of ITTOIA.
705. The election is to spread the adjustment receipt over six periods of account beginning with the first one in which the new basis is adopted. As the receipt is postponed under clause 185 until the asset is realised, this first period is not necessarily the one in which the charge would be made without the election.
706. Period of account is defined in section 832(1) of ICTA.
707. This clause further postpones the charge on an adjustment in the case of assets to which clause 185 or 186 applies. It is based on paragraph 10 of Schedule 22 to FA 2002. It is the only clause in this Chapter that has no corresponding section in Chapter 17 of Part 2 of ITTOIA.
708. The clause applies only to insurance companies. If the asset of an insurance company is transferred to another insurance company in accordance with a relevant transfer scheme, it is not treated as realised for the purpose of clauses 185 and 186 until it is realised by the transferee company.
709. This Chapter charges receipts which are derived from a trade but are not received until after the trade has ceased and have not been brought into the calculation of profits.
710. The Chapter rewrites sections 103 and 104 of ICTA without distinguishing between trade profits calculated on an earnings basis and trade profits calculated on a conventional basis (see section 110(4) of ICTA). One consequence of this approach is that there is no need to rewrite section 104(3) or section 110(3) to (5) of ICTA.
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